The Open Road

While some entrepreneurs seek to protect their ideas with nondisclosure agreements, investor Mark Cuban has a different idea: open-source your business plan.

Mark Cuban

What does this mean? As Cuban explains, it means that start-ups should openly post their business plans online. Yes, this means that a competitor could take a plan and run with it, but given that the quality of execution often differs markedly from the quality of an idea, the risk may be lower than you think.

You must post your business plan here on my blog, where I expect other people can and will comment on it. I also expect that other people will steal the idea and use it elsewhere. That is the idea. Call this an open-source funding environment.

If it's a good idea and worth funding, we want it replicated elsewhere. The idea is not just to help you, but to figure out how to help the economy through hard work and ingenuity. If you come up with the idea and get funding, you have a head start. If you execute better than others, you could possibly make money at it. As you will see from the rules below, these are going to be businesses that are mostly driven by sweat equity.

Actually, most businesses thrive on sweat equity, not intellectual property. Google? There were a range of other search engines available before Google started. Yes, PageRank arguably gave it a technical advantage, but execution (uncluttered search page) made Google what it is. If we were merely concerned by the quality of the search itself, Microsoft and Yahoo would have much better market share than they do.

Open-source venture funding strikes me as a very good idea. It's a chance to smooth some of the rough edges of an idea long before you attempt to put your business plan into practice. Commenting on Cuban's idea, start-up consultant Mark DeWalle notes that "in a network-based culture, it doesn't work to operate with lots of secrecy. Access to information is shifting the competitive paradigm of business from the idea to the execution." He's absolutely right.

Start by open-sourcing your business plan. Then open-source your software too.

Follow me on Twitter at mjasay.

Over the past year, the open-source business community has collectively donned a hair shirt over stumbles in venture funding, especially when venture funding in open-source companies took an apparent 12 percent slide in the third quarter of 2008.

However, while the second half of 2008 saw declines in open source-related venture funding, overall, funding levels were 35.5 percent higher than in 2007, according to The 451 Group.

Open Source Venture Funding 2008

(Credit: The 451 Group)

This is pretty amazing, when you consider that overall U.S. venture capital investments plummeted 8 percent over 2007 funding levels, as TechCrunch reports.

U.S. Venture Funding 2008

(Credit: PricewaterhouseCoopers)

And if you treat Washington state as a proxy for Microsoft-related funding (a poor proxy, to be sure, but...), well, TechFlash reports that venture funding there dropped 82 percent from 2007 levels.

True, the prospect of an exit for an open-source company is no better right now than for proprietary software companies, which will likely drag open-source investment declines into parity with their proprietary peers.

Still, for now, open source looks more and more like a safe haven in this battered economy, whether you're spending IT dollars or investing VC dollars.

In a not-so-surprising turn of events, The New York Times reports that Silicon Valley venture capitalists actually care about revenue again.

After years of investing in Web 2.0 companies that generate eyeballs and weird brands but little revenue, VCs have decided that businesses that actually make money are a priority:

For Web sites that do not already have large audiences, "your business model may be just as plausible as it was 18 months ago, but we're all more cautious about giving you a slug of money," [Accel partner Theresia Gouw Ranzetta] said.

Instead, investors are looking for sites that make money in ways other than selling ads, like selling subscriptions or virtual goods. Selling 50 cent costumes for online avatars might not seem to be much of a revenue model, but pennies add up.

This emphasis should actually benefit companies with open-source models, which have seen investments taper off somewhat in the past few quarters.

Given that open source went through its own investment silly season years ago, back when it was fine to have downloads without corresponding dollars, it may make a safer investment for cautious VCs today. A wide array of open-source companies are making solid revenues in the $10 million to $50 million range, either reaching or approaching profitability.

In sum, as VCs focus on value again, just as customers are, open source should benefit.

The 451 Group's latest venture capital report shows open source funding taking a 12-percent slide in Q3 2008.

Open Source Venture Funding - Q3 2008

(Credit: The 451 Group)

The 451 Group's Matt Aslett offers several explanations, but here's one that he missed:

Perhaps the data was faulty.

The report leaves out a range of companies that are open source but don't appear to have made it into The 451 Group's calculations. Some of these investments simply haven't been announced yet (I know of several), while others (like CloudEra) have, but don't seem to have made it into the data.

It's hard to tell since the report doesn't list the deals, but it does mention that there were only two Seed or Series A-stage deals. This is simply not true, but it's not really The 451 Group's fault: it was simply relying on publicly available data.

I have no doubt that open-source funding is down, or will be, but until we have an accurate data set, it's hard to draw too many conclusions as to how deep it will be and for how long.

I just saw the news that Zend has raised $7 million more, in its fifth (Series E) round of funding. Zend last raised $20 million in August 2006. Zend has raised so much money that it must be bought for a bazillion dollars for its investors to get a good return from it.

There are good reasons to raise money heading into a downturn: The justification noted in the press release is to use the funds "as needed." That sounds like "in case things go awry during a recessionary period." This is smart.

One of two things must have happened. Either Zend is struggling and this was a way to give it some runway, or Zend is doing fine but the new investor gave such a rich, (relatively) non-dilutive valuation that Zend couldn't help but take the money. I'm guessing the latter.

Even so, it's worrisome that Zend has needed to raise as much cash as it has. Yes, MySQL raised a ton of cash and saw a massive exit for its investors. But most exits - open source or not - will not see $1 billion for under $100 million in sales. It's best to raise as little money as possible, if you can.

Any comment from Zend?

Marketcetera just announced a $4 million series A round of venture funding with Shasta Ventures and Jack Selby, managing director and co-founder of Clarium Capital. There's something highly appropriate in a hedge fund investing in a software company set up to help hedge funds (and others).

Marketcetera, as I've opined before, is one of the coolest open-source companies on this planet. It provides an open-source trading platform for hedge funds and others to process and deliver trades.

Marketcetera can start with algorithmic trades for hedge funds, but that's just the beginning. As Dana at ZDNet suggests, open source is increasingly "the traditional way" that software will get done. The fact that Marketcetera is open source will help it, and certainly won't pigeon-hole where it takes the technology or its business.

Congratulations to the Marketcetera team!

Good things come in threes, as EnterpriseDB confirmed today. The company today announced that it has raised a $10 million Series C round, including backing from IBM. With $37.5 million in funding to date, EnterpriseDB isn't hurting for cash.

This, however, has not been EnterpriseDB's primary problem. It's not cash that it has lacked, but open-source cachet. Its story of "Oracle performance and interoperability at a fraction of the cost" is a winner, but it was muted by its lack of a compelling open-source story.

That just changed.

Open-source wiki company SocialText just pulled down a Series C round of funding ($9.5 million from Draper Fisher Jurveston, Omidyar Network, SAP Ventures, Intel Capital, plus a few angel investors). It also got a new CEO, Eugene Lee.

Congratulations to Ross Mayfield and the SocialText team. My one question in this is why no new investors joined in the round. If I remember right, the investors above are the same who invested in the last round. This either means that the Series C round was so hot that the existing investors didn't want to share it, or that SocialText was having difficulty finding new investors.

I hope it's the former, as the wiki/collaboration world keeps heating up and SocialText has been one of the leaders.