Monday, January 14, 2008

Ruby company raises $3.5 from Benchmark

Thank God for Matt Asay and his real time coverage of all things OSS. This morning he beat the wire to blog about the Series A investment of Benchmark in a company called Engine Yard. They have raised $3.5M with revenues of $3M (!). Mitch Lansky seems to be the principal investor and Peter Fenton will be joining the board as well. Wow, 2 board members for the price of half, lucky you!

The one thing I wanted to really comment on is a sentence thrown out there by Matt:

The investment, however, is very telling. When one of the top venture capital firms on the planet puts hard dollars behind a support model, it's significant. It becomes doubly so when the firm (or its investors) in question previously invested in JBoss, MySQL, SpringSource (Interface21), and other support-based open-source companies.
It may mean that Benchmark knows something that the rest of the industry seems determined to ignore: services-based businesses may well be the future of the software industry.


a/ A point of detail: Benchmark didn't invest in JBoss. Matrix, out of Boston, did, with David Skok. Peter took a secondary investment with Accel, before transitioning to Benchmark, and I find the constant taking of credit in the press misleading and distasteful. There I said it.

b/ FALSE: the future of the software industry (as a whole) is services. I always enjoy it when in debate people mention the case of VMWare to evangelical OSS zealots. Here is a company that is creating vasts amount of technological innovation and money with a classic licensing model of software. When asked why they didn't go OSS, the CEO responded "why would I do that?" It is embarrassing for the zealots that in this day and age one of the most successful companies is a proprietary software model. What? my ideology is not perfect? the good old model is still kicking arse? by orders of magnitude in terms of technology and, it goes without saying, financial value creation? I enjoy the squirming. The problem with the generalization above is that it assumes that proprietary license models are dying. That is just false, period. That ship is still sailing. Oracle, Microsoft, IBM, SAP are all growing healthily and running the money presses. The proprietary model is alive and kicking. The existence of OSS models DO NOT negate the proprietary models. GET OVER IT, both models will co-exist and thrive sometimes at the expense of each other, sometimes independently of each other. It is not a zero-sum game, there is value being created in both.

d/ In fact, witness the RUSH of OSS companies to emulate the proprietary licensing models to monetize their bases. The VC's may have invested in service based companies but they are all becoming product license companies. It is not that they know something we don't, au contraire, they are rediscovering what we all know: that giving away your core competency is a tough way of making money and nothing beats the good old proprietary licensing model. JBoss, MySQL have followed the example of RedHat with the "RHEL/FEDORA" split. AND THAT IS A GOOD THING, don't get me wrong. That model is a proprietary distribution of OSS codebases. That is the engine that ignited RedHat's revenue. The proprietary licensing model is still top dog and the OSS guys are falling all over themselves to emulate it. BTW, on this topic, I find that Savio Rodrigues, the "community blogger" from IBM is a more enlightened read. Maybe because he is from IBM and they literally wrote the book over the past 50 years? Going back to software as a driver for services and hardware? no problem it is called Global Services. Milking software licenses for all it is worth? no problem it is called WebSphere. Giving it all away? huh... no thank you, no!

e/ I don't read this particular announcement as an announcement in a services model: these guys do run-time, and if they do run-time they will gravitate towards licensing models as ways to supplement revenue... why? just watch!

f/ TRUE: there is a viable niche in the future of OSS software in services. Note the 2 qualifiers to Matt's blanket statement. 1/ niche 2/OSS not 1/all 2/of software. The services models will scale. I always find myself amused when people broadly claim that 'Services don't scale, everyone knows that'. Because you know, IBM GS, McKinsey, Bain, Accenture, Atos Origin, CapGemini, you name it, these are all 2 bit little shitty companies, right? No, what they mean when they say "it won't scale" that is that the speed at which these businesses grow (slow) and the margins with which they grow (low) do not suit the private money timelines. THAT IS A VC MONEY PROBLEM, NOT AN INTRINSIC INDUSTRY PROBLEM!!!!

g/ Also, to do a services model, and to a lesser extent a product model, you need the heads of projects. That was the professional OSS pitch at JBoss. I am SICK AND TIRED of seeing 2 bit consultancies claim to be the "best/sole/main" source of consulting on project X/Y/Z. You see these greasy haired car-salesman running with dollar signs in their eyes, because you know the software is out there, those poor chums wrote it for free and we get to reap the rewards. The developers of X/Y/Z are the best source of consulting. Period. That is what is fair, ethical and in fact workable from a business standpoint (JBoss, MySQL, Spring).

h/ To do a licensing model with products, you need to be in operations. Operations is where the runtime/product money is. If you are selling services like training and consulting then you are happy surviving in development circles outside of runtime (old JBoss/Spring). But selling a product is done in production with runtime offerings. This is where this new company is strong (they host and scale the runtime). JBoss, MySQL, RedHat are all very strong in this runtime as well, that is where they all make their money. Spring ironically is struggling to transition to monetizing the runtime, since their value is mostly at development time.

I wish them good luck, I always want to see the business of OSS making progress.

21 comments:

botchagalupe said...

f/ TRUE: there is a viable niche in the future of OSS software in services.

THAT IS A VC MONEY PROBLEM, NOT AN INTRINSIC INDUSTRY PROBLEM!!!!

a/Agree…

g/ Also, to do a services model, and to a lesser extent a product model, you need the heads of projects.

b/disagree. This is no different that services for proprietary companies. Some service companies will scale and some will not. In the services business there is one thing even the greasiest of used-car-salesman can’t sell … references …

If you want to see more of my thoughts on this see …

http://www.johnmwillis.com/wp/technology/reuseable-ip/

My Views on OSS ESM (Part 2)

Shaun Connolly said...

Agree that "The existence of OSS models DO NOT negate the proprietary models". Both models will coexist for a very long time.

I have a problem with "proprietary distribution of OSS codebases" in that proprietary to me means private ownership/control to the exclusion of other parties.

The fact that CentOS exists and Oracle rebrands RHEL tells me that it isn't proprietary...since other parties are not excluded.

Nobody else can create equivalent distros of closed source / traditional software, so they are proprietary...at least according to my definition.

Yagiz said...

What happened to "c/"?

Matt Asay said...

Oh, Marc, you made Savio's day! He'll be smiling all day long now that he can keep writing proprietary software. Good for you.

I think you mistake sometimes what I mean when I say "services." JBoss Operational Network? Service. (Though you'd probably say "Proprietary software.")

I think there's a large, beckoning world of proprietary services: things that complement the core product that people use but aren't required to do so. This is a very different model from proprietary software which holds back the essentials and maybe gives away nice to have, peripheral elements.

In short, I disagree. But at least you've got Savio hugging your critique. ;-)

Matt Asay said...

Btw, I *did* note that Peter was with Accel when he did the deal. Or implied it. And no, he wasn't the initial investor. But why does that matter? He was smart enough to do a follow on. Full credit to David, but why should that diminish Peter's investment?

william.louth said...

Matt I think you have over simplified the proprietary software world with

"This is a very different model from proprietary software which holds back the essentials and maybe gives away nice to have, peripheral elements."

What is "essential" is different to many people in the application life cycle. I would regard cluster, management & monitoring capabilities to be essential (if the software is to leave the developer workstation) but yet many open source projects have very little to offer in this regard and instead only provide a "proprietary" solution (if at all) when you pay for a subscription.

There are also many "proprietary" software solutions that offer all of the features you would expect from an enterprise offering with some creative limits within the execution runtime.

I suppose relabeling "proprietary software" as a "service" makes it more accessible to those who foolishly believed they had bought into an open source stack. Hey, OSS customers (more like users) have already accepted they must pay for training, support,...why not rename those backend essentials as services too..

Marcf said...

Botchagalupe aka john m willis

great picture on your blog and interesting post. You make the case of "reusable IP". I used to say that in the internet age, bits are reproducible at zero cost however knowledge about the bits is not. Becoming an expert at a product is not transferable through internet. No wonder you got shut out of the VC discussion: their returns (time/money) are usually not compatible with a services business. Which is not to say that a services business will not scale. It will scale and is somewhat defensible through brand and relative lack of expertise out there.

Marcf said...

Mr Shaun Connolly,

Good to hear from you.

We have too much mutual respect and history to spout company lines at each other that insult our respective intelligences.

RHEL is a proprietary binary distribution of open source software. Period.

Denying it makes you look silly and is frankly irrelevant. Bad karma.

I repeat that I think it is a good thing and that you shouldn't hide behind your little finger.

Marcf said...

Yagiz,

c... good question. I always screw the numbering up when I edit my answers :) I should really use the *li* tags

Marcf said...

yagiz,

I remember. I wrote

c/ OSS IS HORRIBLE BUSINESS MODEL, WHAT WERE WE THINKING! RUN! RUN! RUN! FOR THE DOORS!!!!!! WE ARE DOOOOOOMED! DOOOOOOOMED

but then thought better of it and erased it.

Marcf said...

Matt,

What I say is: CHARGING FOR YOUR CORE COMPETENCY IS A GOOD THING.

OSS does not violate the first law of economics invented 20000 years ago which states:
1- all work deserves pay
2- there is no free lunch
3- put food on the table, punk
4- giving away your core competency is dicey
5- RHEL/FEDORA is a good thing

they are all the same statement,

Marcf said...

Matt, no sweat on the Peter reference. Peter is a good friend of mine and someone I got to appreciate personally. It is the "implied" part that bothers me. It bothers me that most folks fail to recognize the dominating influence David Skok and Matrix had on JBoss.

Shaun Connolly said...

Classic Marc Fluery blog! I've always loved the "little finger" statement. :-)

Heck...one could argue our JBoss.org distros are proprietary-ish since JBoss is the only one who creates such distros; I suspect Savio will run with that angle too. Anyhow, I still do feel open source distributions are less proprietary; but it's an argument of semantics....or to use one of your favorite words..."irrelevant!". I won't belabor since arguing definitions reminds me of Bill Clinton's "Depends of what the definition of 'is' is."

Community or Enterprise....the point on the business side is strong brand along with key lead developers help drive the business...and runtime-oriented businesses will scale much better than developer-framework businesses....since there's more implied value to those who pay the bills.

Matt Asay said...

Marc, there's a huge benefit to giving the core away, as you well know. The cost of sales and marketing, for example, drops through the floor. I have relatively junior inside sales people closing six-figure deals over the phone because my customers aren't gated away from the product. You can't get that by closing off your core product because you have to invest serious money in helping would-be customers buy.

Should people get paid for their work? Of course.That's not in question. What *is* in question is how to get to money most efficiently. I believe open source does this, and I have personal experience living in my own lab. It works.

Marcf said...

Matt,

The low cost of entry is a huge advantage to the OSS. But it is not the sole province of the proprietary models.

Witness SalesForce. They hook you with 30/person/month and before you know it, we at JBoss were paying 250k/year. In other words it is a "money upfront (license) vs money as you go (subscription)" and as long as you LOWER THE BARRIER TO ENTRY (to zero or not) you gain that advantage. OSS does that, pricing schemes do that.

On efficiency, there are 2 modes that I observed

1- if you have critical mass in your community, then the cost of marketing goes down, the cost of sales goes down. It is efficient.

2- If you DON'T have critical mass, then you have FULL cost of sales and marketing AND you DON'T have license revenue to offset it, pretty shitty position to be in. Completely sub-optimal.

This by the way is why I prefer GPL license for newborn projects, because they can create a trickle of revenue from dual licensing. The efficiency of the model from a cost of sales standpoint is an argument but the real crux of it, as you know and have debated in the past is the CONVERSION RATE. With a proprietary license 100% of your users are paying. If you have attracted them through low barriers to entry then you win double. In that case OSS is a model made in heaven. But really, Matt, few are those that can reach that state.

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