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What is an Open Source Company Really Worth?
CNet has an interesting profile of MySQL, JBoss, and Zimbra, exploring what an open source company is actually worth. "Given how slowly revenue accumulates in an open-source company--assuming it is recognizing subscriptions over 12 months--bookings is probably the valuation metric being used or at least strongly considered. It surely is the metric by which the start-up wishes to be measured. So while Savio suggests we open-source entrepreneurs may be "sleeping with dollar signs in (our) eyes," there's clearly a lot of work to do before most open-source companies are worth selling. It's not worth selling out for $100 million. Not for the venture-backed companies, anyway."
A public company (think RedHat) trades for X times earnings. Buying RedHat would rationally need to have a return after debt service and 'thinning'. The software is free, but the services and integration and packaging that RedHat does is where the money is.
A private company like Digium, who does Asterisk, has a NIBT and may have additional potential for digital PBX widgets (look at their recent deal with 3Com for an example). They'd probably bring in 7 years run rate as a buy price.
Hyperic, while smaller, has great community development and might bring in more, because of a wider breadth of products touched. I'd value them at 10x annual run rate.
MySQL AB did a great job. Hurray for those guys; they deserve what they got. I hope that Sun can integrate MySQL well without butchering the company and product. Professional results can pay off.
---- Teach Peace. It's Cheaper Than War.
What's missing from the article is the usual valuation of a closed source company. Anyone know the answer to that?
When a program is "GPLv2 or later" and "Contributions are signed back to the company", if the OSS software is useful the GPL's patent poison pill actually makes it a more attractive buyout target.
You see, when Apple buys out CUPS, or Sun buys out MySQL, they can distribute the code under whatever liscence they want as copyright holders.
Which means, for THEM, its non GPL. But for everyone else, it is GPLv2 or later.
Thus you can still get community support with copyright transfer, but you have a competitive advantage in selling/using it commmercially.
I wonder if the FSF realized that this is a side consequence of GPLv3 and the "or later" clause?
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The extremely poorly articulated point of the posting and article is that open source companies are often criticized because they face a serious issue other software companies do not. That issue is the re-use of their source code by other companies.
What is to keep another company, say NySQL Inc. from taking the source code to MySQL, compiling their own product, and then reselling it? Nothing. You might say "It's illegal!", but that's ONLY in the USA. I'd bet there are at least 3 companies in China reselling MySQL right now. Since they keep their source code release up to date, this means NySQL's product will always be up to date. And since NySQL has a bigger presence in China, Chinese customers will always go to them first.
I recently sat next the Digiums VP of sales on a flight. Personally, I feel Digium is on the cusp of a revolution in telephony, but the company needs some good leadership to capitalize on it. I also just spent two days reinstalling freaking TrixBox which had trouble dealing with the crummy TDM400 card I bought from Digium. The VP of sales seems to think their future is in proprietary software sales, like the deal with 3Com. He also is hyped about some acquisition of some proprietary software front-end to Asterisk, but the whole worlds seems to use TrixBox, and I don't see anyone lining up to switch to a non-free alternative from Digium.
Understanding open-source company strategies is a bit mind-bending, and unfortunately, I don't think Digium's current leadership gets it. They may be missing the real opportunity. Instead of making the software great and easy to use, which would lead to virtually universal adoption, they're doing the opposite, to help sell their services and proprietary solutions. If they were able to understand the value of being the provider of virtually all new telephony systems as an open-source platform, I think they'd bag their current strategy.
Problem is, most people think of open-source ventures as having 0 assets, and being worth 0.
Beer is proof that God loves us, and wants us to be happy.
Their current management fits their profile and run-rate. Attracting and incentivizing management takes time, as well as the ability to structure the organization for rapid growth. One more PBX company will need to battle with seventy+ PBX/keyswitch companies already in the marketplace. They're distracted by their hardware revenues, as this makes up a disproportionate amount of their current revenues. I'm hoping it's a phase they're going through or things might go badly for them despite the current quality (very good) of their stable branch of code. Their community relations people have a bit to learn, but herding cats isn't easy. Overall, we would agree.
---- Teach Peace. It's Cheaper Than War.
But it's not really that easy, either. If you really believe you should measure Google, Microsoft, Intel, GE, P&G, Citibank, and Caterpillar using the same method, then I *guarantee* your formula isn't simple or isn't accurate.
Revenue as measured in GAAP is an accounting construct, not necessarily a great measurement of the prospects of a company. This becomes particularly apparent in cases where revenue must be recognized over time due to support contracts. It also gets modified in strange ways due to reserves for non-payment and the like (note the recent impact on financial companies due to insufficient loss reserves for the risk they were bearing)
These issues result in various differences between cash flow and revenue. In the case of software support, you end up with a revenue stream that is more predictable than it would be with a company that only sells a physical item without support (because the sale event already occurred, and you are recognizing deferred revenue; the cash flow may also differ depending on the contract).
Anyway, the greater predictability of revenue reduces the risk of that revenue, which should alter the value of the company. Note that it can alter it BOTH up and down - there are places where reduced risk implies no upside (think government bonds) and places where the increased predictability of revenue can support a higher valuation (software support contracts)