What Benchmark's investment in Ruby on Rails support should tell us

Last week, Benchmark announced a $3.5 million investment in Engine Yard, which provides commercial support for Ruby on Rails applications. Engine Yard is doing $3 million in business and growing. It's also profitable. It didn't need the investment.

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.

For those who believe the only way to make money is by locking up IP and metering access to it, Benchmark's success with a very different business mindset and model is instructive. Successful companies are those that discover scarcity in abundance. For Engine Yard, it was simple:

Engine Yard came about in early 2006 because we saw a genuine need: customers were developing business-critical Rails apps, but they didn't want to worry about deployment issues, nor did they want to hire IT staff to manage servers. Customers wanted Rails-focused 24/7 operations support on top of great infrastructure, plus they wanted a smooth path from 100 users to 100,000 users.

They didn't apparently want proprietary software. In fact, the hordes that have moved to Ruby on Rails have wanted the opposite to a great extent. But that doesn't mean they expect everything to be free. Engine Yard's opportunity is to discover the services that Ruby on Rails' adoption and success require. Google discovered that the massive amount of information on the Web meant that people would pay (through advertising) for help finding needles in the Web's haystack. What will Engine Yard find?

One thing that it will find is that it can continue to feed Rails' abundance in order to fuel the need for its services. Hence, the company plans to use Benchmark's capital infusion to help improve the stability of Rails for all...not just Engine Yard's customers:

(A) capital infusion could help Engine Yard work on some key open-source projects that can help Rails perform better, including Rubinius (a more robust and speedier version of Ruby) and Merb (an adjunct of Rails). This work, in turn, might transform the company into becoming a software business, said (Engine Yard), one that can help it scale much more quickly.

That's the power of open source. Different people or organizations can be working on it for their own narrow purposes but everyone benefits as a result. It's a bit like a micro version of Adam Smith's invisible hand. It makes sense to make the pie bigger so that Engine Yard's slice will also be bigger.

In sum, it would be wise to think through the implications of Benchmark's investment in Engine Yard. Perhaps Benchmark knows something that you will eventually figure out. Best to do so sooner rather than later.

[lmasanti]

quote:
"Perhaps Benchmark knows something that you will eventually figure out."

Or, they have the guts to risk... something that companies had almost forgot to!

[billxa]

Benchmark has a working model for making money from what had become a mature software industry with tremendous barriers to entry. They model takes advantage of the disruptive economics of open source, which makes to pie smaller but allows new market entrants to grab it. Add to that the disruptive shift from traditional applications models to Rich Internet Applications models and this would appear to be another great investement for Benchmarket based on another opportunity to take a piece out of the entrenched software behemoths, not by beating them at their own game, but by changing the rules.

This is a point of I have been trying to make in my comments to Savio Rodrigues' posts on his Infoworld OpenSources blog at: http://weblog.infoworld.com/openresource/archives/2008/01/clearing_up_my_1.html

Congrats and best wishes to both Benchmark and Engine Yard

Bill Miller, XAware.org