1. Building a Winning Strategy for an Open Source
Company - Some Views
Mikko Puhakka

2. Short Bio
-Management Consultant 1993-
-Venture Capitalist (investment into MySQL in 2001) 1999-
-Researcher 2004-
-COSS 2005-
- xx board seats globally e.g ConeAdvisor (Finland),
TargetSource (China )

3. Agenda
• Strategy and Timing of Business
• Open Source Business Models
• Venture Capital and Open Source

4. Agenda
• Strategy and Timing of Business
• Open Source Business Models
• Venture Capital and Open Source

5. About Strategy
• Building strategy is like a trip to the
moon...you know your target but it keeps
moving and you have to react accordingly.
Paraphrased from
Regis McKenna

6. What Type of Business Are You in?
High risk High risk
Small return High return
Small risk Small risk
Small return High return

7. Financing Need
Due to start-up investments in 2006 and growth
investments in 2008 xxxx expects to reach
breakeven status around 2010
Cumulative cash flow
Payback period
Time
-10
-06
-08 Financing Need

8. Content vs Context vs Timing
• right idea in the wrong place
• right idea, right place wrong timing
• right idea, right place, right timing…but
wrong team

9. Why OS matters: Belynda &
Wikipedia
Couple months ago I was exchanging e-mails with an long-time
friend, explaining to her why she should take a careful at what is
happening in the publishing and content industries. After I sent her
a link to Wikipedia (www.wikipedia.org), I got this very worried
response:
“The reason I am asking these questions is that I just
realized this threatens millions of dollars of our business in
my existing company. We sell an online encyclopedia - in
my territory alone this is over $400,000. One of our stated
benefits is that our source is authoritative - Wikipedia
seems to be gaining so much ground and legitimacy that
customers may say why should I spend over $170,000 on a
product that I can get basically free?”

10. LINUX HYPE CYCLE HAS BEEN GUIDED,
AMONG OTHERS, BY PERCEPTION OF PROs AND CONs
Visibility
Peak of inflated
expectations Plateau of
productivity
Slope of
enlightenment
Trough of
disillusionment
Technology
trigger
1991-1996 1997-2000 2000-2001 2001-2002 2003-now Time
PROs &
CONs in
the press
? PROs
CONs PROs
CONs
PROs CONs
PROs
CONs
Source: Gartner ; Novell ; Press clippings ; SaS analysis 10

11. State of OSS Adoption
: : 11

12. Governing Model
Technology Adoption Life Cycle
by Geoffrey Moore
Pragmatists: Conservatives:
Stick with the herd! Hold on!
Visionaries: Skeptics:
Get ahead of the herd! No way!
Techies:
Try it!
Innovators Early Early Majority Late Majority Laggards
Adopters
Pragmatists create the dynamics of high-tech market development

13. Business Evaluation Needs
OSS CONTRIBUTION INCREASES
OSS OSS OSS ACTIVE LAUNCHING
APPLICATION AS TOOLS COMPONENT PARTICIPATION NEW
UTILIZERS IN R&D INTEGRATION & MANAGEMENT COMMUNITIES
OF OSS
COMMUNITIES
- new attitude - new
BUSINESS needed, e.g communicati
- potential living on on skills
- non-issue - non-issue terms of needed:
savings +
- potential meritocracy blogs,
impact on - new skill discussion
business sets: groups
model ‘community - ‘community
manager’ leader’
COMPLEXITY OF THE OSS MANAGEMENT FRAMEWORK INCREASES
11/28/09 Managing Open Source Software as an 13
Integrated Part of Business

14. Basic Elements of a Strategy
(the Cone way)
1. Organization Chart
2. Strategy Model
3. Project & projectportfolio
4. Projectportfolios’ Performance
5. Projectiportfolios’ GANT chart - Roadmap
6. Metrics - Measure of success

15. Strategy model based activity
management
Mission, Vision & Values
Web-based,
Strategy model efficient &
Board better
communication
From strategy
Management to action
Organization Dialogue with
Activity 1 Project 2 Measure 3
front line
Shared strategy
Source: Ala-Mutka 2008. Strategiamalli
© CONE ADVISOR Jukka Ala-Mutka 15

16. Agile Strategy Concept
1-3 months per strategy iteration
Strategy Model Taking Responsibility
Business model innovation Shared strategy
Competitive Advantage Scorecard
Iteration & Learning Management by Objectives
© CONE ADVISOR Jukka Ala-Mutka 16

17. Model & Visualize your
Business Model
Business model Red = Poor
Performance Yellow = Satisfactory
“traffic lights” Green = Excellent
Action
Status Report
Click
Easy to
Drill Down
Click
© CONE ADVISOR 17

18. 4 Steps from Vision to Action (part
of business model)
Case: Building Facility Services
• (1) Vision Wonderful Living
• (2) Strategy Long Lasting
Customer Relations
• (3) Business Element Rise of
valuation of property
• (4) Activity Element Stop tags
and graffiti
Source: Ala-Mutka 2008. Strategiamalli
© CONE ADVISOR Jukka Ala-Mutka 18

19. Agile Strategy - A Sprint Model
2. Iteration 3. Review &
phase Reflection
• Plan & Test • Final assesment
• 1-4 months • Decision (continue or
• Interaction stop sprint
development)‫‏‬
1. Initialize 4. Roll-
Sprint out
• Goals
• Tasks
• Participants
Source: Ala-Mutka 2008. Strategiamalli
© CONE ADVISOR Jukka Ala-Mutka 19

20. Strategic Project Management
Big Manage
implementatio
n
•Business
results
•Time
Risks •Resources
•Money
Small Time
to
4 month 6 months 12 months market
© CONE ADVISOR 20

21. Agenda
• Strategy and Timing of Business
• Open Source Business Models
• Venture Capital and Open Source

22. Sample of business models
11/28/09 Managing Open Source Software as an Riseforth 22
Integrated Part of Business

23. The best models (Mickos/MySQL)‫‏‬
• Mozilla’s: sell ads
• Red Hat's: sell services around a
binary
• Sugar's: sell proprietary extensions
to open source software
• Dual-license: charge a fee for
dropping open source into a
proprietary product
11/28/09 Managing Open Source Software as an 23
Integrated Part of Business

24. Evolution of OSS business
models
In 2005
– Are OSS businesses sustainable?
In 2007
– How do you scale OSS business?
In 2008
- When will the big money start flowing?
In 2009
- Business elements are in place, what
next?

25. Agenda
• Strategy and Timing of Business
• Open Source Business Models
• Venture Capital and Open Source

26. Funding of an Idea (private equity)
• Own pocket
• FFF
• Business angels
• VCs

27. The VC and a Businessplan

28. Venture funding to Open Source
• Open Source Across the Enterprise
• 2004: $149MM, 20 open source startups–
• 2005: $294MM, 41 open source startups–
• 2006: $475MM, 48 open source startups–
• $1.89B raised by open source startups
since 2000–
• 1Q2007: $86.3MM SourceFireIPO,
$100MM, 11 deals
* Open Source Business Conference / Info World

29. VC money is focusing on growth and
talent markets
* Ernst & Young: Global Venture Capital Insight Report 2007

30. Challenge: Conservative Valuation Methods
(Lockett, Wright, Sapienza & Pruthi 2002)
1. Liquidation value asset based methods
2. Discounted cash flow based methods
3. Options based valuation methods
4. Rule of thumb valuation methods
(comparator valuations)
Puhakka & Jungman(2005)

31. Aggressive Valuation Methods -
Bad Track-Record
• In the nineties it was argued that revenues and
earnings were not sufficient nor relevant ways of
putting value to emerging e-businesses or
‘dotcoms’ which had no revenues and actually
no existing mechanisms of extracting payments
from customers
• Life-time value of a customer
• A price-to-eyeball multiple
Puhakka & Jungman(2005)

32. Valuing OSS Companies
• Open Source companies face a similar
challenge as part of their business (and value)
rely on Open Source communities where people
contribute voluntarily their time and knowledge
into projects
• Contributions are real but take place without
formal contracts or incentive mechanisms and
people can easily abandon the community
Puhakka & Jungman(2005)

33. Some messages
• Money is available for OS ventures, but no
special value is put to companies
• Transparent valuation methods lacking not
only from OS companies, but all venture
capital investments
• Results are indicatory, larger sample
would be needed
Puhakka & Jungman(2005)

34. Exit Markets - Industry seems to know
more than VCs
Zimbra - $350 million (on ~$3 million of trailing revenues) -
September 2007
XenSource - $500 million (on $1 million in trailing revenues)
- August 2007
JBoss - $350 million (on $27 million in 2006 revenues) -
June 2006
Sleepycat - $35-50 million (on ~$7 million in trailing
revenues, is my best guess) - February 2006
Gluecode - $10 million (on very little in trailing revenues,
less than $1 million, I believe) - May 2005
SUSE - $210 million (can't remember revenues - I think
$30-40 million) - November 2003
Ximian - ~$50 million (I can't remember - on $1 million or
so in trailing revenues) - August 2003
Source: Matt Asay
+ Trolltech & Sourcefire IPOs & MySQL & SpringSource
tradesales

35. Build on Our Heritage -
You need a good story
• In coming 5 to 10 years Open Source based
innovation and service is one of the largest
business transitions in software driven industries.
– IDC Research; Worldwide revenue from standalone Open
Source Software will grow 26%(CAGR) to reach $5.8 Billion by
2011.
– IBM is investing hundreds of millions on Open Source based
software development.
– Several countries (e.g. China) has made decision to favor OSS
based architectures.

36. Open Source evolution -from process
innovation to value creation!
• In its early days open source was rather improving existing than
innovating new
– Value creation and preservation are the key. The software value is
preserved by sharing it. The more people using it, the more value it
creates. People should not mix the value of "IP protection" (i.e. a legal
tool to protect intellectual assets) to the business, with the value of the
asset itself.
• Today there are clear evidences of business innovations
– Proprietary software world talked about subscription models for years,
but it was companies with open source related products that
developed real innovation here. Likewise,with SaaS vendors that are
invariably hosted on infrastructures of open source software and able
to be more inventive in their business models because their margin
calculations scale differently.
• Phenomena is still moving on
– Open software, open data, open innovation…
There is an great opportunity to further accelerate
OSS transition towards
value creation!

37. Maybe we should change terminology?
Maybe we should start talking about software driven
businesses instead of Open Source businesses.
After all Open Source is way of producing and distributing
software, not a businessmodel.
...and the biggest successes in 2000’s have been software
(OSS) driven businesses such as Google, Amazon,
Ebay, Sulake Labs.

38. Thank You!
http://fi.linkedin.com/in/mikkopuhakka