Werd I/O

This afternoon, Greg Wester tweeted this screen grab:

Your eyes are not deceiving you. That's a 420 square foot studio apartment - not even a one bedroom - for $3,050 a month. That's a base cost: your bills, and most likely parking, are extra.

There are only two kinds of people who can afford this:

• Workers on a substantial salary (realistically $100K+, which would still leave you with a bi-weekly check of a little under $2500 after taxes, meaning rent would be well over 50% of your monthly cost)
• The independently wealthy

Let's leave aside the obvious social inclusion issues at play here, and the effect this has on diversity in the city. Let's ignore that this is killing the artistic temperament of the city and turning it into a primarily financial center like any other. Let's pass over the inevitable effect this will have on the city when these high-value residents start to ebb away. Let's pretend not to see the rising homelessness problem. Not because those are unimportant issues - they're vital to the future of San Francisco - but because it's harmful to the ecosystem that helped create this situation to begin with.

If only rich people can afford to live in San Francisco, it is impossible to really innovate. All the creative energy is being driven out. There's no way for ordinary people - people who haven't made it yet - to experiment. Everyone is either on salary or has raised money from institutional investors with a proven business model.

So the gentrification cycle turns:

Deindustrialization creates low-rent vacancies in industrial districts; artists are drawn to these districts by the depressed rents and spacious "lofts"; the district becomes a hub of avant garde creativity, generating media attention and foot traffic, both of which create a "buzz" around the neighborhood; shops and restaurants are drawn to the area to cater to the increased foot traffic and capitalize on the "buzz;" the introduction of these shops and restaurants in turn induces more foot traffic, more media attention, and more "buzz;" eventually national chain stores see the area as ripe for investment and begin to move in; finally, of course, each of these trends causes rents to escalate until, with the arrival of deep-pocketed chain stores, the very artists who made the district trendy are priced out.  The district ends up as nothing more than a high-end outdoor shopping mall with little street "cred," and the artists relocate to a new low-rent industrial area, triggering the process all over again.

We've seen this process start to rapidly transform Oakland:

Oakland neighborhoods that are experiencing "advanced gentrification," according to the study, include Lower Bottoms, Old Oakland, and Northgate/Koreatown. The researchers define "advanced gentrification" as areas that have experienced significant demographic changes and high levels of real estate investment. Those areas are also very vulnerable to gentrification due to their locations near transit, historic housing stocks, rising house prices, and high rates of market-rate developments. [...] The researchers also said “the crisis is not yet half over” and that the city can expect the displacement of lower-income households to accelerate in coming years.

The interactive map is worth exploring for yourself.

All of which means that the rents in Oakland are already rapidly increasing (partially because it's within commuting distance of San Francisco). So where's next? If I'm running a small startup that needs to lengthen its runway while I figure out my product / market fit - or better yet, if I'm an artist that wants to live somewhere nurturing, affordable and creative - where can I go?

My money's on one of two places:

Sacramento.

As Thrillist noticed this summer, California's capital has a plethora of food and culture, for a much lower living cost:

We have a hard time even talking about San Francisco rent anymore. We start sweating, breaking out in hives... yeah. Especially when we think about rent in Sacramento. I mean, look at this -- $1,650 for a four-bedroom HOUSE!? That’ll get you, what... a patch of ground under the freeway in San Francisco?

Pretty much. In fact, Sacramento is 36.5% cheaper to live in than San Francisco overall (and rent is 65% less). And, yeah, it's the seat of state government, which gives enterprise startups access to a different kind of infrastructure. The only real bummer is that if you do need to get back to the Bay Area for meetings, the drive will take you two hours in good traffic.

Santa Rosa.

Situated in the middle of wine country, Santa Rosa is also adjacent to a lot of the trappings of fine living, although it's a little less hot on live music and theater. (Those needs are met by Sebastopol, just a few minutes down the road, which is also a base for O'Reilly Publishing.) Overall, it's a little more industrial than Sacramento in itself, but is set in outstandingly beautiful countryside and high-class local amenities.

But here's the big plus: as well as being super-close to Petaluma (home of TWiT), Sebastopol, Sonoma, Healdsburg and Napa, Santa Rosa is only an hour's drive from San Francisco. The Smart Train will provide effective public transport for the north bay - something it's sorely lacking right now - and further reduce the commuting pain. The first stretch, between Santa Rosa and San Rafael, opens in 2016. It'll use the same Clipper card system used by BART and Muni, effectively linking the north bay to the greater San Francisco Bay Area transit system. And expansions will link the train to the existing ferry infrastructure.

My bet is that the Santa Rosa corridor will be the next place to look. Its top-tier office space is a third of San Francisco's cost, it's surrounded by beautiful countryside and some of the country's best food, and is still within a hop, skip and a jump of Silicon Valley.

Known has become the easiest way to create an online community to support your class or group. We've built an easy-to-use platform that lets people publish in a group with a variety of media, from blog posts and photographs to files and points on a map. Each post can be private or public; every Known site as a whole can be private or public. And it all works on any device, from the biggest, strongest desktop to the most entry-level smartphone, as long as it comes with a web browser.

Institutions like Harvard and MIT use it to run classes; so do groups teaching web skills in rural India, activists promoting racial justice, writers who need to control their identities, and open source hackers.

Here's how we got here, and here's where we're going.

Finding a fit in higher education

We arrived at Matter knowing we wanted to give people more ownership over their conversations and content online. As well as investing in our team and creating a structured environment for us to grow our company, they gave us a grounding in design thinking which helped us change the way we think about technology businesses.

It was through this process, and hundreds of hours of conversations with teachers and students, that we discovered a deep need in education for social platforms. 98% of higher educational institutions use something called a Learning Management System - platforms like Blackboard and Moodle - but very few report that they are satisfied with the experience. These platforms focus on administration, rather than learning. While they are often used for classroom teaching, they fall comically short of the kinds of social experiences students are used to.

Enter Known. Our platform runs as a stand-alone community site, but it can also integrate with a school's LMS to add those much-needed social features. We offer single sign on to campuses, and unlike many social platforms, let you publish any kind of file you need to. All our plans come with unlimited storage and bandwidth, so you don't need to worry about capacity. We sell SaaS subscriptions, and enterprise licenses for organizations that want to run Known on their own infrastructure.

We also understand that conversations don't just happen in tiny sites on the web. Known sites can push their content across social networks: audio, for example, can be immediately copied to a SoundCloud account. Using brid.gy, we can pull replies and likes from those social networks back to the community, so everything is always stored in one place.

Social infrastructure for campuses

The possibilities are endless. Any campus can run as many Known communities as they need to. We also know that discovering all the content being created on a campus is key, so we've started to provide social hubs and search engines for all of it. On-campus users can search for content that only they can see; visitors to a campus can search for and discover content that has been made public. The result is an easy-to-use gateway to everything happening at a campus. It's never been done before.

We know that in education, one size rarely fits all. So we offer design sprints, where we'll arrive on campus and run design thinking sessions with students, faculty and staff. These allow us to tailor the product to meet the needs of a particular institution, so it complements their activities, their design, and their culture. (These sprints turn out to be useful whether you end up using Known or not.)

Because that's the other thing about Known: it's open source and extremely customizable.

An open source core

In VentureBeat, Lightspeed's John Vrionis writes:

The OSS companies that will be pillars of IT in the future are the companies that leverage a successful OSS project for sales, marketing, and engineering prioritization but have a product and business strategy that includes some proprietary enhancements. They’ve figured out that customers are more than happy to pay for an enterprise-grade version of the complete product, which may have security, management, or integration enhancements and come with support. And they also understand that keeping this type of functionality proprietary won’t alienate the community supporting the project the way something such as a performance enhancement would.

This is our strategy. Our core platform is available on GitHub: you can get it right now. We offer a fully-managed service, with unlimited storage and bandwidth, so you don't need to worry about server maintenance or capacity. But we also offer premium features like LTI integrations, file uploads, and searchable user directories.

We love our open source community. Thousands of people use Known to publish on their own site as an indieweb blog, and the activity helps us build a better platform for everyone. Every single page on every Known site has a little heart icon. Click it, and you're prompted to send us feedback. We read every single message personally, and it allows people who aren't developers or designers to contribute to the community and help us develop the product.

John goes on to say:

OSS businesses turn the customer discovery process completely upside down. Open source software is put into the wild, and the company immediately receives signals from those who are interested. Entrepreneurs get the benefit of real data and usage to help them decide where to focus engineering and sales-and-marketing resources. This is tremendously helpful and important. Data, not guessing, drives prioritization of the limited resources at a company’s disposal.

The combination of an open source development model and a design thinking product process means that we can rapidly prototype new ideas, and get strong signals from real people about the desirability of our platform.

Beyond education

It's obvious that a flexible community platform that runs on any device has applications beyond education. With LDAP / Active Directory integration, you can run it alongside your intranet to support a project or a company. Because you can make a community private, we've even seen families use it to share photos of their children that they wouldn't feel comfortable publishing on Facebook.

Mozilla's CEO Chris Beard said today that he thought of revenue as "a means to do better for the world". We agree: it is important to be a growing, valuable company, but in service to being able to provide a platform that can support any class and give anyone in the world a voice in a space they control. The total market for Known in education is measured in billions of dollars, but our potential goes beyond that.

We're living in a world where everyone can be connected, but only a handful of companies control those conversations. Censorship and surveillance are growing threats. By creating an open, easy-to-use platform that works on every device, we can help everyone own their own conversations. Not only can top-tier universities and companies benefit, but we can help disadvantaged communities, too. From non-profits sharing resources in developing nations to vulnerable groups who need to protect their identities right here in America, we believe we can make a difference.

Our role as technologists is to build a better future where everyone is represented. That's the promise of the web, and it's something core to our mission and beliefs. We're building what I call respectful software, and by showing it can be successful, we will encourage other vendors to follow.

Today, it's the best way to build an online community. But Known has an even brighter future ahead of it. We're excited to bring it to you.

Get involved

Check out our website, and follow us at @withknown on Twitter.

If you're a developer, you can find our core platform on GitHub, and you're invited to join the developer mailing list.

And you can always email me at ben@withknown.com. I'd love to talk to you.

Prologue:

The first time I ever visited South Park, the tiny patch of grass in downtown San Francisco that the Matter garage would later back onto, Biz Stone bought me a coffee. We circled the park and talked about Elgg, our open source social networking product, and Twitter, the startup he was working on at the time.

The most important piece of advice he gave us was this: hold something back. It's fine to open source your code, to release an open product, but you've got to hold back the thing that will make you valuable.

This was the most important advice we received about Elgg. We ignored it completely.

Six years later: September 2014.

Erin and I stepped down from the Paley Center stage in New York, exhausted. Most accelerators have one demo day. Because Matter is so closely tied to both media and technology, it has two: one at the Folsom Street Foundry in San Francisco, in the heart of SoMa, and the other in New York, the city where most of America's media companies call home.

Known, we told an audience of media luminaries like Jeff Jarvis and industry investors, was a way for post-secondary students to save their coursework, notes and discussions on a site that they controlled. In a world where students are used to delightful apps and beautiful user experiences, the Learning Management Systems used by 93% of institutions are an abomination that actively hinder learning. Worse, when a course is over, all of the discussions and resources that were collaboratively made by the class are deleted forever. With Known, students can publish to their own site, and syndicate to these other platforms, allowing them to take control over their learning using a beautiful, mobile-first user interface.

Better yet, we told the audience, Known has an open source core. We know that one size doesn't fit all in education. With Known, every single feature has an API endpoint, and every single feature can be customized to fit both the needs of the institution and the student. The first pilot is happening right now, and we're getting great feedback.

Applause. Seven minutes later, we were done. This was day zero for our company: the next day, the hard work would begin.

Skip forward: September 2015.

I looked around the table at Garaje. Most of the alumni from Matter's third class were here, and had great stories to tell: Musey were thriving and building beautiful design apps; LocalData were helping to improve American cities; Louder were preparing their acquisition by Change.org. Over in New York, Stringr were delivering video to more and more news stations.

In some ways, Known was doing well. Our software was powering tens of thousands of websites. We had received great coverage at our launch, and continued to get fantastic feedback from educators all over the world. People were using Known to teach on five continents.

Yet at the same time, we didn't know how we were going to pay rent, and growth was linear. For a project, we were doing well. For a company, we weren't doing well - and there were still only two of us.

What went wrong?

First, you have to understand open source.

Open source is best defined by its four freedoms, which are inspired by Roosevelt's declaration of the four freedoms that every human should be able to enjoy. These dictate that you should be able to:

0. Run the program as you wish, for any purpose
1. Study how it works, and modify its function
2. Redistribute copies “so you can help your neighbor”
3. Distribute copies of your modified versions

The intention is that open source software is free as in speech: it grants you liberties over the code you run that you might not get with other products.

Unfortunately, the word "free" is overloaded: it has multiple possible meanings. In reality, open source has become synonymous with free as in beer: software that you can use without incurring any direct licensing costs.

Our strategy was to create an open core that people could freely distribute, and then layer premium services over the top. If you didn't want to worry about managing servers, we had an excellent SaaS product. If you didn't want to worry about managing APIs to third-party platforms, we offered Convoy. Finally, we wanted to provide access to a network of trusted consultants who could create customizations for institutional customers.

Our utopian vision was to have organic growth through sharing, leading to institutional customers. This didn't happen - at least, not as fast as we needed it to.

Second, you have to understand startups.

We have exact numbers internally, but a good rule of thumb in San Francisco is that, to break even, we need to bring in $10,000 per employee per month. This covers below market rate salaries, as well as all the overheads you incur when you're running a business (for example, taxes and moderate infrastructure costs). It doesn't cover some of the extra investment you really need to put into sales, marketing and product development.

To be relatively comfortable as a two-person company, we need to clear $240,000 per year. That's a tough ask for many businesses, which is one reason why investors are useful: they back your team and put money into your company, making a bet that you'll be profitable later on and will be able to pay them back and then some.

Consider, also, that most teams are not limited to two people. I've got a development and product management background; Erin is an analyst and user experience expert. We need to bring on a full-time technical lead and a front-end designer. I can't do either my CEO (sales! research! business development!) or web development jobs justice, and Erin can't do her user experience or front-end jobs justice. We also need to have redundancy on our staff, so if one of us is sick or out doing sales work, the company can continue to be productive. As soon as you start talking about building a real team, those numbers explode.

I don't believe it's possible to start a consumer startup as a full-time endeavor without significant investment. Unlike businesses, only a tiny minority of consumer users are willing to pay money. You need to have enough runway (the time left in your company before it runs out of money) to reach a mass-market audience, and then make sure you're either solving a problem that they are willing to pay for a solution to. Because it's so hard to get money from consumers, these businesses often make their money through advertising: reaching targeted, engaged audiences is absolutely a problem that advertisers will pay for a solution to.

Enterprise startups potentially require less investment, but the sales cycle - the time it takes to sell to an individual customer - is potentially much longer, and the total cost to acquire a single customer is much higher. You need to have enough money in the bank to make this work; investment is a useful vehicle to bring your company to the next stage of its development.

Investors protect their money by minimizing risk. In this context, open source is a liability: remember the free as in beer problem? By giving away the portion of your product that captures value, you're essentially devaluing your business to zero. Why would anybody invest in that? I'm sincerely grateful that Matter did invest in our team. In return, the least we can do is be a good steward of investor value.

That $240,000? It's a baseline. Biz was completely right: you need to hold back the thing that makes you valuable.

Feedback is a gift - and so is open source.

When they work well, open source communities are amazing things: collaborative groups of disparate people all agreeing to make software together for use by the commons. As a methodology, it's beautiful, and can showcase the best of humanity.

When you're building a product for sale, it's important that you've identified a problem that people will pay money to have solved for them, and that you're solving it well. That means talking to a lot of people, and both making and iterating a lot of rough prototypes. Your product has to be compelling, well-made and scalable. As it's concisely described in design thinking circles, you need to constantly be testing its desirability, feasibility and viability.

When your product is open source, you'll get a lot of feedback from the community. This is important to take on board, and the community is a hugely valuable part of your ecosystem - but at the same time, it's unlikely that open source community members are customers. It's possible that they're users; it's also possible that they're open source enthusiasts who are just happy to see another project join the movement.

Open source projects, as a whole, have famously bad usability. That's because their feedback loop is constrained to other developers. One recent example of this disconnect is a heated debate about using Slack vs Internet Relay Chat. To non-technical users, IRC is arcane and unfriendly (which also accurately describes many of the discussions that take place there), yet many open source maintainers couldn't understand the problem.

When you're building a compelling product, the license should be irrelevant. It should be compelling whether it's completely closed or released under the GPL: the license is how you distribute the product, not something that's inherent to the product itself.

Unfortunately, in the case of Known, I think a lot of people liked it because it was free and open source. This was a bad signal - and certainly not one that will lead to paying customers and a thriving business. (It's worth saying here that a consistent voice of real support has been the indie web community, alongside companies like Reclaim Hosting, which legitimately wants to see us succeed.)

I'm not Donald Trump, but ...

The biggest surprise I've had since starting Known is the amount of feedback complaining that we're trying to make money with it. Usually this comes with some kind of a complaint about startups and capitalism.

If you know me, you'll know that my politics err on the liberal side of liberal; Bernie Sanders and Elizabeth Warren are the US politicians who best describe the country I want to live in. I'm hardly a hardcore conservative capitalist. Nonetheless, I was taken aback to discover that we'd accidentally joined an anti-capitalist movement: we've been very open about being a business since the day we announced our existence.

In fact, I really wanted to show that it was possible to create a profitable, thriving business creating respectful software that gives users full control of their data. I think it's important.

Here are some real things I've heard about making money from open source:

• We should have a universal basic income so people won't have to worry about how they'll make money.
  A universal basic income is not money from the sky; it's a proven way to create a real safety net, but it does rely on taxation. It doesn't work if everyone relies on a basic income, and the idea that you should have to live at the lowest possible income if you're going to build respectful software is both ridiculous and kind of offensive. Welfare is important, but not as a way to pay for open source software.
• We should be striving to build a post-money society.
  I mean, to be fair, I'm a Star Trek fan too.
• We should just build software for the love of it and not worry about making money.
  Most egregiously, we've heard this from people who literally take our free product and sell services around it.

All of these are obviously detatched from reality.

This culture of anti-capitalism in open source is actively harmful. It's a reason why so few women (1.5%!) participate in open source projects, for example, and why people in disadvantaged communities are underrepresented. Having the ability to work on a project for free represents enormous privilege. At its best, open source can be a way for people to contribute to a global commons and freely exchange ideas; at its worst, it's exploitative and exclusionary.

It's devalued our time. I get personal requests on all channels on a daily basis - email, Twitter, Facebook, even unsolicited phone calls - asking for free help. (I no longer give free personal help, except on the mailing list, where it can be used to grow a commons of support information that everyone can use.) Sometimes these calls for free help come from people who are making money from our labor.

Open source doesn't need folk songs. It needs a way to fairly compensate the people who participate in it. I'm not at all against anti-capitalism - but it sure is hard to build a business on it.

But aren't there a lot of profitable open source businesses?

No.

We've most often been compared to WordPress, which powers over 23% of the web. Automattic is valued at over $1.1bn, has a huge team worldwide, and is widely held as the poster child for open source businesses.

In reality, the WordPress open source project is held by a non-profit foundation. Automattic concentrates solely on hosted services.

Ghost, another project we've been compared to, is a non-profit entity in its entirety. It made a lot of its money by crowdfunding as a WordPress plugin, before switching to becoming a node.js project. This technical change made it much harder to install, making their paid, hosted services an easy choice.

Ind.ie hasn't really launched Heartbeat, their distributed social network, but their project is significantly better-funded than Known. This is partially because they crowdfunded as a smartphone, before choosing to shift their attention to a more focused problem.

Mozilla has a long history that stems from Netscape. Their success is not something that a new entrant to the market could replicate.

Red Hat is held up as a model open source business: its current market cap is $14.8bn, or roughly 2.8% of a Google. It provides professional services and support licensing around its Linux distributions.

Infrastructure is a more profitable place for open source to thrive: MongoDB, CoreOS and Docker are all examples of well-funded open source startups. Each one sells better support, trustability and reliability - which makes sense to pay for if you're building a business on top of their technologies.

For these businesses, open source allows them to build a bigger market for their products, which they can then capitalize on. It's a smart strategy that has very little to do with freedom, and everything to do with growth.

What about other funding methods?

BountySource, the crowdfunding platform for open source projects, is one oft-mentioned funding method. It's actually a pretty great idea, that I think will wonderfully for hobbyists, and will encourage developers on distributed projects to work on smaller bugs and features. I don't foresee it covering our costs.

Similarly, Patreon works very well for personal projects, and is redefining how some artists make their money.

We currently make a significant portion of our income through professional services, but this isn't sustainable for a number of reasons. As Tomasz Tunguz at Redpoint Ventures pointed out earlier this year in this excellent analysis:

The data suggests that customers are willing to pay 20%+ margins on price points of greater than $200,000. Less than that price point, the data shows it to be difficult to operate a professional services team at better than breakeven.

When you consider all of the overheads inherent to running a company, you would actually make more money just being a freelance developer. Professional services jobs are often one-offs, and while they sometimes lead to contracts, it can be an equal effort to go find the next one. It's not a great way to grow.

That also negates the common argument about making money by providing tertiary services like support and customization. These strategies add more risk to the business, and don't cumulatively add value. At lower price points, it's not even a lifestyle business: it's hand to mouth.

What's next?

None of this should be a downer. I want to open a real conversation about making money sustainably with respectful software. Between Elgg and Known, I've spent the majority of my career working on these issues. I think they're solvable, and I think the result will be a better software ecosystem.

Known isn't at all going away, and we continue to release new versions every single month. We're evaluating the services we provide around it, but we love how the community has rallied around it, and we love how it's being used. We expect it to live and breathe for a long time.

However, we're learning from companies like Automattic, and non-profits like the WordPress Foundation. We're thinking hard about how the project is supported. And it should go without saying that we're committed to building a valuable, growing business.

There's a strong movement around creating alternatives to software that tracks and spies on us. I think that's a fantastic thing. Building software is about empowering people to do things they previously couldn't. But a part of building empowering tools is to make sure they can be provided sustainably. If you're doing something good, you need to be able to keep doing it - and whether you like it or not, that means money.

We need to have a stronger conversation about money in open source, and about building healthy businesses on respectful software.

Conclusions

As either Milton Friedman or Alfred P. Sloan said: "the business of business is business". Build a healthy business; don't be led by ideology. You're not helping build a more open world if you're showing that being open is unsustainable or detrimental; show that you can do well.

And when you succeed, use the fruits of your labor to do good.

We'll be here, cheering for you.

I wrote a follow-up to this post: why we built Known.