VCs fund companies so they can get 10x or 100x of their money back. They don’t want to own a company, they want to flip it. This, of course, determines the growth trajectories and exit strategies of the firms they fund, including open source startups.
Two weeks ago, publisher Tim O’Reilly wrote:
FOSS companies have essentially the same business model as Microsoft, except that they've largely given up on revenue from the consumer market and instead target the corporate market. (So let's say they have the same business model as Oracle, just to be more precise.) And while OSS is far superior to proprietary software as a development model, and has some advantages in lower marketing costs, a close study of any FOSS companies shows that they have no demonstrated business model advantages over Microsoft's or Oracle. …O’Reilly used to make money publishing Linux books and now he makes money publishing books on Web 2.0, a term that he invented. Hmmm. Still, he has proven a clever trend-spotter in the past.
I will predict that virtually every open source company (including Red Hat) will eventually be acquired by a big proprietary software company.
The real change to proprietary software is going to come from the Web 2.0 challenge.
Yesterday, my friend Matt Asay tried to rebut the O’Reilly claim. Asay was formerly a GM at Lineo (an embedded Linux company) before they cratered, then director of Novell’s Linux business office, and now a VP at Alfresco, an open source content management company.Matt claims:
I actually believe that open source, not proprietary software, is the natural state of the industry, and that Tim's proprietary world is anomalous. …I’m sure Matt is neither smoking something nor drinking anything stronger than Coca-Cola, so I guess he just has a fertile imagination.
Suddenly, the license matters more, not less, because it is the license that ensures the conversation focuses on the right topic — service — rather than on inane jabberings that only vendors care about. You know, like intellectual property. …
I look forward to buying Microsoft. I've got a great job ready for Steve Ballmer...as a product evangelist.
Those VC-backed startups need an exit strategy to make the VCs happy, and (absent something silly like an ESOP) the choices are limited to IPO or be acquired. Yes Red Hat and a few other OSS companies IPO’d in the red-hot 90s, but today that’s very unlikely for any software company. There are noises that MySQL is hoping to IPO, but how many other OSS companies are there with a similar installed base?
Instead, the normal path is to be acquired. Embedded database company Sleepycat was bought in Feb. 2006 by Oracle, and yesterday virtualization company XenSource sold itself to Citrix, a close ally of Microsoft.
VCs sell their OSS startups to proprietary software companies because (as Willie Sutton didn’t say) that’s where the money is. So as long as impatient investors are looking for liquidity — and the IPO market remains closed to all but a handful of companies — OSS companies will be gobbled up by proprietary software companies.
That’s not to say that Matt is wrong on the other stuff. The software industry is likely to shift from selling licenses to selling service, as product categories mature and users revolt against upgrades with unneeded features. This was a “trend” when I was an ISV 20 years ago: companies keep paying for support and assurance, not for creeping featuritis.