OSBC 2010 - Highlights - Day 2

Day 2 of the 2010 OSBC again had several interesting sessions, including some insightful legal sessions.

A. Maximizing the Value of an Open Source Business

If you are looking for a nuts and bolts "how to" session on building an open source business from the ground up, this is the type of session you need to attend. Benchmark Capital's Rob Beardon made it through only half his presentation on "Tactics and Metrics for Scaling an Open Source Business" because of the volume of audience participation. Beardon, along with assistance from Zack Urlocker (former MySQL VP) and other open source veterans in the audience, sketched the following blueprint:

Guiding Principle: the value of an open source business is directly proportional to the size of the community and the company's ability to influence and monetize it.

Key Areas:

1. Foundation - every open source business must start with the following attributes to be successful:

• Technology - must add value by solving a customer's problem
  
• Community - must attract the best in the field with the promise of innovation and disruption
  
• Business Model - choose between the "owner/builder" (innovation) and packager/distributor (commoditization) models
  

2. Tactics - position for rapid scalability with viral awareness, then generating adoption, THEN sales

3. Metrics - traditional metrics are not relevant. State of the art is to measure web traffic, customer acquisition percentage and lead nurturing tools

A successful open source business will be able to create a "closed loop demand management" workflow that fuels growth. It is important to note that this methodology is not much different that standard "Entrepreneur 101" tactics, but is highly tuned to the particular needs of an open source business with a goal of a liquidation event for its VC vendors.

B. Legal Matters in Open Source
I attended several legal sessions on Day 2 as well. I won't recount all the details of the discussions, but here are some of the most interesting points:

1. GPL Enforcement. Karen Sandler, General Counsel of the Software Freedom Law Center, gave a thorough review of common open source software license incompatibility. Of note was her helpful clarification on the requirements of the GPL (Sec. 3 of v2, Sec. 6 of v3). In particular, she confirmed that the common practice of including only a download link to source code is not enough to satisfy the "written offer" requirement of the GPL. However, she also emphasized that a download link might be enough for all practical purposes as long as it is relatively easy to find the source code. This is true at least for the SFLC, which is more interested in software freedom than litigation. This is likely a relief for many developers that try their best to comply, even when the details often elude them.

2. Best Practices. Virginia Tsai Badenhope of Big Fix provided some great pointers in her session on how to handle open source within an organization. Her comprehensive checklist consisted of 5 categories:

• Inventory and assess usage of open source
• Comply with terms of open source licenses
• Implement an open source policy to whatever degree necessary to meet the business needs
• Update outbound licenses to ensure they reflect the use of open source
• Update inbound licenses to ensure suppliers make proper representations and warranties for open source

The details under each of these categories will vary depending on the company and particular circumstances, but it is critical to have a set of procedures in place to ensure nothing slips through the cracks.

3. Affero GPL. In his session on Open Source Litigation, Catalin Cosovanu from Wilson Sonsini primarily discussed litigation on enforcement of the GPLv2, but audience questions quickly transformed the discussion into the legalities of the Affero GPLv3. For example, the lack of definitive caselaw on the meaning of "distribution" under the traditional v2 means that the more comprehensive notion of "conveyance" under the could trigger more legal claims and lead to more uncertainty, particularly in the Affero network context. The network terms of Affero also make the notion of "corresponding source code" more ambiguous, particularly in a cloud environment. Finally, even simple questions like "where should the written offer appear?" are not as simple in the Affero context.

Show Me the Money at OSCON - Venture Capital and Open Source

To my pleasant surprise, Mark Radcliffe (notable open source attorney) announced last week on his blog that his law firm, DLA Piper, would host an open source legal track to run in parallel to the OSCON trade show in San Jose this week. The schedule included a diverse mix of topics that pushed the boundaries of typical legal presentations on the issue of open source. I found the talk on venture capital and open source the most interesting. The panel consisted of 3 seasoned venture capitalists (Josh Stein of Draper Fisher & Jurvetson, Mark Gorenberg of Hummer Winblad, and Vivek Mehra of August Capital) and an experienced open source attorney (Vicky Lee of DLA Piper).

Venture capital is a hot topic of discussion. Several tech publications and blogs are reporting, based on a report issued earlier this week by PricewaterhouseCoopers and the National Venture Capital Association, that venture investment has shrunk to pre-tech-bubble levels, the slow economy is putting a damper on venture capital, and venture funding in the tech industry is down over 50% year-over-year from 2008 to 2009. At the same time, however, the tech sector seems to be attracting more investment in recent months. The panelists at the OSCON session on "Understanding Venture Capital Investments in Open source Projects" seemed to have an enthusiastic view of investment in open source companies.

The panel described several elements that go into their determination of what is a good open source investment. The most fundamental points, however, came during the second session by Larry Augustin on "Choosing a License: Ensuring that Your Intellectual Property Strategy Matches Your Goals". Augustin emphasized that: (1) open source is only a tool and an open source business model alone is not enough to guarantee success or to warrant funding by venture capital firms; and (2) quality is critical to ensuring customers want to purchase a product regardless of whether it is open source or not.

Beyond these fundamental points, the panel discussed the following elements:

1. Successful Business Model

• Copyright Ownership - This is an immense benefit because it provides maximum flexibility as a company grows.

• Clear Distribution Rights - Ownership of all the copyrights in a product eliminates uncertainty about distribution rights. When third-party components are involved, however, clarity on rights is important.

• Disruption, Platform and Infrastructure - Venture investments are most desirable in quality companies that focus on specific areas: (1) market disruptors in an existing industry; (2) technology that can become a platform; and (3) technology that focuses on infrastructure (because it is most likely to help companies reduce costs).
  

• Free is a Negative - Serious customers do not find as much value in free products as products that they must pay for (Larry Augustin emphasized this point in the second session).

• Support and Services - Companies that do not own their code and generate revenue only from services are susceptible to competitors.

• Open Core - This is the current popular favorite of open source business models and it has a proven record of generating revenue, which is attractive to venture capitalists for obvious reasons.

• Community - Open source products that spring from existing communities or that are developed in parallel with newly created communities can both be successful, but they present distinct tradeoffs. Existing communities provide an available user base that drives quick adoption, but the likelihood of multiple contributors complicates the intellectual property ownership issues.

2. Benefits to Venture Capital Investors

• Lower Cost - While the first wave of financing is typically the same for open source and proprietary companies, the second wave often results in significant savings, which the panel estimated to be 30% or more. Specifically, the availability of open source software and related ecosystem allow open source companies to spend less on sales and marketing, which greatly reduces operating expenses.

• Quicker Adoption - Because end users always have access to open source software, companies are able to avoid the lengthy proof-of-concept and testing cycles that occur when releasing a product for the first time. The panel felt this could save open source companies up to 2 years of development and testing time.

• Easy to Build a Channel - Open source communities are well suited to perform localization, vertical market and other customization for products, which allows open source companies to enjoy the benefits of channel distribution without devoting sales and other resources.

• Early Revenue and Exit - The lower cost and quicker adoption enjoyed by open source companies mean that these companies are likely to begin generating revenue and profits more quickly, which means that investors are likely to reach an exit opportunity more quickly too.

3. Net Results for Venture Capital Investors: When open source investment opportunities are carefully screened with the business model considerations above in mind, the benefits inherent in open source companies make these types of investments relatively safe for venture capitalists. At a minimum, investors should not view open source companies as being inherently more risky that other startup venture investments.

In closing, the panel indicated that approximately 15% of their holdings are in open source companies. While this is a significant amount of investment, the percentage is likely to grow over time as new software companies arise and existing ones revisit their business models. At the same time, the 85% of holdings that are not in open source companies is a good reminder that a good idea will attract investors because it's a good idea, not because it's open source.