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Building A Winning Strategy For Open Source Company Beijing Nov2009


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Building A Winning Strategy For Open Source Company Beijing Nov2009

  1. 1. Building a Winning Strategy for an Open Source Company - Some Views Mikko Puhakka
  2. 2. 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 )
  3. 3. Agenda • Strategy and Timing of Business • Open Source Business Models • Venture Capital and Open Source
  4. 4. Agenda • Strategy and Timing of Business • Open Source Business Models • Venture Capital and Open Source
  5. 5. About Strategy • Building strategy is like a trip to the know your target but it keeps moving and you have to react accordingly. Paraphrased from Regis McKenna
  6. 6. What Type of Business Are You in? High risk High risk Small return High return Small risk Small risk Small return High return
  7. 7. Financing Need Due to start-up investments in 2006 and growth investments in 2008 xxxx expects to reach breakeven status around 2010 Cumulative cash flow Payback period Time -10 -06 -08 Financing Need
  8. 8. 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
  9. 9. Why OS matters: Belynda & Wikipedia Couple months ago I was exchanging e-mails with an long-time friend, explaining to her why she should take a careful at what is happening in the publishing and content industries. After I sent her a link to Wikipedia (, I got this very worried response: “The reason I am asking these questions is that I just realized this threatens millions of dollars of our business in my existing company. We sell an online encyclopedia - in my territory alone this is over $400,000. One of our stated benefits is that our source is authoritative - Wikipedia seems to be gaining so much ground and legitimacy that customers may say why should I spend over $170,000 on a product that I can get basically free?”
  10. 10. LINUX HYPE CYCLE HAS BEEN GUIDED, AMONG OTHERS, BY PERCEPTION OF PROs AND CONs Visibility Peak of inflated expectations Plateau of productivity Slope of enlightenment Trough of disillusionment Technology trigger 1991-1996 1997-2000 2000-2001 2001-2002 2003-now Time PROs & CONs in the press ? PROs CONs PROs CONs PROs CONs PROs CONs Source: Gartner ; Novell ; Press clippings ; SaS analysis 10
  11. 11. State of OSS Adoption : : 11
  12. 12. Governing Model Technology Adoption Life Cycle by Geoffrey Moore Pragmatists: Conservatives: Stick with the herd! Hold on! Visionaries: Skeptics: Get ahead of the herd! No way! Techies: Try it! Innovators Early Early Majority Late Majority Laggards Adopters Pragmatists create the dynamics of high-tech market development
  13. 13. Business Evaluation Needs OSS CONTRIBUTION INCREASES OSS OSS OSS ACTIVE LAUNCHING APPLICATION AS TOOLS COMPONENT PARTICIPATION NEW UTILIZERS IN R&D INTEGRATION & MANAGEMENT COMMUNITIES OF OSS COMMUNITIES - new attitude - new BUSINESS needed, e.g communicati - potential living on on skills - non-issue - non-issue terms of needed: savings + - potential meritocracy blogs, impact on - new skill discussion business sets: groups model ‘community - ‘community manager’ leader’ COMPLEXITY OF THE OSS MANAGEMENT FRAMEWORK INCREASES 11/28/09 Managing Open Source Software as an 13 Integrated Part of Business
  14. 14. Basic Elements of a Strategy (the Cone way) 1. Organization Chart 2. Strategy Model 3. Project & projectportfolio 4. Projectportfolios’ Performance 5. Projectiportfolios’ GANT chart - Roadmap 6. Metrics - Measure of success
  15. 15. Strategy model based activity management Mission, Vision & Values Web-based, Strategy model efficient & Board better communication From strategy Management to action Organization Dialogue with Activity 1 Project 2 Measure 3 front line Shared strategy Source: Ala-Mutka 2008. Strategiamalli © CONE ADVISOR Jukka Ala-Mutka 15
  16. 16. Agile Strategy Concept 1-3 months per strategy iteration Strategy Model Taking Responsibility Business model innovation Shared strategy Competitive Advantage Scorecard Iteration & Learning Management by Objectives © CONE ADVISOR Jukka Ala-Mutka 16
  17. 17. Model & Visualize your Business Model Business model Red = Poor Performance Yellow = Satisfactory “traffic lights” Green = Excellent Action Status Report Click Easy to Drill Down Click © CONE ADVISOR 17
  18. 18. 4 Steps from Vision to Action (part of 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 graffiti Source: Ala-Mutka 2008. Strategiamalli © CONE ADVISOR Jukka Ala-Mutka 18
  19. 19. Agile Strategy - A Sprint Model 2. Iteration 3. Review & phase Reflection • Plan & Test • Final assesment • 1-4 months • Decision (continue or • Interaction stop sprint development)‫‏‬ 1. Initialize 4. Roll- Sprint out • Goals • Tasks • Participants Source: Ala-Mutka 2008. Strategiamalli © CONE ADVISOR Jukka Ala-Mutka 19
  20. 20. Strategic Project Management Big Manage implementatio n •Business results •Time Risks •Resources •Money Small Time to 4 month 6 months 12 months market © CONE ADVISOR 20
  21. 21. Agenda • Strategy and Timing of Business • Open Source Business Models • Venture Capital and Open Source
  22. 22. Sample of business models 11/28/09 Managing Open Source Software as an Riseforth 22 Integrated Part of Business
  23. 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 a proprietary product 11/28/09 Managing Open Source Software as an 23 Integrated Part of Business
  24. 24. Evolution of OSS business models 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, what next?
  25. 25. Agenda • Strategy and Timing of Business • Open Source Business Models • Venture Capital and Open Source
  26. 26. Funding of an Idea (private equity) • Own pocket • FFF • Business angels • VCs
  27. 27. The VC and a Businessplan
  28. 28. 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
  29. 29. VC money is focusing on growth and talent markets * Ernst & Young: Global Venture Capital Insight Report 2007
  30. 30. Challenge: Conservative Valuation Methods (Lockett, Wright, Sapienza & Pruthi 2002) 1. Liquidation value asset based methods 2. Discounted cash flow based methods 3. Options based valuation methods 4. Rule of thumb valuation methods (comparator valuations) Puhakka & Jungman(2005)
  31. 31. Aggressive Valuation Methods - Bad Track-Record • In the nineties it was argued that revenues and earnings were not sufficient nor relevant ways of putting value to emerging e-businesses or ‘dotcoms’ which had no revenues and actually no existing mechanisms of extracting payments from customers • Life-time value of a customer • A price-to-eyeball multiple Puhakka & Jungman(2005)
  32. 32. Valuing OSS Companies • Open Source companies face a similar challenge as part of their business (and value) rely on Open Source communities where people contribute voluntarily their time and knowledge into projects • Contributions are real but take place without formal contracts or incentive mechanisms and people can easily abandon the community Puhakka & Jungman(2005)
  33. 33. Some messages • Money is available for OS ventures, but no special value is put to companies • Transparent valuation methods lacking not only from OS companies, but all venture capital investments • Results are indicatory, larger sample would be needed Puhakka & Jungman(2005)
  34. 34. Exit Markets - Industry seems to know more 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 trailing revenues, 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 or so in trailing revenues) - August 2003 Source: Matt Asay + Trolltech & Sourcefire IPOs & MySQL & SpringSource tradesales
  35. 35. Build on Our Heritage - You need a good story • In coming 5 to 10 years Open Source based innovation and service is one of the largest business transitions in software driven industries. – IDC Research; Worldwide revenue from standalone Open Source Software will grow 26%(CAGR) to reach $5.8 Billion by 2011. – IBM is investing hundreds of millions on Open Source based software development. – Several countries (e.g. China) has made decision to favor OSS based architectures.
  36. 36. Open Source evolution -from process innovation to value creation! • In its early days open source was rather improving existing than innovating new – Value creation and preservation are the key. The software value is preserved by sharing it. The more people using it, the more value it creates. People should not mix the value of "IP protection" (i.e. a legal tool to protect intellectual assets) to the business, with the value of the asset 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 that developed real innovation here. Likewise,with SaaS vendors that are invariably hosted on infrastructures of open source software and able to be more inventive in their business models because their margin calculations scale differently. • Phenomena is still moving on – Open software, open data, open innovation… There is an great opportunity to further accelerate OSS transition towards value creation!
  37. 37. Maybe we should change terminology? Maybe we should start talking about software driven businesses instead of Open Source businesses. After all Open Source is way of producing and distributing software, not a businessmodel. ...and the biggest successes in 2000’s have been software (OSS) driven businesses such as Google, Amazon, Ebay, Sulake Labs.
  38. 38. Thank You!