There has been much written lately about what kind of markets and verticals an open source business model will thrive in. Matt Asay wrote that "if you open source an old market, you might be doomed to fail". The point of Matt's article is that though it was fashionable for open source companies to raise money by entering older, more mature markets with the idea of winning by the commoditization of these markets, they really lost. Asay's point is who wants to be king of dying, commoditized market? Sort of like Mad Max roaming a post-apocalyptic wasteland. You may be king of the road, but your not exactly living high on the hog. Matthew Aslett in his 451 Group Chaos blog responded, somewhat agreeing with Matt's point and using that to justify why open source models may not be a great target for traditional VC style investing.
Matt and Matthew of course have many data points to back up their thoughts. There have been 100's of millions of dollars raised by open sourced based businesses with the idea of commoditizing an older market by being the "open source choice". As Matt points out many of these have failed miserably. Some have treaded water, never reaching their hoped for goals and a rare few have had very successful exits (which lest we forget is the name of the game in the VC world).
Matthew points to a full report (beware it is not free) the 451 Group wrote on open source business strategies. The gist of Matthew's point is that as one market commoditizes, usually adjacent markets are opened up. For instance when Linux disrupted the Unix market, it was not the Linux distributors who made the big profits, but rather the IBMs, HP and Dell's of the world who used Linux and standard hardware to displace Sun and other specialized hardware/Unix distributors.
Red Hat of course is the exception to the rule. But even Red Hat's CEO Jim Whitehurst put this into perspective when he described how in order to generate $5bn in revenue, Red Hat would need to displace software that currently costs $50bn. How many markets can displace $50bn in revenue? There just aren't that many markets big enough, hence why there are not any 1bn plus open source companies.
Aslett then sums up the 451 position with:
there is a case to be made that a 100% open source software-licensing strategy is incompatible with the demands and requirements of private investors, and that the template for future open source distributors is not the venture-backed high growth and profile of Red Hat, but smaller, more modest open source support, service and consulting providers.
I agree and disagree (I write the blog here and it my prerogative to play both sides of the coin). I think there is lots of room for open source companies to play just below the radar of the major VCs providing support, services and consulting. But I also think that there are markets (especially cloud based) where open source model with an SaaS dual license/core model will satisfy the insatiable appetites of VCs regarding returns.
Matt Asay also has another point. It is fine to play Road Warrior in the old, commoditized market, but you need a second act. A sequel if you will, beyond ThunderDome even. An open source company can get its legs in an older market and use that to break out into a newer, more lucrative faster growing one. Of course, that is certainly a play.
I want to leave you with one other thought on this though. The VC baseball model. It goes like this, if out of 10 investments, one is a home run, there are two or three doubles or triples, 2 are single and 4 or 5 strike out, they still make their money. Remember in baseball if you only get three hits out of every ten at bats (hitting .300) you are a potential Hall of Famer. In the VC world the same batting average rules apply. So I don't think open source business models are so unappealing to VCs as Matthew Aslet would have us believe.
As co-founder and Managing Partner at The CISO Group, Alan Shimel is responsible for driving the vision and mission of the company. The CISO Group offers security consulting and PCI compliance management for the payment card industry. Prior to The CISO Group, Alan was the Chief Strategy Officer at StillSecure. Shimel was the public persona of StillSecure as it grew from start up to helping defend some of the largest and most sensitive networks in the world.
Shimel is an often-cited personality in the technology community and is a sought-after speaker at industry and government conferences and events. His commentary about the state of security, open source and life is followed closely by many industry insiders via his blog and podcast, "Ashimmy, After All These Years" (www.ashimmy.com). Alan is now also a regular contributor to The CISO Group’s security.exe blog and podcast.
Alan has helped build several successful technology companies by combining a strong business background with a deep knowledge of technology. His legal background, long experience in the field, and New York street smarts combine to form a unique personality.
Disclosure: The CISO Group sells a software-as-a-service PCI compliance application called SAQPro. The company is independent and does not represent any other vendor's products as a reseller.
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