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Businesses The Almighty Buck GNU is Not Unix

Venture Capitalists Think Open Source Again 115

Posted by timothy from the hey-kid-here's-a-nickel-get-a-haircut dept.
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."
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Venture Capitalists Think Open Source Again More

Venture Capitalists Think Open Source Again

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  • How do you make money on free software? (Score:5, Funny)

    by Anonymous Coward on Saturday November 13, 2004 @03:18PM (#10808274)
    Volume.

    • Re:How do you make money on free software? (Score:4, Insightful)

      by nadadogg ( 652178 ) on Saturday November 13, 2004 @03:23PM (#10808296)
      Support contracts

      • Re:How do you make money on free software? (Score:5, Insightful)

        by Fnkmaster ( 89084 ) * on Saturday November 13, 2004 @05:11PM (#10808917)
        Or giving away the software and selling the hardware to go with it like Digium [digium.com] 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.
        • That linux telephony stuff is pretty darn spiffy, and a far better example than my 2-word answer.

    • Re:How do you make money on free software? (Score:5, Insightful)

      by tonsofpcs ( 687961 ) <slashback&tonsofpcs,com> on Saturday November 13, 2004 @03:24PM (#10808305) Homepage Journal
      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? (Score:4, Interesting)

        by UniverseIsADoughnut ( 170909 ) on Saturday November 13, 2004 @03:36PM (#10808385)
        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.
        • To me, the way open source should work (in my utopia) is that you decide what it's going to cost to implement a feature and then when people give you the money you implement it. If you can't handle the work right away it goes on the pending list or you contract it out. It makes sense to me, anyway. If it doesn't work, obviously that's not where the demand is. Basically users can suggest features, and in the order you think you should evaluate them, you attach a price to them. If you want to do this based on
          • So in this scenario you work directly for the end user? If so, how is the payment structured? Let's say you have 100 end users and a piece of software that will take 1000 dollars (to make things easy) to create. Does each of them pay 100 dollars? What happens when someone else comes along and the software has already been made? If you're not working for the end user, but for a business, where are they recieving the income to pay you with?

            I'm not discounting your idea, but I find it a little hard to impleme
        • 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 w
        • A good peice of software won't need support.

          Depends on the software. Big enterprise software packages involve things like dedicated staff from the software vendor working 9-5 at the customer site, full time, because the software is doing something big and complex (like running the company's books) and if it's down (no matter who's at fault) you're leaking megabucks until it comes up again.

        • A good peice of software won't need support.

          First, FOS software, while often known for technical excellence, does not exactly have an awe-inspiring record for excellent documention and/or ease-of-use.

          Second, many companies always want support contracts because thats how they do business. Why do you think MS and friends always use FUD like "When something goes wrong with FOSS, who ya' gonna call?". For many businesses, support contracts, are part of the standard "CYA business method".

        • 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.

          You mean like Novell [novell.com]? It also seems as if Apache has dominated their market [netcraft.com].

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

          If a developer was making money on the support contracts their customers purchased for the Open Source Software they were using, it's a huge motivation to the developer that they make that support expe

        • I think the question of whether support is a good model or not depends on what market you are going after. If you are looking at enterprise software, there is a lot of value in offering support, because few of these companies are going to deploy Open Source software without someone to support it. These companies are not worried about getting support for "How do I use a Web Server", they're looking for someone to turn to when their servers drop dead after being pushed hard for a week straight. When you st
      • 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.

        • ...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

          Isn't this the whole problem with the selling software ideal? I.E., the idea of do once (for $16.57 plus pizza and time/devotion) and then become a millionaire?

          How many el-cheapo startups are still around today and make enough money to keep going all by themselves?

          WinZip? IrfanView?
    • 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? (Score:5, Insightful)

      by jarich ( 733129 ) on Saturday November 13, 2004 @03:33PM (#10808362) Homepage Journal
      Ask RedHat!

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

      Market Cap: 2.13B

    • Free software does not imply no cost software. You could sell the package and/or support provided it is an attractive (<I>i.e.</I> desirable) application.
    • I don't know if having a venture capitalist invest in an opensource company is actually a good thing. Most venture capitalist expect their investments to mature within 5 years, at most 10. This means that these companies will most likely be forced to go public. Depending on the company, they may not be able to survive this. Its good to see that venture capitalist are finally getting out of their investments during the dot com era, and are able to invest in other businesses. My 2 cents.
    • Implementation, integration, training, and support.
    • If I did understand the whole thing, Open Software does not mean free software. At least no free as in free beer but free as in freedom. You can charge for the use of an open source software. It works almost like in shareware, if you feel obliged to pay for the software you go and pay. Take a look in resin J2EE server. It is open sourced, but you must pay to use it! In its licence says if you make money with it you have to pay for it. Open Software means that you get the source when you get your software wh

  • Software (Score:2, Interesting)

    by 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.
    • ``How about companies standing behind their work because there is actual competetition in the market.''

      Or how about cooperation instead of competition? Instead of each vendor rolling their own solution, all interested and capable parties add their own piece, and everyone gets better software for less.

  • Luck to them (Score:5, Insightful)

    by OpenSourced ( 323149 ) on Saturday November 13, 2004 @03:23PM (#10808298) Journal
    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).

    • The cost of buying software is only a small fraction of the cost of using it. The companies you mentioned know this. Perhaps so do the VPs?

    • Re:Luck to them (Score:4, Interesting)

      by paretooptimum ( 544535 ) on Saturday November 13, 2004 @03:27PM (#10808329)
      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 (Score:2, Interesting)

      by isometrick ( 817436 )
      I think money can still be made with something like Caucho's developer source license [caucho.com].

      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.
      • The Caucho license is even more restrictive than the old no-commercial-use licenses. I don't see how it's an improvement over things like the Kermit license... which predates most of the open source licenses including the GPL, allows more freedom than the Caucho license, and has been funding full-time development of Kermit for almost 20 years.

    • 80% rule could make a difference (Score:4, Insightful)

      by bstadil ( 7110 ) on Saturday November 13, 2004 @03:36PM (#10808384) Homepage
      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 (Score:5, Insightful)

      by xtal ( 49134 ) on Saturday November 13, 2004 @03:37PM (#10808393)
      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.
      • Well, that's just my point. I tried to say that venture capitalists usually seek big returns, in exchange for taking big risk (i.e. losing the investment). You can make a very decent living by giving consultancy to companies about OSS, or running helpdesks, but that cannot be a pot of gold. Reason is obvious, you can charge a fat buck for an hour of consulting, but you have to deliver the hour, and days have only 25 hours, give or take one. You can have a company filled with people that will give you a sh

    • Re:Luck to them (Score:3, Insightful)

      by antiMStroll ( 664213 )
      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.
    • Actually, the venture capitalists are making a shrewd bet. Most mature companies in the software industry generate the bulk of their revenue by charging existing customers for maintenance - and not in sales of licenses. In fact, that trend is becoming more pronounced. The VC types simply believe that software companies can be viable if they charge nothing for licenses, and generate all revenues from support. Given the megabucks that are generated by these companies, that isn't an unreasonable bet if any

    • Re:Luck to them (Score:3, Interesting)

      by sopuli ( 459663 )
      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
      • 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

        Thats true, but there is still a lot of money to be made from consultancy - look at the revenues of IBM's consultancy business or Cap Gemini.

        I think a good analogy is the computerisation of manual processes. Automating what used to be done manualy, for example cheque handling in banks, is cheaper than doing it the other way

        • Thats true, but there is still a lot of money to be made from consultancy - look at the revenues of IBM's consultancy business or Cap Gemini.

          I've worked for both of those. Bonuses (if at all) were always crap, if one unit made a profit another burned it up. Revenue is nice, but steady revenue does not increase stock value. To do that they have to grow and that is pretty difficult in such a mature market as IT consultancy.

    • Perhaps some of these venture capitalists are companies that use all this software. They're investing on companies like JBoss to make sure they continue to exist and support their products. If some of these companies went under, someone else can always maintain the code but in practical terms it would be stalled for some time.
      Personally, I think that some part of the gazillions of dollars made by the big firms you mentioned are going to finally "trickle down"... small sums will be going to many people who k

    • Re:Luck to them (Score:1, Insightful)

      by Anonymous Coward
      The point isn't to make a gazillion dollars, right now there are a "few" firms making the "most" money. However, w/ open source, I sense that there will be many many more firms making "some" money. Ie distribution of wealth :) which is a good thing IMHO. And previous posters are correct, there is very little money to be made "selling" software, most of it comes from support and services (consulting, etc.)... Wait a couple years, I'm sure there will be viable CRM solutions and Back office solutions and th
    • Point 3 is simply not going to happen.

      SAP's already open-sourced their database software. The big bucks for SAP isn't in selling software, it's going in and SAPifying businesses for $big$bux$.
      1. 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. ...

        ... 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).

      I mostly agree, with a slight change in perspective.

      Propriatory rat

    • I don't think software licensing will go away, at least not for enterprise software. Consumers enterprise software would rarely choose a platform just because it is free. So how to make money with OSS? Hire OSS coders to make you products. How about making products or "Solutions" with OSS components, and in so doing make better products, faster. License the end product to customers in the traditional sense. The contributers to the OSS have their pick of employment opportunies or contracts or start up p
    • We think there is an opportunity to make a very significant business in open source software, and also to fundamentally disrupt the cozy status quo of proprietary software. Customers of all shapes and sizes are fed up with being locked-in to proprietary API that force them to ransom their applications back from aggressive sales people year after year. Licenses for infrastructure software (databases, middleware etc.) were worth more than $14 Billion last year. The companies riding that gravy train are not

    • I really like your sig aphorism: Rome taught me patience and assiduous application to detail. Virtues which temper the boldness of great, general views.

      Did you author it or are you quoting someone? If the former, could you please provide me with some context as to how "Rome" taught you? And do you mind if I quote you? If the latter, would you mind sending me the source via email?

      Thanks.

      PS Sorry to use this channel to ask this question, but I could not figure out any other way to reach OpenSourced. If th

  • It's cause copyrights are and should be dead (Score:5, Informative)

    by argoff ( 142580 ) on Saturday November 13, 2004 @03:23PM (#10808301)

    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 (Score:2, Interesting)

    by omghi2u ( 808195 )
    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. :-)
    • More true with the hardware, there isn't much support in software since one shouldn't require support.

      Apple is an example of not making money on the software but making it on the hardware. They made a lot of money on me when i bought an OS from them, came fully functional will a heavy aluminum box.
  • 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

  • Verticle Market Products (Score:4, Interesting)

    by randall_burns ( 108052 ) <randall_burns@@@hotmail...com> on Saturday November 13, 2004 @03:36PM (#10808378)
    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.
    • Some schools are starting to use OSS now - mine uses Audacity. I'm still waiting for Firefox, but, I'm not all that hopeful.

  • Why Developing Free Software Can Make You Money (Score:3, Insightful)

    by RAMMS+EIN ( 578166 ) on Saturday November 13, 2004 @04:49PM (#10808787) Homepage Journal
    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.
  • I think the issue here is the difference between business and consumer software. Business software has an opportunity for revenues (and some profits) from customization, support, application service provider, and management services. I don't see much money in the consumer side of the equation -- most consumers won't pay the $50 it takes to keep a qualified tech support person employed. Moreover, well-designed consumer software needs no support, customization, etc. And since much of the open source commu
  • 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!
  • I look at this, and question what open source companys OVP has baught into, and take the statement with a grain of salt.

    If you baught into something, and wanted it to succeed, wouldnt you take the more positive and earth shattering (in a good way) side of the issue? Not saying that her statement may not be true, but what stake does that company hold in seeing the statement become true.

  • The ideal Open Source model: Collabnet (Score:3, Interesting)

    by JPyObjC Dude ( 772176 ) on Saturday November 13, 2004 @07:07PM (#10809619)
    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

  • 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."

    Thank god none of my venture funds are with OVP Venture Partners. That statement is so ridiculous it's unbelievable. It shows you how disconnected and uninformed most VC's are. If this guy actually used any open source software he would immediately shut down all open so
  • Brace yourself. And pray that some real OSS company will survive when the greed-enflated OSS bubble will explode.

    But maybe this can be avoided. Vulture Capitalists have notoriusly a short attention span, and if we find something to distract them ...

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