The pragmatic and ethically-rooted world of free software might seem about as far away as possible from the highly abstract and, at times, morally dubious world of high finance. But as Richard Stallman has frequently pointed out, free software is by no means antithetical to making money: it's just a question of how you make money.
The scalability of open source, and its ability to turn markets on their head, represent a huge opportunity for venture capital (VC) companies that are savvy enough to understand that there are important rules within the free software community that must be respected.
One VC group that seems to have twigged this is the European Index Ventures. Companies that it has invested in include MySQL, TrollTech, Zend, Sourcelabs, Pentaho, OpenX and Dimdim. Here Bernard Dalle, one of its partners, provides a fascinating insight into the other side of the investment equation. He explains why Index Ventures is not worried that it may run out of top-flight open source investments, why he, too, hates software patents, and why cloud computing is an opportunity, not a threat, for open source startups.
GM: What's your background? When did you first come across the idea of free software? What were your first thoughts about it?
BD: I am a Partner with Index Ventures, a European venture capital firm which I joined in 1997. Prior to that, I worked as a consultant for McKinsey and as an IT project manager at Procter & Gamble where I led the implementation of various software systems. I really became interested in open source software beyond Linux when, along with my partners, I realized that the innovative web-based businesses that we were backing were increasingly using various open source building blocks.
It was in the 2001-2002 time frame, post-bubble when startups had to do more with less. At first we were mostly curious. Then we became increasingly impressed by the quality coming out of some of open source projects. Finally, we realised that a fundamental opportunity was shaping up, enabled by broadband internet.
GM: What do you think were the defining moments for open source as far as VC investment is concerned?
BD: The market has provided investors with a continuous, increasing flow of evidence that open source and a strong business model can actually go hand-in-hand. The big bang took place with Red Hat going public in 1999. More recently, MySQL's acquisition underlined that substantial value that can be created by commercial open source. The interim period was punctuated by acquisitions such as those of SUSE, Zimbra, Xensource or Trolltech.
GM: What's the attraction of open source for VCs? What do you see as the main business models for open source that are likely to be viable in the long term?
BD: Open source is a better way for startups to develop and distribute software than the traditional closed source model. Prospective customers are more involved in the specification and quality assurance of the software because they typically are already using it and often take part in user community forums either by making suggestions, asking for help or sharing tips with others. This leads to solutions that are more likely to be embraced by customers.
From a go-to-market perspective, open source businesses can leverage inside sales teams effectively because sales opportunities are with well-qualified prospects. While incumbents can afford to invest vast sums in sales & marketing (e.g. Microsoft for example spends 50% more in sales and marketing than it does in research and development), such capital intensive model is usually inappropriate for startups.
Open source enables them to achieve a better economic model which benefits their customers and which will typically contain one or several elements of charging for support, assembly and maintenance, add-ons or a hosted version.
GM: It is almost universally accepted within the open source world that software patents are antithetical to free software; typically, though, investors regard intellectual monopolies like patents as part of the nominal value of a company. What's your position on this?
BD: Copyright is important for any software company as it forms the basis of licensing. The startup world would however be significantly better off without the existence of software patents. I have never seen patents creating value for our companies but I have witnessed patent trolls unfairly targeting startups or incumbents attempting to use them to create fear in the minds of customers thereby stifling innovation.