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

sick of it

[dzafez]

Anyone else sick of reading Businessadvice?

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Are there any Geeks who care about it? Go read on the numberous businesspages about it.
This is This is fir Stef Murky not for me. Sorry, for the flamebait.