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.
Follow me on Twitter @mjasay.
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.
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 moreJust 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.
I 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.
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The unfortunate thing about writing all your thoughts down in a blog is that it makes it very clear just how wrong I can be sometimes. My "code" is online, for everyone to see, analyze, and critique.
And critique you do. :-)
A case in point is my fulminations earlier Thursday on XenSource and its alleged abandonment of the Xen project. John Vigeant, a friend from my Novell days and XenSource's director of Business Development, kindly swatted me in an e-mail for errors in my post.
Witness my sackcloth and ashes (with John's permission--he must have some perverse pleasure in seeing me don this hairshirt :-):
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(Credit:
Zim Rent-a-car)
I read this Charlie Babcock (InformationWeek) interview with Peter Levine (CEO, XenSource) and Wes Wasson (corporate VP of worldwide marketing, Citrix), and I'm left with the feeling that XenSource really doesn't see Xen's future in open source, but rather in Windows.
Which makes me think it may be time to fork the project and move on. But then, the company already did that for us, didn't it?
... Read moreSaying open source is incidental to Citrix's acquisition of XenSource is like saying one would buy Red Hat and not care much about its role in the Linux kernel. Yet Matthew Aslett and Raven Zachary both suggest precisely this.
I guess they're following the flawed reasoning that Savio Rodrigues uses. Namely, that if Citrix cared about Xen and not just XenSource's proprietary technology, it could just fork Xen for free. This would be true if it weren't false. Xen without open source is an emperor without clothes.
It's also the reason that Novell failed to entice XenSource into an acquisition when it was knocking on Peter Levine's door nine months ago. It tried the "fork" argument, and gave a low valuation as a result. Guess who acquired XenSource?
... Read moreIn response to my post on the XenSource acquisition, a friend made this comment, which I think is dead-on:
What this also says is that it isn't about the revenue. It is about having new technology in the arsenal to go after older competitors that have not revamped their technology. The lack of investment in technology by both start-ups and the established players in the early part of the decade is now catching up with them by making them exposed to new, open source entrants that were able to survive in the shadows of the dinosaurs. There is sales capacity and existing brand equity that can take these technologies and the new business model and make more out of it quickly.
As his email came in, I was on the phone with the CTO of a multi-billion dollar enterprise. ... Read more
Wow. The ink was barely dry on my critique of Tim O'Reilly's position on whether proprietary companies will buy up the open-source companies, and along comes the news that Citrix is buying XenSource. It's a good technology fit, but Citrix would have been one of the last companies I would have accused of a predilection for open source.
Mea ignoranta.
The news is pretty intriguing, and funny on at least one count:
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