Bonsai Partners Q1 2022 Letter

Theme and Background

This chapter opens the Bonsai Partners Fund Q1 2022 investor letter. The fund posted a net return of -17.8% in Q1, significantly underperforming the S&P 500 Total Return Index's -4.6%. Author Andrew uses personal career setbacks as a lead-in, arguing that the current market decline creates opportunities for future excess returns, and introduces one of the fund's stock selection logics — the concept of "re-founders".

Core Views

• The past 16 months have been the most challenging period since the fund's inception, but the author explicitly views this as an opportunity rather than a crisis: adversity forces the team to evolve, and the best investment opportunities often emerge from market panic.
• A contrarian view: More than half of Nasdaq stocks have fallen over 50% from their highs. This is precisely the time to upgrade the portfolio and buy long-admired but previously overvalued companies at reasonable prices.
• The fund manager emphasizes rationality and long-term execution, refusing to change established strategies due to short-term drawdowns.

Key Arguments and Data

Metric	YTD 2022	2021	2020	2019	2018	Cumulative Since Inception	Annualized Since Inception
Bonsai Gross Return	-17.6%	-13.9%	277.9%	60.3%	-17.6%	254.3%	44.5%
Bonsai Net Return	-17.8%	-14.8%	247.9%	56.1%	-17.7%	212.8%	39.3%
S&P 500 Return	-4.6%	28.7%	18.4%	31.5%	-8.6%	74.6%	17.6%

> Note: The figures in the table are presented as in the original text. The 2021 column numbers (-13.9%/-14.8%) do not match the fund's actual full-year 2021 returns (Gross 277.9%/Net 247.9%), which may be a typesetting or labeling error in the original. They are listed here as per the original text.

• Market environment: As of the letter's writing, more than half of Nasdaq stocks had fallen over 50% from their peaks.
• Personal experience evidence: The author recounts three specific setbacks — not receiving a full-time offer after an internship (led to joining Matrix Capital), not being promoted to partner (led to joining Adaptive Biotechnologies), and the COVID-induced decline in 2020 (provided unprecedented investment opportunities) — to illustrate the cycle of "adversity creating opportunity".
• New investment move: During Q1, the fund bought its first U.S.-listed software company, Elastic NV, believing the current price offers a window to invest in a long-admired business.

Companies/Assets Involved

• Elastic NV (ESTC): A U.S.-listed software company. New position initiated in Q1, bullish. The author does not disclose the exact position size but emphasizes it is a "long-admired but previously unaffordable at a reasonable price" target.

Investment Insights

• Active stock picking has a significant advantage in the current market: In an environment where more than 50% of Nasdaq stocks have fallen, fund managers can buy high-quality businesses at a discount, upgrading the portfolio.
• Manager selection should prioritize "founder mindset" over "founder status": Founder-led companies have been fully priced by the market (average premium of ~20%), narrowing the room for excess returns. The author proposes the concept of "re-founders": CEOs who are not founders but possess a founder-like long-term thinking and equity orientation. Such companies are not yet effectively identified and represent a potential source of excess returns.
• Investors should stay rational and use market panic to position: The current drawdown is not a signal to retreat, but a window to position for excellent returns over the next 3-5 years.

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Theme and Background

This chapter discusses the phenomenon of "Re-founders"—moments when a CEO reshapes the company according to their own values and thus develops a deep personal identification with the firm. The author argues that such "re-founding moments" are critical turning points for a company's long-term success.

Core Thesis

The author's key judgment is that when a company's CEO undergoes a "re-founding moment," the company is no longer just a job but becomes an extension of the CEO's personal identity. This state of deeply tying long-term success to personal identity is a significant driver for the company's ability to consistently generate excess returns.

Key Arguments & Data

This chapter is a qualitative discussion and does not provide specific financial data or historical case studies. The author merely describes the definition and characteristics of the "re-founding moment," without citing any numbers, comparisons, or empirical research. Therefore, the argument lacks quantitative supporting evidence.

Companies/Assets Involved

This chapter does not mention any specific company or security name.

Investment Implications

For investors, this concept suggests paying attention to companies whose CEOs have undergone major strategic or cultural overhauls and have deeply embedded their personal values into the company's operations. Such companies often demonstrate stronger long-term execution capabilities. However, investors need to assess whether a "re-founding moment" has genuinely occurred by reviewing financial reports, management interviews, shareholder letters, and other materials. Due to the lack of data validation, this viewpoint is more suitable as a supplementary reference in qualitative analysis rather than as a standalone basis for investment decisions.

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Theme and Background

This chapter discusses how to identify whether a non-founder CEO genuinely possesses a founder’s mindset—that is, whether they become a “re-founder.” The author argues that this assessment requires an extremely long time horizon, far exceeding the evaluation periods typically granted to management by the market.

Core Thesis

The author’s core investment thesis is: Only after more than a decade of observation in office can it be confirmed whether a non-founder CEO truly thinks and acts like a founder. No short-term performance is sufficient to support the label of “re-founder.” This judgment runs counter to the market—which often quickly labels management as “outstanding” after performance improvements—while the author insists on a multi-decade validation.

Key Arguments and Data

• Every CEO the author calls a “re-founder” has been in their current position for more than ten years.
• Regarding CEOs in the Bonsai portfolio, the author frankly admits that “it will take many years to know” whether they deserve the “re-founder” title.

Category	Confirmed re-founder	Potential re-founder
Tenure requirement	Over ten years	Requires years more observation
Certainty of judgment	Confirmed	Uncertain

Companies/Assets Involved

• Some CEOs in the Bonsai Portfolio: No specific companies are named. The author suggests these CEOs have the potential to become re-founders in the future, but no conclusion can be drawn now.

Investment Implications

Investors should not casually regard a non-founder CEO as a “re-founder-style leader,” especially when their tenure is less than ten years. Over-trusting short-term performance may obscure a CEO’s deviation from the founder’s culture. A long-term holding strategy must be matched by a time-based verification of management’s true mindset—if a company undergoes a leadership change, the non-founder identity of the new CEO inherently means more time is needed to determine whether they truly carry forward the founder’s motivation and resilience.

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Theme & Background

This chapter discusses how management’s genuine commitment affects investment returns. The report argues that investors are generally willing to pay a premium for “founder-led companies,” but what truly matters is managers’ actions rather than their titles. In difficult times, the real quality of leaders emerges, offering opportunities to identify “re-founders”—leaders with a founder’s mindset but without the founder title.

Core Thesis

The report’s core investment thesis is: Investors should not pay a premium for a founder title; instead, they should identify managers who demonstrate long-term commitment through actions during adversity—whom the author calls “re-founders.” The contrarian insight is that markets typically overvalue the founder label while undervaluing the excess returns that non-founder managers with a founder mindset can generate.

Key Arguments & Data

This chapter provides no specific data or cases, relying purely on logical reasoning:

• Asymmetry between verbal commitment and actual action: managers can easily tell long-term stories, but only challenging periods reveal their true commitment.
• Existence of the founder premium: investors usually assign higher valuations to founder-led companies, but if equivalent thinking can be identified among non-founder management, this premium can be avoided.

Concept	Common Market Practice	Author’s Recommendation
Founder label	Pay a premium	Do not pay a premium; identify through actions
Management commitment	Believe verbal statements	Observe actual behavior during adversity

Companies/Assets Involved

This chapter does not mention any specific companies or assets.

Investment Implications

Investors should abandon the strategy of simply chasing the founder title and instead focus on the following:

• Actively identify non-founder CEOs who display founder-style long-term thinking (e.g., sacrificing short-term profits to invest in growth, buying into weakness, not easily giving up) during earnings calls, crisis responses, or capital allocation decisions.
• Use the “adversity test” as one of the stock selection criteria: prioritize investing in companies that have experienced an industry downturn and proven their management, rather than relying on a valuation premium tied to the founder label.
• This strategy is expected to capture long-term excess returns comparable to those of excellent founder-led companies, without paying the premium.

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Theme and Background

This chapter discusses two key actions taken by the Bonsai Partners Fund in the first quarter of 2022: first, investing in operational processes and personnel (e.g., bringing in an outsourced CFO to improve back-office functions), and second, adding a new position (Elastic NV) to the portfolio while reducing an existing position (Redbubble). Against this backdrop, the author describes how the fund aims to enhance long-term returns by optimizing internal workflows and selecting individual stocks in a challenging market environment.

Core Thesis

The author’s core investment thesis is: Elastic NV (ESTC) is a long-term investment opportunity with multiple growth drivers, and its fundamentals are undervalued by the market. Although the company’s name emphasizes “search,” more than half of its revenue in fact comes from areas beyond traditional search, such as Security and Observability. This forms a counterintuitive judgment—the market may simply categorize Elastic as a “search company” while overlooking its platform-based, multi-scenario potential.

Key Arguments and Data

• Scale and Revenue Base: Elastic NV started as an open-source project in 2012 and now has an annualized revenue exceeding $800 million, the bulk of which is recurring.
• Market Leadership: Elasticsearch is the world’s most popular enterprise search software, with over a billion cumulative downloads, making it one of the most popular open-source projects globally.
• Product Matrix and Customer Solutions: The core product offerings are divided into three segments, with Security and Observability being the primary revenue drivers, rather than traditional enterprise search. The specific functions are compared as follows:

Bonsai Fund year-to-date net return of -17.8%, annualized net return since inception of 39.3%, compared to S&P 500 return of -4.6% over the same period

Solution	Function Description
Security	Logging, detection, and alerting for anomalous network activity
Observability	Monitoring, data collection, and visualization of internal system activity
Enterprise Search	Centralized search and data analysis based on Elasticsearch

• Competitive Advantage: The Elastic Stack comprises three core technology layers (Kibana for visualization, Elasticsearch as a distributed analytics engine, and data ingestion tools such as Logstash/Beats/Endgame), supporting near real-time retrieval and analysis of large-scale data, which creates high stickiness among global enterprise customers.

Companies/Assets Involved

• Elastic NV (NASDAQ: ESTC): Newly purchased position. Bullish. The author believes its platform drives multiple high-growth use cases, and the market’s perception is distorted by the “search” label; the company will benefit from continued expansion in Security and Observability demand.
• Redbubble (ASX: RBL): Continued reduction. The author remains positive on the company’s long-term outlook but notes that no additional position will be added until management execution improves; this represents a phase of cautious waiting.

Investment Takeaways

• Implications for Investors: Pay attention to technology companies that the market simplistically categorizes—Elastic NV demonstrates that meme-like labels (e.g., “search company”) can obscure true platform and multi-business-line value. Security and Observability sub-markets often have higher growth rates and customer loyalty.
• Specific Direction: In the current market environment, the fund’s decision to buy Elastic NV and wait for Redbubble management improvement reflects a strategy of “buying high-quality, multi-driver companies at reasonable prices” during a downturn. For such assets, investors should remain patient and closely track the revenue share and growth trajectory of non-standard business segments (Security, Observability).

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Theme and Background

This chapter delves into how Elasticsearch (ticker: ESTC) leverages a free, open-source software model to build and continuously expand its enterprise search business. The report focuses on the unique value of the open-source community, its "bottom-up" sales strategy, a node-based pricing model, and the growth logic behind high net revenue retention. This provides investors with a clear framework for understanding the competitive moats and profitability models of modern open-source software companies.

Core Thesis

The author's core investment thesis is: Elastic's open-source community is not a financial burden, but rather its most critical competitive advantage. Through community-driven network effects, it builds moats in R&D efficiency, low-cost expansion, and engineering talent acquisition that are difficult for competitors to replicate.

The report also highlights a counterintuitive judgment: Unlike the high-cost "top-down" sales model of traditional software companies, Elastic's approach of letting users "come to them" (bottom-up) significantly reduces sales expenses and improves conversion efficiency, enabling stronger customer loyalty at a lower cost.

Key Arguments and Data

1. Network Effects of the Open-Source Community:

• Scale Data: Elastic's community on Meetup.com has approximately 150,000 members, spanning 164 cities and 58 countries. This scale effect makes new developers prioritize the software with the most active community, creating a "winner-takes-all" virtuous cycle.
• Three Major Advantages: The community can (1) efficiently contribute code and feature planning, boosting R&D efficiency (e.g., entering the Observability and Security fields originated from community needs); (2) enable the company to early identify and acquire low-cost projects (approximately a dozen acquisitions completed) built around Elasticsearch, integrating their core features; (3) identify and recruit top development talent.

2. Unique Sales Model ("Bottom-Up" vs. "Top-Down"):

The report points out that Elastic's model acts like a "Trojan horse": Developers can download and use it for free without management approval due to its free and customizable nature. Once usage becomes a critical part of the company's technology stack, users actively seek paid plans. In contrast, traditional competitors (using the "top-down" model) need to conduct comprehensive bidding first, resulting in higher sales costs.

Sales Model	Representative Company	Core Logic	Sales Efficiency
Bottom-up	Elastic	Individual developers use for free, demand-driven	Extremely high (customers come proactively)
Top-down	Traditional Competitors	Management decision, comprehensive bidding	Relatively low (requires "door-breaking" sales)

3. Business Model and Net Revenue Retention:

• Business Model: Adopts an "Open Core" model: basic features are free, while advanced features and support are paid. Of subscription revenue, approximately 70% comes from self-hosted deployments, and approximately 30% from managed cloud services (Elastic Cloud). Pricing is based on the number of nodes, and customer data growth directly drives spending increases.
• Net Revenue Retention: Since its IPO, Elastic's Net Revenue Retention has consistently been above 130%. This means that without considering new customers, existing customers alone drive 30% annual revenue growth, providing a solid foundation for the company's growth.

Companies/Assets Involved

• Elastic (ESTC):
• Role: The only company analyzed in depth in this chapter; the author holds a clear bullish view.
• Key Data:
• Open-source community size: ~150,000 members, covering 164 cities and 58 countries.
• Revenue composition: Self-hosted accounts for ~70% of subscription revenue, Elastic Cloud accounts for ~30%; cloud share is on an upward trend.
• Growth metric: Net Revenue Retention (NRR) since IPO ≥ 130%.
• Acquisition history: Approximately a dozen acquisitions completed to integrate core features.

Investment Implications

• Monitor the Shift in Subscription Revenue Composition: Investors should closely track whether Elastic Cloud's revenue share continues to rise. Cloud services not only offer customers simpler deployment experiences but also, through resource consumption-based pricing (e.g., compute, storage), more directly convert customer data growth into revenue growth—a key driver of long-term revenue and profit growth.
• Net Revenue Retention is a Core Leading Indicator: An NRR of 130% means that Elastic's new customer acquisition is pure incremental growth. As long as this figure stays above 125%, even if macroeconomic headwinds slow new customer adds, the company can still maintain healthy organic growth. A decline in this metric would be an early warning signal to watch.
• Value the Competitive Advantage of the "Open-Source Community": The market often underestimates the value of open-source community network effects. The author believes this is not just a marketing tool but an intangible asset that drives R&D efficiency, reduces acquisition costs, and provides a talent pipeline. This gives the company a resilience that traditional software companies lack, forming the foundation for sustained high growth and strong moats.

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Theme and Background

This chapter discusses Elastic (ESTC)'s customer expansion strategy. The report argues that Elastic's "bottom-up" adoption model creates a natural diffusion effect within existing customers: after initial success in one department, the product gradually penetrates other teams, thereby driving an increase in customer lifetime value.

Core Thesis

The author believes that existing customers deploying Elasticsearch across internal teams is one of the core drivers of Elastic's future growth. This model naturally expands the paying user base without additional sales costs, and the expansion cycle is typically long, offering sustainability.

Key Arguments and Data

The original text does not provide specific data, but the report supports the thesis based on the following logic:

Argument	Description
Adoption Path	After successful implementation in a single department (e.g., the operations team), internal word-of-mouth and demonstrated results gradually attract other departments (e.g., security, log analysis, business insights) to deploy Elasticsearch on their own.
Expansion Driver	Horizontal expansion across departments does not rely on traditional sales-driven land-and-expand; instead, it grows organically from user demand, reducing customer acquisition costs.
Upsell Potential	Each newly deploying team becomes a new paid node or increases usage on existing licenses, creating a revenue compounding effect.

The report does not provide specific expansion ratios or revenue contribution data but emphasizes that this model is a key differentiator for Elastic compared to traditional enterprise software vendors.

Companies/Assets Involved

• Elastic (ESTC): Bullish. The report believes that the product's adoption model results in high customer stickiness, low expansion costs, and cross-department deployments will drive long-term revenue growth.

Investment Implications

Investors should focus on Elastic's Net Dollar Retention and growth in enterprise customer count. If the pace of internal team expansion among existing customers accelerates, it will directly improve revenue quality and reduce sales expense ratios, making these key metrics for evaluating whether the valuation premium is justified.

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Theme & Background

This chapter discusses the cross-selling potential among existing customers of Elastic (NYSE: ESTC). The report notes that although Elastic already has three core use cases—enterprise search, observability, and security—more than half of high-value customers currently use only one of these products, leaving significant room for incremental penetration.

Core Thesis

The report argues that Elastic’s unified platform architecture and single-pricing model (as opposed to charging per product) will significantly lower the barrier for customers to deploy new solutions, driving existing high-paying customers to expand from single-use cases to multi-use cases. This represents one of the most certain sources of future revenue growth for the company.

Key Arguments & Data

• Customer Distribution: Among customers spending over $100,000 annually, more than 50% currently use only one Elastic solution.
• Technology/Pricing Advantage: Elastic employs a unified platform with a single pricing structure (rather than per-product pricing), making it frictionless for customers to add new capabilities on top of existing deployments.

Metric	Data
Share of single-use-case customers with annual spending ≥$100K	>50%
Elastic platform pricing model	Unified platform, single pricing

Companies/Assets Involved

• Elastic (ESTC): Recommended thesis. The report takes a bullish stance on cross-selling to existing customers, believing the unified platform structure is the core catalyst for converting single-use-case customers to multi-use-case.

Investment Implications

Elastic's net expansion rate has consistently exceeded 130% since its IPO; customer spending grows 2.1x in two years and 3.2x in four years

Investors should monitor changes in the average number of products used by high-value customers over the coming quarters. If the share of single-use-case customers starts to decline (e.g., from >50% to below 40%), it would validate the cross-selling thesis and could serve as a catalyst for share price upside. At the current stage, this thesis has not yet been fully priced into the market.

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Theme and Background

This chapter focuses on Elastic's cost advantage relative to its competitors and analyzes how this advantage could influence market share shifts in the context of a potential economic slowdown. The market environment is facing macroeconomic uncertainty, and enterprise customers' sensitivity to IT spending costs is increasing.

Core Argument

The author argues that Elastic's core competitive moat lies in its significant cost advantage—competitor Splunk's pricing is approximately 5 times that of Elastic's comparable solution. This cost gap will drive incremental workloads to continue migrating from high-cost competitors to Elastic, and this dynamic will become even more pronounced during an economic slowdown.

Key Arguments and Data

Metric	Elastic Logstash	Splunk (Competitor)
Relative cost benchmark	1x	~5x
Pricing model	Annual billing, based on data consumption	Annual billing, based on data consumption

• Data point: Splunk's cost is roughly 5 times that of Elastic Logstash.
• Logic chain: Cost advantage → drives incremental workload migration → cost sensitivity rises during economic downturns, amplifying the advantage.

Companies/Assets Involved

• Elastic (ESTC) — Bullish. The author believes its low-cost strategy is key to gaining market share, especially during periods of macroeconomic pressure.
• Splunk (SPLK) — Bearish / viewed as a competitive threat but at a disadvantage. Its high pricing (5x that of Elastic) may face customer churn risk.

Investment Implications

Investors should focus on the possibility that Elastic leverages its cost advantage to accelerate enterprise customer acquisition during an economic downturn, while higher-cost competitors like Splunk may face growth pressure and valuation downgrades. It is recommended to overweight Elastic and underweight Splunk.

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Theme and Background

This chapter focuses on the trend of customers migrating from self-managed Elasticsearch to Elastic Cloud. The author argues that as enterprises migrate more workloads to the cloud, their Elastic deployments will follow suit—a structural shift that will significantly improve Elastic’s business model.

Core Thesis

Direct judgment: Elastic Cloud will replace self-managed solutions as the mainstream. The author explicitly states that customers prefer Elastic Cloud over self-managed options because contract values are significantly higher—Elastic profits not only from software licenses but also from compute and storage resources.

Key Arguments and Data

• Technical logic: Elasticsearch clusters perform best when located close to the data they index. After workloads move to the cloud, users naturally want their Elastic deployments to be in the same cloud environment.
• Economic logic: Elastic Cloud contract values are “significantly higher” than self-managed options because Elastic earns profits from both the software and the underlying infrastructure (compute + storage).
• Comparison framework: The author does not provide specific figures, but implies a contrast: self-managed (software-only revenue) vs. Elastic Cloud (software + infrastructure revenue).

Comparison Dimension	Self-Managed	Elastic Cloud
Revenue Source	Software license only	Software revenue + compute + storage revenue
Per-contract Unit Value	Low	Significantly higher
Customer Stickiness	Lower (can migrate away)	Higher (tied to cloud infrastructure)

Companies/Assets Involved

• Elastic (ESTC): The only asset discussed by the author. Self-managed options are seen as a low-value starting point, while Elastic Cloud is the core driver of future incremental profits. The author is clearly bullish, arguing that cloud migration will improve overall unit economics.

Investment Implications

Investors should focus on Elastic’s cloud migration rate and average revenue per contract (ARPC) trends. If enterprise customers accelerate the shift from self-managed to Elastic Cloud, it means Elastic’s revenue quality will improve (from low-margin software licenses to high-margin SaaS + infrastructure fees), while customer lifetime value will also increase. This is a classic value-revaluation narrative of transitioning from a software company to a cloud infrastructure platform.

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Theme and Background

This chapter discusses the operational complexity of Elastic (Elastic N.V.) products. The fund previously noted that the current market downturn creates opportunities for long-term returns, and as Elastic is one of its potential holdings, its maintenance costs and technical barriers are key factors in evaluating its investment value.

Core Viewpoint

The author argues that maintaining Elastic clusters is more complex than off-the-shelf commercial software. This means that enterprise customers using Elastic need to invest dedicated engineering resources to ensure resource adequacy, version updates, and data distribution, which increases customers' total cost of ownership (TCO) and may affect product competitiveness.

Key Arguments and Data

The original text does not provide specific data or cases, only qualitatively stating that maintenance requires continuous attention from engineers. This section lacks numerical support, but in the context of the overall report (the fund seeking opportunities after a sharp decline in growth stocks), this assessment may point to challenges Elastic faces in customer development efficiency.

Companies/Assets Involved

• Elastic N.V. (ESTC): The subject of analysis. The author suggests that the maintenance complexity of its products is higher than that of standard software, which may weaken its advantages over open-source alternatives or managed services, indirectly affecting customer stickiness and earnings expectations.

Investment Implications

Investors should pay attention to the relationship between Elastic's customer acquisition cost (CAC) and customer lifetime value (LTV). If maintenance complexity forces customers to hire additional engineers, it may reduce the willingness of small and medium-sized enterprises to adopt the product, increasing the risk of customer churn. Against the backdrop of significant valuation pullback (more than half of NASDAQ stocks have declined), it is necessary to verify whether the product has a sufficient moat to absorb this cost disadvantage.

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Theme and Background

This chapter analyzes the core challenges and opportunities currently facing Elastic (ticker: ESTC). The report argues that Elastic's sales personnel struggle to convince developers to pay for open-source software they already use for free, which slows new customer acquisition. At the same time, the company faces a competitive threat from Amazon Web Services (AWS). The report's core thesis is that Elastic is gradually mitigating these risks through its cloud service transition (Elastic Cloud) and legal measures, and is on track to achieve profitable growth.

Core View

The author's core investment thesis is bullish on Elastic, believing that the company is successfully transforming from an open-source software company into a SaaS cloud services company, which can effectively resolve the sales bottleneck and improve profit margins. The report presents a contrarian assessment: despite fierce competition from Amazon, the author believes Amazon is not an "Elastic killer." The author judges that Elastic is pulling away from Amazon through legal action and faster technological iteration.

Key Arguments and Data

1. Solution to the Sales Conversion Bottleneck: Developers are accustomed to using Elasticsearch for free, but the sales-led conversion to paid usage is low and sales costs are high. Elastic Cloud, as a pure paid managed service, significantly reduces friction for paid adoption by automating resource provisioning, lowering the entry cost (a few hundred USD per month vs. thousands per month for a single node), and providing trials of all paid features.

2. High Growth of Elastic Cloud: Data directly demonstrates the success of the cloud transition. Elastic Cloud's revenue share increased from 18.5% at the end of 2019 to 38% in the most recent quarter.

3. Margin Improvement: Elastic Cloud's sales process is more self-service oriented, reducing the need for sales support and customer onboarding resources, thereby improving sales team efficiency. The report argues that the combination of higher revenue per customer and lower operating expenditure is the decisive reason why Elastic achieved positive cash flow in its fiscal year ending April 31, 2022, and expects its profitability to continue improving over the coming years.

4. Open-Source Community and GitHub Activity Comparison: In response to competition from Amazon, the report demonstrates Elastic's advantage by comparing developer community activity. Specific data is presented in the table below:

Comparison Dimension	Elasticsearch (Elastic)	Opensearch (Amazon)	Multiples Difference
Number of Active Contributors	Significantly higher	Significantly lower	3x - 6x
Number of Pull Requests	Significantly higher	Significantly lower	3x - 6x
Number of Code Commits	Significantly higher	Significantly lower	3x - 6x

Companies/Assets Involved

• Elastic (ESTC): The core analysis target. The author is bullish.
• Key Data: Elastic Cloud revenue share grew from 18.5% (end of 2019) to 38% (most recent quarter); expected to turn cash flow positive in April of fiscal 2022. Background: The author has been eager to hold high-quality Western software companies since founding the fund in 2018, and believes the investment opportunity has arrived due to a significant decline in software valuations.
• Amazon / Amazon Web Services (AWS): Appears as a competitor. The author views it as a risk to be cautious about but not fatal.
• Key Data: The activity of its fork, Amazon Opensearch, on GitHub (contributors, PRs, code commits) is 1/3 to 1/6 of Elastic's. The author assesses it as a "low-cost, basic version" alternative that primarily eats into the low-end market.

Investment Implications

1. Favor SaaS Cloud Transformation: Investors should prioritize companies that can successfully convert free/open-source users into paying SaaS customers. Elastic has lowered the barrier to adoption and increased ARPU and margins through Elastic Cloud. This model validates the sustainability of its business.

2. Avoid Excessive Fear in Direct Competition: When facing competition from giants like Amazon, one should not dismiss the target outright. Through legal measures (brand protection) and technology (continuous iteration), Elastic has proven its ability to maintain leadership and widen the gap in its niche. This provides an evaluation framework for investing in other companies facing similar threats.

3. Focus on the Profitability Inflection Point: Elastic is expected to turn cash flow positive in fiscal 2022, with profitability expanding as Elastic Cloud penetration increases. This points to an investment thesis centered on net profit improvement, and investors should monitor the release of operating leverage.

Summary

The appended fund legal documentation in the follow-up article is not irrelevant; rather, it reveals how formalized, heavily disclaimed sales materials exacerbate developer distrust. The core predicament for Elastic salespeople is not only a lack of product differentiation, but a deficiency of trust infrastructure — they cannot rely on performance commitments and legal protections as in traditional B2B sales, because developers' decision-making logic is based on "verifiable facts" rather than "disclaimers." Every risk disclosure in the Bonsai letter has a corresponding "open-source alternative" benchmark in the developer community, making any paid proposition appear costly with uncertain returns.