Advice for Open Source Startups: Remember LinuxCare

Dave Rosenberg, Principal Analyst, Open Source Development Labs, contributed this commentary piece: Despite all the open source software and services companies funded in 2005, the associated business models are still considered experimental and unproven. The new crop need only to look to the past avoid missteps. At the Open Source Business Conference in November, VCs and open source software company executives wondered aloud if what we’re seeing today is a “bubble” of open source start-ups being funded. One journalist’s recap of the event cited $144 million in open source start-ups receiving VC funding in 2005, double the venture capital flow for open source start-ups in 2004. Bubble or not, there is a company that every would-be open source start-up investor should learn a lesson from: LinuxCare.

LinuxCare was born in 1999 -- venture-backed by top tier VC firms like Kleiner Perkins, with total funding in the ballpark of $70 million.

Those were the frontier days for Linux. There was a ton of industry interest and activity despite the fact that the jury was still out with respect to end user adoption. Nobody really knew exactly how Linux was going to be used – would it be for the desktop, servers, etc.? The company used the vast venture coffers to promote the brand and staff star-power (even Linus Torvalds consulted for them briefly)– and LinuxCare quickly became the recognized name for Linux services and support, doing work for big systems vendors like Dell and IBM in addition to developing device drivers and offering education services.

Red Hat had the Linux OS and software, VA Linux had the hardware – and LinuxCare had the services. It was a theoretically perfect enterprise Linux ecosystem triumvirate.

But it wasn't meant to be.

The demise of LinuxCare can be attributed to many factors. The first was that enterprises were slow to adopt Linux – in the early ‘00s, IT spending came to a grinding halt with the dot-com and stock market crash. But the key factor to LinuxCare’s spectacular death spiral was the fact that they were going up against Red Hat, the very company they were basing their business on. Red Hat not only developed their own distribution of Linux, but also started offering support for it. Red Hat offered a one-stop shop for Linux software and services regardless of hardware. Enterprise customers decided it was easier to buy from one vendor. This same sentiment is what drives sales of Microsoft software in enterprises today.

LinuxCare suffered a painful public death over months of executive departures and layoffs, VA Linux abandoned hardware for software, and RedHat, with the cash to weather the tech spending downturn, expanded its revenue streams and became the de-facto enterprise Linux distribution.

It's easy to dismiss LinuxCare as "ahead of their time", which is definitely true. But the fundamental and fatal flaw was that they based their products on someone else's IP, with no IP of their own. When the market tanked abruptly, LinuxCare didn't have the money to weather the storm and didn't have consistent alternative revenue streams to combat the lack of services income.

Some of the executives from LinuxCare went on to start a new company called Levanta, which focuses on Linux systems management. They have since developed IP in software and hardware that can sustain the business beyond the services revenue.Their LinuxCare experience taught them how to build a sustainable technology business model on top of open source software. No longer do they rely on IP that walks out the door every night in their employees' heads.

In the end, it all comes down to IP. Building a business on top of something you don't own is extremely risky. Companies need to develop their own IP to be innovative and have competitive differentiation. And if they don't develop it themselves, they need to acquire or license the relevant code to protect themselves and ensure they aren't caught without alternatives.

An Open Source Danger Zone?

In my eyes, the bubble associated with open source is less related to the millions of VC dollars and more related to the reliance on software and components that are not part of a company's internal IP. When Oracle acquired InnoDB, it had a less than positive effect on MySQL, but MySQL is a smart enough company to not bet the farm on something it doesn't own. It owns enough IP to sustain its products-and it's business from the risk associated with relying on someone else's code.

IT Groundwork has built a business on top of an open source network monitoring project called Nagios. They don't own the copyrights and they don't employ the creator. Kleiner-backed SpikeSource offers "certified stacks" of open source software components, but they don't actually create the open source components themselves.

And in SpikeSource's case, Red Hat announced that they too would offer "certified stacks." Who do think is going to win that battle? Red Hat, the one-stop shop that offers the OS and the apps, or the company that offers merely a portion of the total package. Does SpikeSource have the IP or alternative revenue sources to withstand Red Hat? Let's wish them luckand hope they know the LinuxCare tale.

If there is a bubble, it will burst when the open source projects these new company's products and services depend on go private, fork, or get acquired. The market for open source is so new we haven't seen much of this yet. Only time will tell if the recently funded open source companies can build sustainable businesses, or if this grand experiment will result in a few 800 pound gorillas and many tiny monkeys.

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Comments

I hate to be a dick, but . . .

[Seumas]

I really hate to be an asshole here, but you know what I am tired of? I'm tired of every two-bit geek thinking that he's going to come up with a revolutionary idea, be able to implement it and be the next billion-dollar sell-out to Fox News Corp or Yahoo!.

The 90s are over. I hate to break it to my fellow geeks, but being successful in a startup was always a risky proposition even in the heyday. Your best bet, now, is to learn how to properly brown-nose and pick up lots of business and office-politics skills and make yourself satisfied with the "employee" thing. Working for other people kind of sucks, but it's better than suffering grand delusions of greatness.

Then again, it's christmas time and I like being a grinch. So go suck a glass ornament. :P

Re:I hate to be a dick, but . . .

[Eightyford]

A few. Obviously not everyone can be a millionaire, but unless you are born into wealth, it takes a certain determination to become that rich. Most people don't have that determination.

Re:I hate to be a dick, but . . .

[Seumas]

Geeks rarely exhibit the behaviors and habits of successful business men. Hell, if you can't even be bothered to shower, how can you be expected to bother to show up to work and meetings and run your business? Further, geeks tend to push aside the important things and focus on what (to them) are the "fun" things. That doesn't help anyone succeed.

More importantly, as geeks are fond of saying "I'm an engineer - not a manager". They don't want to be bothered with business things. They want to sit in a dark room drinking soda and coding. If you just want to code and make stuff and let someone else do the important work (the marketing, management, payroll, loan negotiation, paying the bills, business plans, etc) then . . . well, work for a company like most of you probably already do.

The really successful people tend to be business oriented and let other people do the grunt work . . . because they have to make the decisions around the place.

Not to mention, most businesses fail. And by most, I mean almost EVERY business fails.

On the other hand, if someone wants the stress and ulcers and short life and agony that comes with being responsible for every aspect of a business that won't do much more than provide you with the income you already had when you worked for someone else, go for it I guess... But remember, you HAVE the salary you're making now. When you work for yourself, you will probalby not turn *any* profit for years. Much less make what you're already making.

Frankly, I just don't think geeks are cut out for business and running their own companies. What successful companies out there have an owner or CEO that still spends the majority of their time designing and writing their own software and such? I bet it's small or nonexistant.

Re:I hate to be a dick, but . . .

[WhiplashII]

If it is luck, why are there basically no out-of-work millionaires (outside of sports) - even though you have heard of many people that lost it all. In fact, most commonly you hear about the people that worked up to millions, lost it all, and then worked up to millions again.

It isn't luck - that's what people say who do not have the dedication or risk accepting attitude. You can always use whatever luck you have - there is always some option.

That said, there is a lot of luck involved - but it determines the level of success, not who is successful.

OSS is not at its tipping point - yet.

[IAAP]

The demise of LinuxCare can be attributed to many factors. The first was that enterprises were slow to adopt Linux - in the early '00s, IT spending came to a grinding halt with the dot-com and stock market crash.

They were just ahead of their time. Like Go computer was. Now, there's a market for handheld and tablet devices. OSS' time will come. When, if I knew that, I'd be investing/starting something myself!

Linuxcare ... beh

[TallMatthew]

I've worked with and for a handful of Linuxcare peeps and my impression of them is ... well ... unfavorable. Generally less-than-talented, albeit good intentioned.

Using Linuxcare or VALinux or even Redhat to judge the financial viability of open source companies doesn't paint a complete picture. The number of companies deploying open source technologies in their production infrastructures, embedding Linux in their hardware and porting their software in order to save their customers' hardware budget, these are a better barometer of the movement's success than the attempts of the aforementioned companies to make money off of something which is intrinsically free.

Re:That's not the only thing

[El Cubano]

I wish business were that easy. It's not just about avoiding the mistakes of your predecessors, though that's probably a necessity.

Right. It's also about doing the same things right. I saw a presentation by Bill Matthews of Hurricane Labs (no affiliation). He was presenting on building a company on open source. He said that number one thing is to not take venture capital. He said that the investors will likely force your company in a direction in which you do not want go, if it means they think they will get a higher return.

Basically, he said to start small and self-fund as much as possible. That is what he did and he claims that he and his partners were able to make Hurrican Labs profitable in two years. When I start out on my own, I plan to at least give self-funding a shot before seeking venture capital.

Seems to me...

[Otter]

From the VC's point of view, LinuxCare doesn't seem like a bad idea even in hindsight. If things had played out differently and Linux had a 25% desktop market share (which, for all anyone knew, was possible) LinuxCare would be sitting pretty today, even with their obvious managerial problems. It was a bet that had to be placed, even though it wound up coming up empty. VC's make their money on hitting enough lucrative longshots to make up for all their losses.

What exactly to they mean by "IP"?

[doom]

What exactly do they mean by IP? They don't seem to understand that RedHat releases all the code the write under the GPL, and most of the code in their distro doesn't belong to them in any sense at all. RedHat has a brand, it doesn't have "Intellectual Property".

They know absolutely nothing about what happened to LinuxCare, except that it tanked. My impression is that it's a good example of a geek-founded company taking on Professional Management to keep the VCs happy and getting royally fucked over by the Professional Management with the Impressive Credentials.

Suits never want to take the rap when suits screw-up. You can bet that if the geeks had tried to maintain control and tanked the company, the business press would never stop yammering on about how they obviously needed Professional Management.

Re:What exactly to they mean by "IP"?

[DraconPern]

IP means the knowledge required for future development of a product. For traditional companies (e.g. 'closed source'), it takes the form of patents, documentation, and trade secrets. For 'open source' companies (e.g. companies that hope the community knows more about their target market), IP takes the form of developers who knows the source code inside and out.

For RedHat, it doesn't matter if their source code is out in the open. What is valuable to them is their network of developers (e.g. mindshare) and the ability to affect the direction of projects. Think of them as the used car salesmen, they make someone else's ugly cars look good and sells it. Microsoft is like the new car salesmen in this example.

Open Source StartUp Bubble

[virtualthinker]

As a developer who has written a lot of code for a lot of people over the years, I find it incrediable how you can call open source a business model. Open source is not a business model, simply because the objective it free code, which in no way supports any ones business goals - other than some other business'es desire to have something for nothing. Lets face the facts: open source is a code pool used by independant developers to build solutions for a few (maybe more) of their clients. We have a pool of code which we can use to build some really neat stuff (when we can get it to actually work!) Now, I am in favor of open source, because it is good for software people - but software people are not necessarily business, and it does keep the pressure on m'soft, to build better systems. I seriously doubt that real geeks are behind any of this, because most of us know there is no open source business model. Unfortuantely there are the next level business types who want to cash in, but are generally clueless about the technology actually involved. As far as I can tell the open source model allows independant practioners to develop prototype solutions, demonstrating what can be done at a very low price, which business people take to their m'soft geek and say I want this! He eventually delivers something, making them happy. As these systems bubble up to m'soft's attention, they develope targeted packages, plugins, addin's whatever to hold onto said customers. Open source is a developer model; A business model it is not!

Re:Open Source StartUp Bubble

[shmlco]

Especially since many in the OSS community seem to be allergic to paying for anything.

Personally, if I were an investor I'd remove the words Open Source from the business plan. Then see if you'd invest in yet another consulting business (or whatever it is) anyway.

Business Models

[Arandir]

Most business fail. I can't remember the statistics, but it was miniscule amount that manage to survive past five years. I'm not talking Linux support businesses, I'm talking ALL businesses (in the US). The holy grail of "Viable Business Model of Open Source" is a myth, because we still haven't found one for any other industry.

It's like dieting. No matter what the diet fads are, the only way to lose weight is to eat less and exercise. Similarly, no matter what the Open Source pundits tell you, the only way to keep a business running is to sell a product or service other people are will to pay for.

The Open Source fairy going to come along and give you a magical business plan. So start eating less, exercising more, and selling a product people want.

Missing the point...

[duffbeer703]

The author missed the biggest problem with LinuxCare: it was a terrible idea!

I'm sure the VC people made it sound great... "10 billion eyeballs looking at thousands of Red Hat Linux servers... someone needs to support the servers!"

The problem is that they were a third party in a commodity business. If I buy a server from IBM, HP or Dell, I'll get hardware support. Linux support is and was available from Suse,Red Hat, etc.

So where was the growth? If Linux failed, Linuxcare would be out of business. If Linux took off, IBM, HP, Dell, Sun, etc will offer support themselves, with established professional services groups to make it easier.