Venture Capitalists Think Open Source Again

prostoalex writes "Seattle PI notices a rise in venture capital investments into open-source companies. JBoss, SourceLabs, SugarCRM and OSDL all attracted venture capital investments this year, with SourceLabs receiving investments from former Senior VP of Microsoft. ""You could say that it is as disruptive as ... mainframes going to PCs or landlines going to cell phones. Software as it has been sold for years is about to be turned on its head completely," says Lucinda Stewart from OVP Venture Partners."

Comments

How do you make money on free software?

[Anonymous Coward]

Volume.

Re:How do you make money on free software?

[nadadogg]

Support contracts

Re:How do you make money on free software?

[tonsofpcs]

Actually, most likely, tech support. Think about it. If I, as a major corporation, give joe-schmo a copy of an open source app I made to, lets say, track finances, and he starts using it, its doing what he needs, and its tax time, and all of a sudden it stops working, and I don't provide free tech support and he NEEDS it to work, don't you think I'll make a little money (assuming joe-schmo doesn't read code)?

Re:How do you make money on free software?

[dirvish]

No joke. If a lot of people are using your software you'll be able to sell a boat load of support contracts.

Re:How do you make money on free software?

[jarich]

Ask RedHat!

http://finance.yahoo.com/q?s=RHAT&d=t

Market Cap: 2.13B

Re:How do you make money on free software?

[UniverseIsADoughnut]

no, he's going to say screw you and find something else, maybe from someone else giving the software out for free.

Basing things on support is horrible. A good peice of software won't need support. If someone has to call you to figure out how to work it, then the software has a problem.

There is probably some forms of support that work, maybe you give the app away for free, but you charge for plugin that add features, or there is some prescription for an aspect of it, like you pay to have the program get feed info all the time (like a tivo like app, or a weather program would need).

But in the end support fails on these ones to, because someone else won't have any intention of being a business, they will just be making something and giving every aspect of it away, and doesn't need support. At that point no free software business model will work.

Pay software will survive though. For one there is less diversity, thus more people using the same app which makes person to person (friends) support work better, and just nice to know that a big chunk of the world is using the same as you, so you get things like "oh hey, my bank lets me download my statements in the format my app uses". Also when something goes wrong with it, there is someone to hold responsible.

People want to buy stuff from solid companies that they know of, and can feel certain that company will be around. Free software doesn't give that. Redhat is probably the most solid company out there for this, and few outside the linux world have ever heard of them, and even then no one looks at them as a company they know for certain will be around even 3 years from now.

Re:How do you make money on free software?

[DavidNWelton]

You can make money on tech support, but it probably doesn't scale as much as VC's want. What I mean, is that for each company you provide service for, you have to add people. On the other hand, with proprietary licensing fees, you have your sunk development costs, but from that point on, you could sell 1000, 10000, or millions of copies, and it's all profit. It's an exponential curve. Potentially at least... I don't know what the stats are like for the 'average' firm.

Re:How do you make money on free software?

[bergwitz]

no, he's going to say screw you and find something else, maybe from someone else giving the software out for free.

Not if he already paid for the support or a warranty.

Basing things on support is horrible. A good peice of software won't need support. If someone has to call you to figure out how to work it, then the software has a problem.

Really? Perfect software won't need support. If your statement is correct there is no good software available today.

There is probably some forms of support that work, maybe you give the app away for free, but you charge for plugin that add features, or there is some prescription for an aspect of it, like you pay to have the program get feed info all the time (like a tivo like app, or a weather program would need).

Are you sure you really understand what free in free software stands for. The above example is how freeware works.

But in the end support fails on these ones to, because someone else won't have any intention of being a business, they will just be making something and giving every aspect of it away, and doesn't need support. At that point no free software business model will work.

as would any software business model.

Pay software will survive though. For one there is less diversity, thus more people using the same app which makes person to person (friends) support work better, and just nice to know that a big chunk of the world is using the same as you, so you get things like "oh hey, my bank lets me download my statements in the format my app uses".
Also known as standardization.

Also when something goes wrong with it, there is someone to hold responsible.

Also known as a warranty.

People want to buy stuff from solid companies that they know of, and can feel certain that company will be around.

Such as IBM or Sun...

But maybe you just confuse free beer with free speech. In that case disregard my post and go visit Free Software Foundation

Re:How do you make money on free software?

[Fnkmaster]

Or giving away the software and selling the hardware to go with it like Digium does with Asterisk. There are several reasonable ways to make money from Open Source software.

But the problem is that all of them basically devalue the software and the work put into developing it in the first place. And it basically makes it impossible to make money as a small software company - you are making money as a support company, or a hardware company, and just using the software as a hook to get people interested in buying. This is a problem because these small software companies have long been where the best jobs for real software developers have been. If everybody is using Open Source software, then the jobs move to being basically plumbing/IT jobs at larger companies, where you are treated like a cog, a commodity.

I do worry sometimes that the overzealousness to make everything Open Source hurts the very programmers who generously contribute their time.

I'm a big fan of Open Source software, and I think there are a lot of exceedingly common problems that ought to have solutions provided by the Open Source community for the benefit of all, and I'm glad they are there. But there is no reason to think that every niche in the software world should or will be filled by Open Source.

Re:How do you make money on free software?

[JamieF]

A screwdriver is a simple tool. Even so, Craftsman gives a lifetime warranty.

Software can get really complex, and support doesn't just mean that it's broken and you need to pay someone to fix bugs. It can also mean training, or customization, or tool development, or implementation planning. Businesses quite often have no interest in mastering every detail of software, even if that software is critical to their business. They'd rather pay someone who already knows the software to just look at their needs and tell them what should be done, and then to do it.

It's not possible to dumb down all software to the point where nobody wants this anymore. I've been doing business software development for years, and universally, the folks paying for the software aren't interested in thinking about the details of how the thing will work. They just want to wave their hands and have a perfect solution materialize. It's a big chore (but very necessary to a successful project) to try and find ways of making it less painful for them to answer questions about how the system will work at a detailed level, since these decisions can have a big impact on how useful the system is, and since these decisions often must be made by a domain expert rather than a programmer or analyst.

When confronted with the necessary complexity of a system that has to follow rules instead of just doing the decision making for them on an ad-hoc basis, they either want training, or they want to hire a subordinate to get trained and deal with the system. It's important to try and make the system as logical and usable as possible, but a totally intuitive system that even a child could figure out in 5 minutes is just not an attainable goal when the problem domain is inherently complicated and there are issues of security and workflow and large sums of money and domain-specific terminology and regulatory compliance...

Nevertheless, people are foolish enough to think that they can skip all these steps and just jump right into typing in source code, and that this same broken non-process can be optimized by just having cheaper people do it in a faraway country.

Even if the coding and debugging are FREE and the license is FREE, there's still the matter of figuring out how to get it to work. Tar is free, but it doesn't come with a universal backup strategy AI that you invoke with the push of a single button. Somebody still has to THINK about it and WRITE DOWN WHAT THEY WANT. Quite often that person is a specialist who doesn't work for the company, and is lumped in as Support.

Software

[Anonymous Coward]

"Software as it has been sold for years is about to be turned on its head completely," says Lucinda Stewart from OVP Venture Partners.""

And that will be a damn good thing. Perhaps things might get turned to a user license instead of a single user/mahcine licnse. How about resonable prices? How about companies standing behind their work because there is actual competetition in the market.

Luck to them

[OpenSourced]

I'm all for open source software, to the point of administering a sourceforge project. But. But I cannot think open source is anything to get rich with. Can you run a bussiness ? Sure. Can you make money with it ? Sure. But can you make a lot of money with it ? Hardly.

I guess venture capitalist are using the flawed logic:

1. Microsoft, Oracle, SAP, are making gazillions of dollars from software.

2. It seems like Open Source software can replace or at least successfully compete with this behemoths.

3. Somehow, some part of the gazillions of dollars that the aforesaid firms are not going to make, will make it to the Open Source companies.

Point 3 is simply not going to happen. The money will quietly remain in the companies using OSS. They should refocus their strategy and perhaps invest in those companies (the ones heavily using OSS).

Re:Luck to them

[paretooptimum]

That' funny... I've made some real money on open source investing. I bought SCO when it blew up on slashdot, followed it up, sold just over the peak and shorted it down. So there is money to be made on open source - shorting the stocks of the losers. My current investment tips (courtesy slashdot): short Sun.

Re:Luck to them

[isometrick]

I think money can still be made with something like Caucho's developer source license.

It's not BSD or GPL, but it does allow you a lot more freedom than completely closed source solutions do. The only caveat I see is that, unless you work for the company, you aren't getting CVS access.

However, it allows the people who work on the software to be compensated.

Re:Luck to them

[antiMStroll]

You forgot the disruptive technology part and assumed that the glory days of companies such as Microsoft - a virtual monopoly capable of swallowing competitors - will last forever. The computer software market appears to be a strange one comparable to 19th century oil or rail. Neither disappeared but there was plenty of money to be made from disruptive technology like cars and planes.

Re:Luck to them

[sopuli]

Indeed you are not going to make money on selling the program or license costs. However, there is good money to be made in consultancy.

Consider all these big firms like SAP, when their market matures and most of their money starts to come from existing licenses instead of new sales, they invariably try to expand/develop their consultancy side (anoying their former consultancy partners).

So basically an OSS firm skips the initial phase where they get their income from product sales, but they may still be a viable consultancy company, especially if they can capture a large part of the market.

Personally I don't value consultancy firms all that high. Basically they sell hours, and you can sell an hour only once, so your income is limited by the numer of consultants you have (if you have a consultant that is very popular you can't burn other copies of him/her and sell those too). So in that sense I think these OSS firms are probably less desirable to investors.

It's cause copyrights are and should be dead

[argoff]

The simple truth is that copyrights are more like a government regulation that screws up commerce and business than some kind of free merket property right like MS would like you to believe. That's why the GPL which undoes much of the dammage done by copyrights in terms of controlling information flow is becomming such a force to be reconed with.

Like in most cases, freedoms and free markets are linked at the hip and the GPL is no exception. What's driving the rappid adoption of FOSS is pure old fasioned market forces and the service sector making the best use of technology at their disposal. Plane and simple.

Simple

[omghi2u]

It's really a great idea that little people realise in that a product itself relatively costs nothing and supporting it and/or releasing hardware for it is where all the bucks are. :-)

so, i'm a grammar nazi

[heliocentric]

But I just can't read this post. There are 5, an odd number, of quotation marks. How are these supposed to line up?

prostoalex writes "Seattle PI notices a rise in venture capital investments into open-source companies. JBoss, SourceLabs, SugarCRM and OSDL all attracted venture capital investments this year, with SourceLabs receiving investments from former Senior VP of Microsoft. " "You could say that it is as disruptive as ... mainframes going to PCs or landlines going to cell phones. Software as it has been sold for years is about to be turned on its head completely," says Lucinda Stewart from OVP Venture Partners."

The programmer in me looks at this with parsing in mind and goes nuts.

I think either the second one is extra or the editor added a final article quote, but kept the text italics and addeed a final quotation mark for good measure.

Verticle Market Products

[randall_burns]

I've noticed an increased number of Open Source products in verticle market niches(i.e. specialized accounting packages). I can easily imagine that if some of the larger customers would band together and chance their purchasing practices we'd see dramatic change here rapidly. For example, i work with a large public school district. They've had closed source vendors that simply became unable to support their products any longer(basically the folks that understood the product refused to work with the closed source vendor management). Now, the bulk of money flowing into that closed source vendor was taxpayer money. If the school districts had insisted on Open Source up front, it might have cost a bit more money-but it would have saved a lot of hassle down the road.

One way this might be done is for large public agencies to pool their purchasing decisions. Basically they would agree to a large purchase from a vendor on condition the source be open.

80% rule could make a difference

[bstadil]

I think you have overlooked the fact that +-80% of all software expenses and development is done inside companies.

With the advent of FOSS it is much easier to farm out big chunks of developments and take advantage of code already out there. The ability to tap into existing code is something that is much better done at the community level than handled by a few in-house programmers.

This in turn means that companies that are able to do the I/F has a chance of becoming very profitable as it is not easy to do. Notably for domain specific requirements.

Missing the point.. Open Source is not about that

[xtal]

Something I realized awhile ago - and I have been doing very well since - is that open source technologies are not about the software development and software retailing and support processes at ALL. You can make money doing this, but as you mentioned, you won't make a LOT of money. The money isn't going to be in software companies - up until now, the 0 production cost of software after initial R&D is a lisence to print money.

What I realized though was having all this technology around enables companies to apply all sorts of new, "free" technology to solve new problems. Many of the new "free" technologies help a lot of different companies; for example, an inexpensive real time OS is of benefit to many many people. As are machine control libraries, communications libraries, toolkits, etc etc. Do you have any idea how powerful libraries like FFTW are?

All of those pieces can be put together to make new companies possible and existing companies more productive. That's where the gold under the rainbow is for Open Source; commodity software that is in everyone's best interest can be jointly developed, saving thousands and thousands of man hours of duplicated effort.

The only way to compete with third world labour is to increase productivity - and open source technologies can really help here.

And -that- boys and girls is why some savvy venture capitalists are waking up. Finally.

Why Developing Free Software Can Make You Money

[RAMMS EIN]

A lot of people here seem to think you can't make money developing open-source software. It is true developing software costs money and allowing your software to be spread freely is not going to make you a lot of money. However, a number of facts play to your advantage.

1. Open-source software has more value. The same program is worth more if you get the source with it. Being allowed to inspect, distribute, modify, and sell that source is a huge value add.

2. As an open-source developer, you can draw from a vast pool of existing code and adapt it to your needs. This advantage is often denied to closed-source developers (thanks to the GPL), or only available in some limited form (e.g. you can license some code for use in your product, but won't be allowed to modify it). Because of this, open-source software is cheaper to develop.

3. You can take advantage of open-source by having other people find and fix bugs and add new features, decreasing development and maintenance cost.

4. If you are developing custom software, your client will likely not be able to resell your software on a large scale, without putting in significant effort. Even if they do, you have a headstart, because you know how the software works (you wrote it) and they paid you for the development.

So, open-source software can be more than just a loss leader to sell services.

My Only Concern... is the influence

[jedaustin]

While I think it is great that open source projects are getting a nice infusion of cash, I just can't help remembering what happened between 1997 and 2000.

The problem with the dot-com boom was venture capitalists pushed companies to grow too quickly and burn out. I saw a lot of stupid ideas get millions of dollars only to die a horrible death.

Its like making a deal with the devil!

The ideal Open Source model: Collabnet

[JPyObjC Dude]

Whats CSDS - Collaborative Software Development System. The most significat Open Source project out there is probably Collabnet although many don't know what it is, many have used it. If you downloaded netbeans, Open Office or checked out subversion (tigris.org), you've used it.

Their product is built on the premis of combining Open Source applications and building an all encompasing sandbox to house all the sub systems in such a way that the whole is one seamless system to the user. Their web based interface is simply put, elegant. Although, with dhtml they could see significant improvements in performance, the underlying applications are sweet.

This is the type of project model that proves the effectiveness of Open Source. The Company has an awesome product that is built on components that anybody can download and interrogate the source.

The only thing that sucks with CN is, like other Enterprise SCM systems, its damned expensive. But any reasonable sized programming firm that builds on their platform have to work hard to screw things up.

BTW - who owns Collabnet?... Just the Tim O'Reilly, Founder and President, O'Reilly & Associates. And Brian Behlendorf, co-founder of the Apache Software Foundation. Honorary super hackers in my eyes.

I'm just waiting to see an open source project emulating what collabnet is doing. Anybody interested in building an open source CN offering. I'd be there in a flash! :]

JsD