The Open Road

The European Commission may be taking its time analyzing the competitive impact of Oracle's proposed acquisition of Sun/MySQL, but the industry can't afford to dither. On Tuesday, MySQL competitor EnterpriseDB announced that Red Hat joined its $19 million Series C funding round, which follows IBM's own investment in EnterpriseDB.

Is the software industry, once devoted to MySQL, preparing to shift allegiances to Postgres?

Probably not, but clouds are forming. On Monday, I talked with EnterpriseDB CEO Ed Boyajian, a former Red Hat executive, and he suggested several reasons for Red Hat's investment of "a significant amount of money" in the open-source database vendor, EnterpriseDB. As he told me:

This is a great step forward for our company and for Postgres. Red Hat has done heroic work bringing commercial open source to mainstream enterprise adoption. And it's making a difference: arguably billions of dollars of spend in operating system and middleware has gone back to customers. You want to talk about returning control to users? That's the real yardstick. That's real disruption.

For EnterpriseDB to have the trust and support of Red Hat as a partner and investor is a huge help to our company and I think it gives another strong indication to enterprise customers challenging their old spending habits, that there is more they can do.

It's important to note that Red Hat has been distributing Postgres for some time. It's in every copy of Red Hat Enterprise Linux and Fedora that Red Hat ships. As such, it's already in the hands of thousands of Red Hat customers and users, and is in heavy demand in some geographies, particularly Latin America. But until now Red Hat has not provided robust support for the database on par with its support for Linux and JBoss.

That's about to change.

The change is good for Red Hat customers, but this isn't the only area in which Red Hat has been seeking to expand its influence. Red Hat has been actively looking for opportunities to invest in a variety of open-source companies, most recently investing in JasperSoft.

Red Hat, once content to go its own way in the software industry, is increasingly concerned with ensuring the vitality of its peers. After all, if Red Hat remains the only sizable open-source vendor, that's an indication of the weakness of the model, not its strength.

Red Hat CEO Jim Whitehurst, however, nicely marries pragmatism with idealism, as suggested by his comments on EnterpriseDB's subscription model:"EnterpriseDB is also working to create customer value through a subscription support model. Clearly, this is a model we see as beneficial."

He's right, but it's interesting to hear him laud a model (i.e., a subscription to proprietary and open-source software, plus maintenance and support) from which he distanced Red Hat in Red Hat's Q1 earnings call. ("I certainly hope for and we certainly like to work with other open source companies out there. But those are fundamentally different business then what we're doing.")

He's right the second time (in the EnterpriseDB news release). They are not fundamentally different business models. I suspect his comments on the earnings call reflected an attempt to get out of an inaccurate and misleading question from the ever-entertaining Trip Chowdhry.

Regardless, Red Hat's investment in Postgres vendor EnterpriseDB suggests that it, along with IBM and others, is prepared to bolster alternatives to MySQL in its larger quest to provide real competition in the database industry.

To be fair, Red Hat's interest in Postgres and EnterpriseDB precedes the EU's intervention in Oracle's proposed acquisition of MySQL. The interest is understandable: Postgres is a great choice for a wide variety of database workloads. It's built for transactions and higher-end use cases, like the Oracle and IBM database workloads that it can replace (or augment).

EnterpriseDB plays into Red Hat's overarching strategy of commoditizing key infrastructure, as Whitehurst has noted. Given that the $20 billion database market is concentrated in just three vendors who control 85 percent of the market, databases are ripe for disruption, disruption that Red Hat can feed from a distance.

Red Hat's investment in EnterpriseDB says more about Red Hat's increasing awareness of its larger role in the open-source ecosystem than it does of any competition with MySQL. It's about time.

With the market for initial public offerings in a deep freeze and a dwindling number of potential buyers, start-ups have fewer opportunities to exit and retire to Costa Rica.

This is worrisome to entrepreneurs, but if anything, it should be of even greater concern to the venture capitalists that fund them, a point made by TechFlash's John Cook. Venture capital firms simply aren't structured to invest efficiently in this market.

VCs raised billions of dollars during technology's boom, and it's unclear where they can now profitably invest those dollars. IBM, Oracle, Cisco Systems, and Microsoft can buy only so many companies. The industry consolidation that paid big returns to VCs earlier this decade has left far fewer potential buyers, with an anemic IPO market to provide an alternative outlet.

The situation has the potential to get worse. As IBM's Savio Rodrigues writes, Oracle has been hit hard in its middleware business as enterprise IT seeks to minimize the damage from Oracle and SAP price hikes in applications. This could make it harder for the company to afford acquisitions down the road.

In venture investing, small is the new big. Smaller, strategic funds like O'Reilly Alpha Tech Ventures can score big on a "base hit" $20 million exit, given its seed-stage investments of $500,000 to $1 million. Meanwhile, a large firm such as Kleiner Perkins Caufield & Byers will struggle to break even on such an exit, given that its investments need to be much bigger because its funds are so much bigger.

Venture firms have compensated by throwing money at weaker companies that arguably shouldn't get funded. This isn't sustainable. If exit options are dwindling for good companies, they're nonexistent for bad ones.

Compounding the problem for VCs, not only are exits likely to shrink in the new technology economy, but start-ups need less cash to thrive due to low-cost open-source and cloud infrastructure. This is true for most start-ups, but particularly so for companies that sell open-source software.

VCs potentially need to trim their existing funds, and almost certainly should be raising smaller funds.

For those that want to put existing capital to work, it might make sense to swing for the fences with consolidation around portfolio companies. I've described one winning open-source combination (Acquia, Magento, and OpenX), but there are plenty more. The upside to this strategy is that it fattens up a potential acquisition. The downside is that equity positions get heavily diluted in the process, and there are few potential buyers.

It's hard to make early-stage investments in a climate when entrepreneurs need less money, and when the exits promise to return far less. But that is precisely the environment in which VCs find themselves. It may be time to trade in that Porsche for a Honda.

Those who joined the technology industry in the 1990s can be forgiven for believing that dramatic wealth for paltry effort is the norm.

For everyone else, it's worth being reminded of something that Trevor Loy, a partner with venture capital firm Flywheel Ventures, said in recent congressional testimony:

We expect to hold a typical venture capital investment for 5-10 years, often longer and, since the technology bubble burst, rarely much less.

Unfortunately, Loy is not alone. In fact, as Tim McAdam and Jim Tybur of Trinity Ventures told me over breakfast Thursday morning, 20 years of National Venture Capital Association data (PDF) suggests that very few companies grow to $100 million in revenue in fewer than seven years.

If you're looking to flip your Web 2.0 start-up that sells fashion accessory widgets, this will come as bad news. But for those open-source entrepreneurs who are dismayed that they're only at $50 million or so after a few years in business, take heart: that's the way it's supposed to be.

It's supposed to take years to grow a solid business. Sure, Salesforce.com hit $1 billion in revenues after just 10 years in business, and $100 million in its first 5. Google made it to $100 million even faster.

But those are anomalies, as all the data suggests. Red Hat, MySQL, and other leading open-source businesses took at least 7 years to ripen financially. They were built for profitability, which should be the focus of every open-source entrepreneur. We're growing businesses, not hype and fan clubs.

Follow me on Twitter @mjasay. Please note that if someone offers you $1 billion for your company that is still pre-revenue, disregard all advice above. Just take it.

Venture capital has not died, despite a big dip in Q1 2009 financings. But honestly, everyone might benefit if a significant percentage of the industry's members went on life support.

So while ReadWriteWeb waxes hopeful about the venture industry's 61 percent jump in financing in Q2, I'm not so sanguine.

As The Economist notes, we still have an oversupply of poorly managed venture capital firms:

(The) root cause of the (VC) industry's problems...is that most venture capitalists have failed to find enough decent companies to deliver the return they promised investors....Although many venture capitalists have been outstanding at raising cash, they have been pretty lousy at investing it.

The problem may not be that VCs aren't bright, but that there are simply too many of them. As 10-year returns increasingly look negative (as Paul Kedrosky and others have written), we're likely to see a shakeout in the VC community.

In fact, we're already seeing it, with venture funds raising just $1.7 billion in the second quarter, a 13-year low, as TechFlash reports.

Wheat, please say goodbye to the chaff.

Yes, ReadWriteWeb is right to suggest that more money means more employment for entrepreneurs, but I think it's dead wrong to suggest that more entrepreneurs necessarily lead to a rosier outlook for the economy.

Indeed, it strikes me that what we need are better entrepreneurs (and better VCs), which is something that scarcity seems better able to produce, not abundance, as called out by recent studies. "Survival of the fittest," in other words, should produce better startups than "subsistence by VC food stamps."

It is telling to me that many of the best open-source companies--Red Hat, MySQL, JBoss (now Red Hat), etc.--have taken relatively little venture money. They've had to strain earlier at profitability than many of their Silicon Valley peers, and it has been a great boon to them.

We talk often about how cheap it is to start a company these days. If this is true, we should see far less money raised, yet we still see Twitter raising huge piles of cash ($55 million and counting)...yet hardly seeming to spend any of it.

Unfortunately, that money will be spent, and money often ends up hurting as much as it helps, as it tends to amplify character flaws, both personal and corporate.

So, here's hoping that it will become harder, not easier, to raise money, whether you're a VC or an entrepreneur.

If I'm right, we'll all be better off in such an environment.

Of course, if I'm wrong, we'll all be unemployed and be forced to turn to dairy farming.

Follow me on Twitter @mjasay.

I've suggested before that Index Ventures could well be the "best venture firm in Europe." Index has one of the most interesting investment portfolios of any venture firm on the planet, having invested in companies like Skype, Openads, Oanda, DimDim, and others.

Today, Index became even more interesting, adding Michelangelo ("Mike") Volpi to its investment team as a partner based in London. Volpi was most recently the CEO of online video company Joost, but made his name as the mergers and acquisitions maestro at Cisco, where he oversaw 75 acquisitions.

Given Volpi's background as a deal-maker, the question is whether he's going to be investing for Index or selling for Index.

The answer is "both," of course, and Volpi's recent failure with Joost should prove useful instruction for his future Index investments, as suggested in an interview with D: All Things Digital. Look for Volpi to take a hard-headed view on Internet business models: less advertising, and more transactional business models.

Index was already a leading light in the global venture investment constellation. Adding Volpi should make it even better.

Follow me on Twitter @mjasay.

Satish Dharmaraj, founder and former CEO of Zimbra, one of the industry's top open-source start-ups, has joined Redpoint Ventures, a Silicon Valley venture capital firm, as a partner, Dharmaraj confirmed to me by phone on Tuesday.

Dharmaraj sold Zimbra, an open-source e-mail and collaboration company he founded in 2003, to Yahoo for $350 million in 2007. Earlier this year, Dharmaraj left Yahoo to focus on "other things." It's now apparent that the "other things" Dharmaraj had in mind included joining Redpoint, one of the industry's top venture firms.

I asked Dharmaraj about the move and the motivations behind it:

I've started and sold two companies now (Onebox and Zimbra), and was thinking about doing another. I came to the conclusion that a) I love working with entrepreneurs, and b) I can't bear working for a big company.

So I spent the last year doing angel investing, but I didn't like working alone. I've known the Redpoint partners for the past 10 years, and started talking with them last fall about me joining as a partner. Their focus fits really well with mine: cloud computing, software as a service (SaaS), and open source.

Given the shambles that the industry is in, Dharmaraj's timing seems inopportune. But he insists that now is actually an exceptional time to be investing, provided that the focus is right:

Some people think it's a crazy time to invest, but I think it's a great time to invest. Companies born this year will emerge from the recession in 2010/2011 with great momentum and discipline. Even in this bad economic environment, the types of companies I'm interested in dramatically reduce the cost of buying and running software, plus significantly increase productivity through open standards and open source.

For those looking for an experienced investor that seems to have done just about everything right with Zimbra, Dharmaraj should be top of mind. He's a warm but driven executive, someone you'd want to hang out with and report to. And given his track record, he should prove to be an informative adviser to any start-up that is looking to make money while simultaneously enhancing customer freedom.

Follow me on Twitter at mjasay.

Silicon Valley and the entrepreneurship it fosters is different because it thrives on adversity, on making much out of little. This is why Sarah Lacy is right to rebuke Thomas Friedman's suggestion that the U.S. government should bail out venture capital firms:

Friedman further says in the column that "Bailing out the losers is not how we got rich as a country, and it is not how we'll get out of this crisis." Agreed. But what country got rich by bailing out winners? Is that even a concept that makes sense? I can't imagine a greater a waste of shareholder money than giving it to people who don't need it and aren't asking for it....

The reason recession-born companies are so inventive and daring is because founders are forced to work within constraints, precisely because it is harder to raise capital. Nothing kills a great idea like too much cash. Unless it's a flood of too much taxpayer cash, because then we all lose.

Somehow, somewhere, someone decided that government was the answer to the economic crisis, conveniently overlooking government's complicity in encouraging the U.S. consumer to consume far beyond the boundaries of common sense. But I don't blame government for my problems. Nor do I ask it to bail me out.

I certainly don't expect the government to bail out venture capitalists, a group that has not asked for government money and would almost certainly chafe under its strictures. These are people that ostensibly get paid to take risks. The system fails if the VCs can simply get fat on government money.

In many ways, it's already failing due to too much institutional investor funding. Too much money is chasing too few deals is the increasingly conventional wisdom. We need venture firms to fail. We need money to settle into the most intelligent and hungry investors' hands, rather than being shoveled into the pockets of paltry hacks that know how to collect a management fee and little else.

The Gordon Gecko character in Wall Street proclaimed that "Greed is good," but the reality is that "Greed mitigated by failure" is better. We want ambition. We also want poorly executed ambition punished.

That's what makes Silicon Valley great. It's also what made the United States great. We get the air knocked out of us and we get back up. But that initial pain is critical to the recovery. The more the government and others try to soften the acute pain of loss, the less we will strive for gain.

I've found this to be true in my own life. When I told my father that I was planning to go to Brown for my undergraduate studies, he replied, "That's great. Who is going to pay for it?" I went instead to BYU, which gave me a scholarship.

Later, when my wife and I were living in England for my Masters program, I called my mother to get some financial back-up (which she had been giving all along to make it possible for me to study there). She told me 'No." That 'No' proved foundational in forcing me to pull myself up by my bootstraps, as it were, and become self-sufficient.

In like manner, we shouldn't bail out VCs. Let them fail. That's the best way to ensure they'll succeed.

Follow me on Twitter at mjasay.

I have some unfortunate news for those socialists and communists who still believe that open source is their movement. It's not. Open source is firmly capitalist. Always has been. Always will be.

Sarah Grey, writing in Monthly Review, talks up "open-source anticapitalism", but she's too late. Open source, from its inception, has been avowedly pro-business. That was, after all, the whole point behind changing the terminology from Richard Stallman's preferred "free software" to Eric Raymond and Co.'s "open-source software."

The former term scared off business. The latter term invited it.

Grey writes that "there are alternatives to capitalism." She's right. Unfortunately, open source is not one of them. Open source is the essence of free-market capitalism.

However much one may want to lay the blame of the current economic collapse at capitalism's door, one need only look to Soviet Russia or France's socialism (and the massive unemployment it brings) to be grateful that capitalist, free-market open source is currently reshaping the software industry. It's called open source, and it's a capitalist's game.

We have nothing to lose but our license fees.

Follow me on Twitter at mjasay.

There are lots of reasons to love MySQL, the leading open-source database that Sun bought in 2008: it's inexpensive, perfect for Web applications (among other things), and boasts high performance.

According to Brian Aker, a principal engineer at Sun Microsystems, however, the real secret to MySQL's success is ease of use:

The thing that MySQL brought to the table when it came out was the ease of use and the ease of installation. MySQL came out in an era where comparable products were really complex and required a lot of knowledge to be able to use and install. With MySQL, the user is able to take the database, download it, install it, understand it, and then apply it to their application.

This is one reason that MySQL skills are in hot demand. On the Elance recruiting Web site, for example, MySQL skills are the third-most demanded skill.

The next phase for MySQL and other open-source technologies, however, needs to take that ease of use that is characteristic of Ruby, Drupal, and other leading open-source projects, and translate it into business-friendly terms that make it easier for enterprises to consume open source.

Marten Mickos, departing senior vice president of Sun's database group, calls this out in a recent interview:

If we want open source to be "the right choice for business"...we also must make open source suitable for business. It is a strength that the open-source community has passionate members who have no business interest themselves, but we must also find those who are passionate about building a business.

This means an expansion of the original meaning of open source--and a healthy one, I might add. The more business success we have in and around open source, the more open source we will have.

I've been arguing this point for years, and founded the Open Source Business Conference to help tackle the issue. The more money we make in open source, the more open-source software will be written. This is a very good thing.

It will be particularly good if the software written is as easy-to-use as MySQL. MySQL has earned its reputation as an exceptional database. Now it must figure out how to pay back profits on the $1 billion investment Sun made in MySQL. Indeed, this is the next big test for all commercial open-source software.

Follow me on Twitter at mjasay.