(Finally) Meeting Mr. Open Source Business

The careers of few people have been so intertwined with the history of open source as that of Larry Augustin. He was even present when the term “open source” was coined, at a meeting at the offices of his GNU/Linux hardware company...


The careers of few people have been so intertwined with the history of open source as that of Larry Augustin. He was even present when the term "open source" was coined, at a meeting at the offices of his GNU/Linux hardware company VA Linux, on 3 February 1998. Present were Michael Tiemann, Eric Raymond, John "maddog" Hall, Sam Ockman (from the Silicon Valley Linux User Group) and Christine Peterson, president of the Foresight Institute – and the person who actually came up with the name.

The next year, VA Linux hit the headlines because of its IPO: the shares opened at $30 and closed at $239.25, an increase of nearly 700 percent – a record for the largest first-day gain of an initial public offering. Because leading hackers were allocated shares at the opening price, this meant that several big names became quite rich on paper – notably Linus Torvalds and Eric Raymond. The latter wrote a typically entertaining and self-regarding piece about it called "Surprised by wealth", which begins:

A few hours ago, I learned that I am now (at least in thoery) absurdly rich... I had become worth approximately forty-one million dollars while I wasn't looking.

I spoke with Augustin ten years ago when I was writing Rebel Code, but until today, I had never met him. So it was good to do so, and to catch up with the many interesting things he has been doing in the world of open source business recently.

Things soon went downhill at VA Linux after those amazing times a decade ago. The dotcom meltdown meant that people stopped buying VA Linux's boxes almost overnight: revenue went from $60 million a quarter to $15 million in six months. So Augustin set about restructuring the company, turning it from one based around hardware, to one based around the Web. For when it was flush with money, VA Linux had acquired a number of leading sites, including Slashdot, Sourceforge and Freshmeat. These formed the core of a business with $40 million annual revenue – rather a come-down from the $240 million the hardware business had been bringing in just a little while before.

One side effect of this slimming down was that Augustin had effectively made himself redundant. He joined some friends who had set up the venture capital firm Azure Capital Partners. The idea was that Augustin would help them invest in exciting new open source companies. During this time he formulated his view – novel then, but hardly earth-shattering in retrospect – that the next wave of open source companies would be at the application level.

Azure Capital Partners invested in a number of companies in this sector, such as Compiere ERP, but Augustin noticed something interesting: many open source startups didn't actually want all the money that was on offer. Typically, venture capitals want to give a sizeable chunk of money – around $10 million – for a very sizeable chunk of the company (around 40%). Augustin saw that open source companies could get started with much less money, and also preferred to retain more of their independence by giving up less control to outsiders. There was thus an opening for a new kind of funding, between the traditional angel investors (who put in quite small sums) and mainstream venture capital firms.

This led to him becoming one of a new category of "super angels", typically lending $50,000 and expecting a more modest percentage share of the company. This was geared to companies that would never be sold for the hundreds of millions of dollars that venture capitalists often aimed for; instead, prices of a few tens of millions might be achieved. Companies that Augustin invested in at this time include many of today's best-known names in the open source business world: Jboss, SugarCRM, Pentaho, XenSource, SpringSource, Appcelerator, DotNetNuke etc.

In May 2009, Augustin become CEO at SugarCRM, after the founding CEO left. Although this was initially only an interim position, Augustin found he rather liked the company and the challenges it presented, and the company rather liked him, so they removed the "interim" from the job title.

As someone who has been in the open source business longer than most, he is well placed to observe larger trends there, and one is the rise of the VAR. These "Value-Added Resellers" are generally smaller companies that offer bigger companies' software solutions to customers that are tailored in some way. The traditional theory is that open source bypasses such VARs, since customers are able to download and try out free software directly; if they require support or customisation, they would contact the software company directly. But Augustin found that for SugarCRM, VARs were playing an unexpectedly important role in bringing in business.

He puts this down to a number of factors. For example, he believes that SugarCRM's product is a process sale, not a technology sale. This requires people that know the industry and customers, rather than those that are intimately acquainted with the ins and outs of the code. There are also many local variants that are required, and this lends itself to being provided by VARs with the appropriate knowledge. There was also some history involved, too: customers had been used to buying CRM solutions from VARs, but were increasingly unhappy with the traditional offerings. This meant that VARs were keen to meet the customers' needs with new solutions.

There is an unusual aspect to the VARs' approach, which is the use of local cloud computing providers to run their adapted version of SugarCRM for customers. It is rather ironic that this earth-spanning technology should be used for localised purposes in this way. Augustin thinks that this might be applicable for other open source solutions where such localisations are important, and that VARs could have an important role there, too.

Despite his recent experience as a super angel, Augustin has high hopes for SugarCRM. He believes that he can grow it into a billion-dollar turnover company – just as Red Hat hopes to achieve quite soon. I quoted the comments of Red Hat's Jim Whitehurst that for one billion dollars-worth of sales he needed to replace $10 billion of business generated by traditional software companies, and wondered whether the same was true in the CRM market. Augustin pointed out that a significant proportion of their sales comes form companies that currently don't have CRM software in place; in fact, almost unbelievably, many companies use spreadsheets instead.

Despite that interesting fact, I'm not convinced that getting to $1 billion turnover will be easy. The big question is how the SugarCRM community will evolve. SugarCRM uses the typical "community plus enterprise version" business model, but it seems to be doing the right thing on licences:

Being the public license enthusiasts we are, we follow closely the developments around licenses coming from the Free Software Foundation. We've been particularly interested in the GNU Affero General Public License (AGPLv3) since it was first published in November 2007. We agree with the "hosting as commercial distribution" provision that was added to the GPL to create the APGL and feel it applies well to our intention that the Sugar Community Edition source code is to be shared in all circumstances. We've been contemplating changing to the AGPLv3 for some time now.
Since Sugar Community Edition version 6.0 is going into beta this week, we felt it was an appropriate time to change from the GPLv3 to the AGPLv3. Therefore starting with version 6.0.0, the Sugar Community Edition will now be licensed under the GNU Affero General Public License version 3.

Of course, the copyright remains with SugarCRM, so the community is still at a disadvantage, in a sense. And as we've seen, the foundation model is starting to gain more adherents. I don't know the SugarCRM community well enough to comment on whether we are likely to see any community forks here, too, but I don't think such things can be discounted. That doesn't necessarily mean that Augustin won't get his $1 billion turnover (or pull off another successful IPO), but it might make things more complex. Still, given his unparalleled experience in the open source business world, I suspect he will cope, whatever happens.

Follow me @glynmoody on Twitter or identi.ca.

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