What is the value of an open-source asset? Over the past several years, and most recently with SpringSource, we've seen a number of open-source companies acquired at valuations of 10x or better. Did the buyers get their money's worth?
It's a tricky question to answer--and likely depends upon far more data than I have at my disposal. It also depends on the acquiring company executing, which has not been the case with Yahoo (which bought Zimbra) or Sun Microsystems (which bought MySQL). No open-source company can offer a panacea for an acquiring company's failure to execute.
But after talking with a range of the companies involved, it would appear that the answer is "yes"--open-source acquisitions are paying good dividends.
Consider:
- JBoss, bought by Red Hat for $350 million at a valuation 15 times sales (i.e., a 15x valuation), has gone on to grow twice as fast as Red Hat's core Linux business and is the key to its ability to sell strategic value to CIOs, rather than simply commodity Linux servers.
- XenSource, inarguably the richest acquisition at 166x, was doubling its customer count every quarter at the time Citrix bought it for $500 million. This would be less significant except that the company had already pulled in 1,000 customers. Compounding that number...? That sort of growth is hard to hard and continues to feed Citrix today. XenSource's valuation was overly rich but then, it was bought on the heels of VMware's explosive IPO. Some valuation hubris was to be expected.
- Zimbra, which Yahoo paid $350 million to acquire, has largely been buried in the belly of a company that has yet to figure out what it wants to do when it grows up (and out of Google's shadow). Even so, the company, which was doing north of $20 million at the time of acquisition, continues to grow quarter after quarter. Yahoo may not know what to do with Zimbra, but Zimbra's customers apparently do: buy more.
- And then there's MySQL. Ironically, Sun's $1 billion acquisition of MySQL, which was ridiculed as dramatically rich in valuation, has the lowest multiple of the lot, given that MySQL recorded sales of over $90 million the year it was acquired. Despite Sun's myriad problems over the past year, MySQL is growing, recording some of its best quarters ever.
Open-source assets, then, are growth assets. And their growth appears to be hard to check, even in cases of significant mismanagement. Perhaps this is the nature of open source: the company behind it may falter, but ultimately, the success of the project is only a download away, provided that the development community remains vibrant (and, in each of the examples above, it has).
Zimbra's paid user growth increases in lock-step with downloads
(Credit: Zimbra)So long as development continues, so will downloads. If downloads continue, there really should be no reason that a company can't benefit from it. It may derive substantial or anemic benefits, but it should benefit.
Looking around, it's hard to find a company that, on balance, isn't happy with its open-source investments. If open source didn't work, we'd expect to see companies exit, but in addition to the companies mentioned above, Oracle (Sleepycat), IBM (Gluecode), Cisco (Jabber), and others have increasingly bought into open source, and none shows any signs of abating its interest in increasing its open-source activities.
One might think that buying an open-source asset, rich in adoption but relatively light in monetization, would be a poor investment. Based on the data I've seen, however, this supposition is wrong.
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Peter Fenton
No other investor has had as much success in open-source software as Peter Fenton, general partner at Benchmark Capital.
A competitive triathlete, Fenton has turned the standard marathon of open-source business-building into a sprint, churning out four big open-source sales--JBoss ($350 million), Zimbra ($350 million), XenSource ($500 million), and SpringSource ($420 million)--while most investors have yet to turn a profit on any.
Not that Fenton is a one-trick pony. He also just sold FriendFeed to Facebook and sits on the board of Twitter. It's fair to say that Fenton can now afford a second Aston Martin.
But Fenton is still busy, sitting on the boards of open-source companies Pentaho, Terracotta, and Engine Yard. He's also willing to share the secrets to his open-source success, telling The Wall Street Journal the key to building a winning open-source business.
Spoiler? Build a direct line to your customers using open source and then ensure an excellent product to pave the way to adoption, then usage, then sales. According to the Journal article:
Rather than "expensive sales efforts and negotiations with the upper management to get the most money possible," the people that will be using the software can easily download and try the product. This helps the best products proliferate and weeds out the underperformers.
"If you don't have the best product, you're not going to make it in open-source," unlike traditional enterprise software, where customers often flock to good-enough products.
Having a well-received product not only results in plenty of downloads, users and developers, it also makes the sales process that much easier. With SpringSource, "anyone the company sold to was already using the product," he said.
Sounds easy, right? Well, no, not if you've ever been involved in an open-source business. Building a great product is hard enough, but doing so in a transparent fashion while encouraging active adoption without appearing faux to your community...? That's hard.
Venture investing may be more art than science to some, but Fenton has done more than most to turn open-source investing into a science, as VentureBeat reports. For instance, many open-source companies are ecstatic to have widespread adoption, but Fenton is careful to call out the difference between adoption and actual usage, as he does in this Benchmark presentation (PDF).
In this presentation Fenton calls out two strategies for investing in either "farm-raised" or "free-range" businesses. Think of these categories as company-led (e.g., Zimbra) or community-led (e.g., SpringSource) open-source businesses. Neither is better than the other: they simply refer to whether an open-source community predates a company set up to monetize it.
The strategies Fenton takes depends. For "free range," it looks like this:
(Credit:
Peter Fenton (Benchmark Capital))
For "farm raised," Fenton's strategy looks like this:
(Credit:
Peter Fenton (Benchmark Capital))
All of which means your next open-source investment or company should be a snap, right? Maybe not. It's one thing to call the correct shots--and quite another to make them. Part of the reason Fenton has been so successful is that he has invested in exceptional operators at each company, including Marc Fleury and Rob Bearden (JBoss); Satish Dharmaraj, Scott Dietzen, Andy Pflaum, and John Robb (Zimbra); and Rod Johnson and Rob Bearden (SpringSource), among others.
Perhaps this is really the key to Fenton's success, after all is said and done: he knows how to attract top-tier entrepreneurs to top-tier open-source communities. That's not something one accomplishes with a jog or casual bike ride. That's the work of a triathlete, which makes Fenton perfect for the job.
Follow me on Twitter @mjasay.
Could VMware be the next Novell? That's the question Gartner managing vice president and chief of research for Infrastructure David Cappuccio asks in a provocative post, one that bears further discussion. While VMware is at the top of its game, there are several historical analogs between VMware and Novell.
I'll let you read Cappuccio's excellent post for his full argument, but the crux of it is that in the face of dominant but pricey technology, many buyers will turn to "good enough" to fill their needs. For Novell, that competition to its 90 percent market share came from Windows, which displaced Novell's "great technology that was more complex (or complete) than most customers needed."
Today, VMware faces a host of rising threats. Cappuccio picks out Microsoft's Hyper-V as chief among them:
[L]urking in the background is this little thing called Hyper-V; not as robust, or as tested as VMware, with almost no install base, and certainly not ready for prime time in most people's minds. However, it will be an integral part of Windows 7, Windows Server 2008 and Windows Server 7 in 2010. Why should you (or VMware) care? Because like "free networking", or "free SharePoint", hyper-V will get used, slowly at first, but as more and more systems get installed the base will increase and within just a few short years companies will discover (surprise, surprise!) that they have business applications running on both VMware and Hyper-V.
Free-and-good-enough is a great strategy, and one that Microsoft has long used to exceptional effect.
Of course, Microsoft isn't the only one playing this game. Xen is included for free in Linux, though Red Hat is pushing to move users to KVM (and succeeding to an increasing extent). Virtualization customers are spoiled for choice.
All of which leaves VMware exposed. This isn't to suggest that VMware should resign itself to obliteration. Indeed, VMware has gone on the offensive, releasing a host of software as open source to combat open-source alternatives, most intriguingly its open-source virtualization client, as OStatic's Sam Dean notes.
Novell didn't respond to its Netware demise until it was too late. VMware seems to be learning from history.
The real question is whether it will be able to go as low as Microsoft and the Linux vendors on price while still maintaining "good enough" profits. I suspect it will fail in this because for VMware, virtualization is core and it must price accordingly. For Microsoft, Red Hat, and Novell, virtualization is a critical complement, but not the core of their businesses. Complements are cheap, core is not.
Follow me on Twitter @mjasay.
On Thursday Oracle, one of the strongest enterprise software vendors, reported weak earnings, as reported by The Wall Street Journal. Most troubling is Oracle's first year-on-year decline in new software sales in five years, with license revenue falling by 3 percent from 2007.
Some of Oracle's struggles relate to a strengthening dollar, as CNET suggests. But with more than half of its revenues coming from maintenance, Oracle needs to forage for new customers paying for new license deals, rather than simply consolidating the industry to buy its way into new customers.
In short, Oracle needs to expand its open-source strategy.
By this I'm not referring to Oracle's work with open-source projects. Though I've harshly criticized Oracle on this score in the past, Oracle contributes significant resources to advance a range of open-source projects, as it details in its "Oracle Corporate Citizenship Report 2008" (PDF):
Oracle provides choices for end users to achieve flexible and low-cost computing. It invests significant resources to develop, test, optimize, and support open source technologies such as Linux, Xen, PHP, Apache, Eclipse, SASH, Spring, Berkeley DB, and InnoDB. Hundreds of Oracle engineers participate in open source communities and develop code that is freely available.
In fact, the open-source Xen virtualization project announced Oracle as an advisory board member on Thursday, an important step for Oracle. In this way and others, as The 451 Group recently noted, Oracle is becoming a better open-source citizen.
But this all relates to development, and the open-source strategy that Oracle additionally needs to adopt is one focused on distribution. Open source is a far more efficient distribution methodology than traditional proprietary software models, which depend upon a long and expensive sales process. In the case of my company, Alfresco, we routinely close six-figure deals...over the phone...with a relatively junior inside sales force...in 60 to 90 days. (In fact, our average sales cycle is 68 days.)
Open source offers Oracle and other vendors an efficient way to discover new customers at low cost. It is not a prescription for poverty, either: IBM uses open source offerings like Apache Geronimo to get new customers in the door, then upsell them on more expensive, proprietary offerings like WebSphere. There's no reason that Oracle couldn't do the same, rather than playing high-cost customer ping-pong with SAP.
Open source is increasingly a capitalist's game, which should make it a perfect fit for the uber intelligent and aggressive Oracle culture. If I'm Larry Ellison reading the earnings report tea leaves, I'd be seeing opportunities to discover new customers with open source.
InformationWeek's Charles Babcock takes a fascinating look into the pros and cons of open-source mergers and acquisitions, and comes up with some interesting perspectives in the process. In sum, if you want to acquire an open-source software company, you'd better be very clear about what you're buying, and how you're going to pull value from it.
Squeeze too hard, and you risk alienating the community of customers, developers, and interested onlookers that made the open-source project successful. Squeeze too lightly, and you end up being popular and poor.
There is no one-size-fits-all approach to acquiring open-source projects, as the article points out. Indeed, sometimes a private equity buyout of sorts ends up yielding the most value.
What do I mean by "private equity buyout?" Consider XenSource.
XenSource was bought for the princely sum of $500 million despite offering virtually nothing in the way of revenue and a clear business model. Under Citrix's proprietary hand, however, XenSource has gone from pocket change to what XenSource CTO Simon Crosby says will be $50 million in revenue this year. Crosby tells InformationWeek that "XenSource has close to 3,000 customers, compared with 1,800 at the time of the acquisition." Considering that it made less than $10 million or so in sales off those 1,800 "customers," XenSource may well be thanking the proprietary gods right now that Citrix gave it a new way to monetize adoption.
But this doesn't tell all of the story on open-source M&A. If it were a matter of "buy open source, make it proprietary," more would have done it by now. Some, like Red Hat, actually go in the opposite direction, as it did with Sistina, taking proprietary code and open-sourcing it. But the JBoss example is even more interesting, because it involves taking a pre-existing open-source project and trying to improve its financial yield by changing its business model.
... Read more
I just came across this post by Rich Miller, pointing to the XenAccess, a potentially valuable open-source project that aims to bring VMsafe-esque capabilities to the Xen project.
Hatched at Georgia Tech in 2007, the project hasn't been moving very fast, but perhaps its time has come? That depends on the importance of VMsafe, to some extent. As for VMsafe:
VMware VMsafe is a new security technology for virtualized environments that can help to protect your virtual infrastructure in ways previously not possible with physical machines.
VMsafe provides a unique capability for virtualized environments through an application program interface (API)-sharing program that enables select partners to develop security products for VMware environments. The result is an open approach to security that provides customers with the most secure platform on which they can virtualize their business-critical applications.
Could Xen benefit from enhanced security? Of course, just as VMware does. VMsafe enables third-party security vendors to check security of virtual machines at the hypervisor level, scanning incoming and outgoing traffic to get excellent visibility into the virtual machine, and thereby to protect it. Adding this to Xen would be a big win.
It's just a question of whether the project can evolve from Georgia Tech into a broad, industrywide effort to improve Xen's security. Given that Xen started as a Cambridge University project and ultimately gained support from Intel, Red Hat, and others, perhaps the odds are in XenAccess' favor. We'll see.
Just what did Citrix buy when it bought XenSource? As Dana Blankenhorn analyzes, Citrix appears to be in a dead sprint to remove any and all value from open source, virtualization buzz, etc. that it may have acquired when it bought XenSource:
And now, a quarter after the deal was closed, Citrix officials have indicated that they will use the hot XenSource branding, but de-emphasize its identity as a virtualization company. Citrix's flasgship Presentation Server has been renamed to XenApp Server, a fitting title considering its function as an application delivery platform. But it has no XenSource code.
Citrix either got completely snowed in the acquisition or, much more likely, it's getting pressure from its bosom-buddy, Microsoft. What it's not getting is much value for its $500 million.
Oracle has a history of making BIG announcements about how much better its technology is, how it will crush feeble-minded competitors, and such. Its history of actual delivery is somewhat less grandiose. While Oracle has demonstrated an exceptional ability and voracious appetite for acquiring others' innovation, it has proved less adept at actually building things that are dramatically better than the opposition's.
A case in point may well be its virtualization technology, which it trumpeted as three times more efficient than rival products. But as Larry Dignan notes, analysts aren't buying the hype this time around. Oracle's crying wolf over Unbreakable Linux may well be the most immediate reason:
Oracle on Monday announced its own server virtualization software and claimed it was three times more efficient than rival products. VMware shares were whacked on the news. What a difference a day makes. On Tuesday, analysts called Oracle?s virtualization announcement "virtual FUD" and noted it was reminiscent to the company?s Unbreakable Linux announcement a year ago....
... Read more
Wow. I guess for those who have yet to be forced to compete with open source, it's permissible to come out with grossly inaccurate comments about open source. Even Microsoft would never say something like this, which Diane Greene (VMware's CEO) said to The Register:
There is still a lot of innovation going into our hypervisor. As long as there is a lot of innovation going in, (open source) is not the right model.
What we want to do is fund ourselves to be able to build new stuff. If you're purely open source, there is no way you can do new stuff.
Um...no. That is completely false. It's not even a little, teensie weensie bit true. In fact, it's when one is in the midst of innovation that open source makes the most sense. Ms. Greene seems to be suggesting that open source makes sense when you're ready to put code out to pasture because it has passed its prime. Quite the opposite is true, if you're hoping to derive value from community, which is the whole point of open sourcing code.
Community-influenced innovation.
What Ms. Greene ought to have said is something like this:
... Read moreI just heard from an unimpeachable source close to the company that Zimbra's revenue last year was ~$6 million. (Though the more interesting number is the significant increase they've had this year (on track to hit $20 million), which points to a strong future.) That makes the $350 million acquisition by Yahoo outstandingly profitable for Satish and crew. That's a ~60X valuation (on 12 months trailing revenues).
Was Yahoo foolish? Yahoo isn't a foolish company. I think it means that Yahoo believes Yahoo plus Zimbra is worth more than $350 million, and I think it's right. Citrix spent $500 million on a company that had $1 million in 12 months trailing revenues. Foolish? Not when you consider the future.
... Read more
