Over the past few months there has been an upswing in venture capital funding used to establish commercial open source companies.
What makes an open source project a candidate for a commercial open source company? I see three key aspects.
A well established market
The current group of high profile commercial open source companies are all participating in market segments led by one or more dominant proprietary software vendors. MySQL and PostgreSQL are both participating in the relational database segment, well established by Oracle, IBM and Microsoft. Compiere participates in the ERP segment dominated by Oracle and SAP, while SugarCRM and Compiere both participate in the CRM segment, established by Siebel, Oracle and others. None have needed to create a market for their products.
Proven popularity and reputation
These open source projects initially built their brand, not in the traditional sense with multi-million dollar advertising and marketing budgets, but instead through grass roots customer acceptance models with downloads, use by developers and early adopters, interactive web sites and word of mouth as their main approach. They have established their initial reputation among developers and early adopters with high quality software licensed under the GPL, or a similar open source license. All have strong communities of contributing developers, testers and doc writers.
Need for commercial infrastructure elements
Once an open source project has enough downloads among developers and early adopters, it is poised to, or has “crossed the chasm” and is ready to be adopted by mainstream IT and end user organizations. However, most IT and end user organizations are risk averse and will not adopt open source software for business critical situations unless it is guaranteed by a commercial entity. Betting the business on an AS IS license guarantee is unacceptable, especially for more complex solutions such as relational database or ERP applications. Having the source code available doesn’t really help. Having an entity that will continue to exist, provide support, product releases as well as other services is a critical factor in the adoption of open source solutions among this risk averse segment of the market. Building the necessary infrastructure is expensive – this is where outside investors can fill the gap.
Open source projects with these three attributes are well positioned to transition to one of the emerging commercial open source business models and attract the interest of the venture capital community.
Technorati Tag: Open Source, Software, Venture Capital, Entrepreneurship