Investing in Open Source Companies - SD Forum Panel Recap

Last night Dave Lilly participated in a SD Forum’s Open Source SIG panel discussion. The panel, moderated by Andrew Aitken, was about how to solicit VC investments as an open source startup company.

The other panelists were Jason Van Zyl, CEO from Sonatype, a recently funded Open Source company built around Apache Maven- a build and release infrastructure tool; Prashant Shah, Managing Director, Hummer Winblad; Kevin Efrusy, General Partner, Accel and Paul Colton, CEO of Aptana which has developed a widely adopted new IDE product. Aptana received funding from Accel 2 years ago, but just recently open sourced a product and has seen great distribution and developer attraction since the contribution.

The VCs were asked questions around their basic business evaluation principles such as margins, competitive advantage, marketplace demand and customer base. What’s delightful to hear is that VC’s are becoming more intelligent about the power of open source and funding isn’t about downloads anymore. Both agreed that open source is great to reduce the costs for market penetration and branding. This is in addition to the innovation, quality, and transparency benefits of open source.

Dave Lilly led the discussions on how to attain funding beyond the first round, acknowledging the criticality of second round fund raising as had been suggested by Kevin Efrusy. He openly shared that GroundWork started as primarily a services business and used each round of funding to accomplish a specific objective, evolving from services to products to solutions in order to provide a comprehensive monitoring solution for enterprise IT customers. According to the panel, the evolution from services to product to solutions has become a recurring pattern among the more successful commercial open source ventures.

Dave provided insight about how GroundWork learned from its growing pains while staying focused on delivering real value quickly to its customers, and how the benefits of this maturation process can now be seen GroundWork’s class-leading portfolio of enterprise IT monitoring customers. He indicated that many of GroundWork’s customers don’t care as much that the solution is open source, per se, but rather want to use open source to address practical business issues at very reasonable cost.

All of the panelists agreed that open source alone does not attract venture capital funding. The panel members concurred that a focus on open source by itself doesn’t make a company an attractive investment, but rather is an ingredient in the usual evaluation of business plans based on team, market, and technology.

If you’d like more information about SD Forum, click here. If you’re a parent you may be interested in the special “Teens in Tech” conference which is hosted by SD Forum, which was apparently extremely popular last year. Based on what I see kids do with computers nowadays, soon I expect them to host “Tweens in Tech.