building a winning strategy for open source company beijing nov2009

Building a Winning Strategy for an Open SourceCompany - Some Views

Mikko Puhakka

Short Bio-Management Consultant 1993-

-Venture Capitalist (investment into MySQL in 2001) 1999-

-Researcher 2004-

-COSS 2005-

- xx board seats globally e.g ConeAdvisor (Finland),TargetSource (China )

Agenda

• Strategy and Timing of Business• Open Source Business Models• Venture Capital and Open Source

About Strategy

• Building strategy is like a trip to themoon...you know your target but it keepsmoving and you have to react accordingly.

Paraphrased fromRegis McKenna

What Type of Business Are You in?

Small riskHigh return

Small riskSmall return

High riskHigh return

High riskSmall return

Cum

ulat

ive

cash

flow

Time

Financing Need

Payback period

Financing Need

-06 -08

-10

Due to start-up investments in 2006 and growthinvestments in 2008 xxxx expects to reachbreakeven status around 2010

Content vs Context vs Timing

• right idea in the wrong place• right idea, right place wrong timing• right idea, right place, right timing…but

wrong team

Why OS matters: Belynda &Wikipedia

Couple months ago I was exchanging e-mails with an long-timefriend, explaining to her why she should take a careful at what ishappening in the publishing and content industries. After I sent hera link to Wikipedia (www.wikipedia.org), I got this very worriedresponse:

“The reason I am asking these questions is that I justrealized this threatens millions of dollars of our business inmy existing company. We sell an online encyclopedia - inmy territory alone this is over $400,000. One of our statedbenefits is that our source is authoritative - Wikipediaseems to be gaining so much ground and legitimacy thatcustomers may say why should I spend over $170,000 on aproduct that I can get basically free?”

10Source: Gartner ; Novell ; Press clippings ; SaS analysis

LINUX HYPE CYCLE HAS BEEN GUIDED,AMONG OTHERS, BY PERCEPTION OF PROs AND CONs

Visi

bilit

y

Time

Slope ofenlightenment

PROs CONs

Technologytrigger

?

Peak of inflatedexpectations

PROsCONs

Plateau ofproductivity

PROsCONs

Trough ofdisillusionment

CONsPROsPROs &

CONs inthe press

2001-2002 2003-now2000-20011997-20001991-1996

State of OSS Adoption

: : 11

Governing ModelTechnology Adoption Life Cycle

by Geoffrey Moore

Pragmatists create the dynamics of high-tech market development

Innovators EarlyAdopters Early Majority Late Majority Laggards

Techies:Try it!

Pragmatists:Stick with the herd!

Conservatives:Hold on!

Skeptics:No way!

Visionaries:Get ahead of the herd!

11/28/09 Managing Open Source Software as anIntegrated Part of Business

13

Business Evaluation Needs

OSSAPPLICATION

UTILIZERS

OSSAS TOOLS

IN R&D

OSSCOMPONENTINTEGRATION

LAUNCHINGNEW

COMMUNITIES

BUSINESS

OSS CONTRIBUTION INCREASES

ACTIVEPARTICIPATION& MANAGEMENT

OF OSSCOMMUNITIES

COMPLEXITY OF THE OSS MANAGEMENT FRAMEWORK INCREASES

- newcommunicati

on skillsneeded:blogs,

discussiongroups

- ‘communityleader’

- new attitudeneeded, e.g

living onterms of

meritocracy- new skill

sets:‘community

manager’

- potentialsavings +- potentialimpact onbusiness

model

- non-issue - non-issue

Basic Elements of a Strategy(the Cone way)

1. Organization Chart2. Strategy Model3. Project & projectportfolio4. Projectportfolios’ Performance5. Projectiportfolios’ GANT chart - Roadmap6. Metrics - Measure of success

© CONE ADVISOR Jukka Ala-Mutka 15

Organization

Strategy model based activitymanagement

Mission, Vision & Values

Strategy model

Dialogue withfront line

From strategyto action

Board

Management

Shared strategyActivity 1 Project 2 Measure 3

Web-based,efficient &

bettercommunication

Source: Ala-Mutka 2008. Strategiamalli


Agile Strategy Concept1-3 months per strategy iteration

Strategy ModelBusiness model innovation

Taking ResponsibilityShared strategy

ScorecardManagement by Objectives

Competitive AdvantageIteration & Learning

© CONE ADVISOR 17

Model & Visualize yourBusiness ModelBusiness model

Performance“traffic lights”

ActionStatus Report

Click

ClickEasy toDrill Down

Red = Poor

Yellow = Satisfactory

Green = Excellent


4 Steps from Vision to Action (partof business model)

Case: Building Facility Services

• (1) Vision Wonderful Living

• (2) Strategy Long Lasting

Customer Relations

• (3) Business Element Rise of

valuation of property

• (4) Activity Element Stop tags

and graffitiSource: Ala-Mutka 2008. Strategiamalli


Agile Strategy - A Sprint Model

2. Iterationphase• Plan & Test• 1-4 months• Interaction

3. Review &Reflection• Final assesment• Decision (continue orstop sprintdevelopment) ‏

1. InitializeSprint• Goals• Tasks• Participants

4. Roll-out

Source: Ala-Mutka 2008. Strategiamalli

© CONE ADVISOR 20

Strategic Project Management

Timeto

market

Risks

Big

Small

4 month 12 months6 months

Manageimplementation•Businessresults•Time•Resources•Money

Agenda



22

Sample of business models

Riseforth


23

The best models (Mickos/MySQL) ‏

• Mozilla’s: sell ads• Red Hat's: sell services around a

binary• Sugar's: sell proprietary extensions

to open source software• Dual-license: charge a fee for

dropping open source into aproprietary product

In 2005– Are OSS businesses sustainable?In 2007– How do you scale OSS business?In 2008- When will the big money start flowing? In 2009- Business elements are in place, whatnext?

Evolution of OSS businessmodels

Agenda


Funding of an Idea (private equity)

• Own pocket• FFF• Business angels• VCs

The VC and a Businessplan

Venture funding to Open Source• Open Source Across the Enterprise

• 2004: $149MM, 20 open source startups–• 2005: $294MM, 41 open source startups–• 2006: $475MM, 48 open source startups–• $1.89B raised by open source startups

since 2000–• 1Q2007: $86.3MM SourceFireIPO,

$100MM, 11 deals* Open Source Business Conference / Info World

VC money is focusing on growth andtalent markets

* Ernst & Young: Global Venture Capital Insight Report 2007

Challenge: Conservative Valuation Methods(Lockett, Wright, Sapienza & Pruthi 2002)

1. Liquidation value asset based methods2. Discounted cash flow based methods3. Options based valuation methods4. Rule of thumb valuation methods

(comparator valuations)Puhakka & Jungman(2005)

Aggressive Valuation Methods -Bad Track-Record

• In the nineties it was argued that revenues andearnings were not sufficient nor relevant ways ofputting value to emerging e-businesses or‘dotcoms’ which had no revenues and actuallyno existing mechanisms of extracting paymentsfrom customers

• Life-time value of a customer• A price-to-eyeball multiple

Puhakka & Jungman(2005)

Valuing OSS Companies

• Open Source companies face a similarchallenge as part of their business (and value)rely on Open Source communities where peoplecontribute voluntarily their time and knowledgeinto projects

• Contributions are real but take place withoutformal contracts or incentive mechanisms andpeople can easily abandon the community


Some messages

• Money is available for OS ventures, but nospecial value is put to companies

• Transparent valuation methods lacking notonly from OS companies, but all venturecapital investments

• Results are indicatory, larger samplewould be needed


Exit Markets - Industry seems to knowmore than VCs

･Zimbra - $350 million (on ~$3 million of trailing revenues) -September 2007･XenSource - $500 million (on $1 million in trailing revenues)- August 2007･JBoss - $350 million (on $27 million in 2006 revenues) -June 2006･Sleepycat - $35-50 million (on ~$7 million in trailingrevenues, is my best guess) - February 2006･Gluecode - $10 million (on very little in trailing revenues,less than $1 million, I believe) - May 2005･SUSE - $210 million (can't remember revenues - I think$30-40 million) - November 2003･Ximian - ~$50 million (I can't remember - on $1 million orso in trailing revenues) - August 2003

Source: Matt Asay

+ Trolltech & Sourcefire IPOs & MySQL & SpringSourcetradesales

Build on Our Heritage -You need a good story

• In coming 5 to 10 years Open Source basedinnovation and service is one of the largestbusiness transitions in software driven industries.– IDC Research; Worldwide revenue from standalone Open

Source Software will grow 26%(CAGR) to reach $5.8 Billion by2011.

– IBM is investing hundreds of millions on Open Source basedsoftware development.

– Several countries (e.g. China) has made decision to favor OSSbased architectures.

Open Source evolution -from processinnovation to value creation!

• In its early days open source was rather improving existing thaninnovating new

– Value creation and preservation are the key. The software value ispreserved by sharing it. The more people using it, the more value itcreates. People should not mix the value of "IP protection" (i.e. a legaltool to protect intellectual assets) to the business, with the value of theasset itself.

• Today there are clear evidences of business innovations– Proprietary software world talked about subscription models for years,

but it was companies with open source related products thatdeveloped real innovation here. Likewise,with SaaS vendors that areinvariably hosted on infrastructures of open source software and ableto be more inventive in their business models because their margincalculations scale differently.

• Phenomena is still moving on– Open software, open data, open innovation…

There is an great opportunity to further accelerateOSS transition towards

value creation!

Maybe we should change terminology?

Maybe we should start talking about software drivenbusinesses instead of Open Source businesses.

After all Open Source is way of producing and distributingsoftware, not a businessmodel.

...and the biggest successes in 2000’s have been software(OSS) driven businesses such as Google, Amazon,Ebay, Sulake Labs.

Thank You!http://fi.linkedin.com/in/mikkopuhakka