Advice for Open Source Startups: Remember LinuxCare 116
LinuxCare
was born in 1999 -- venture-backed by top tier VC firms like Kleiner
Perkins, with total
funding in the ballpark of $70 million.
Those were the frontier days for Linux. There was
a ton of industry interest and activity despite the fact that the jury
was
still out with respect to end user adoption. Nobody really
knew exactly
how Linux was going to be used – would it be for the desktop,
servers,
etc.? The company used the vast venture coffers to promote
the brand and
staff star-power (even Linus Torvalds consulted for them
briefly)– and
LinuxCare quickly became the recognized name for Linux services and
support,
doing work for big systems vendors like Dell and IBM in addition to
developing
device drivers and offering education services.
Red Hat had the Linux OS and
software, VA Linux had the
hardware – and LinuxCare had the services. It was a
theoretically perfect
enterprise Linux ecosystem triumvirate.
But it wasn't meant to be.
The demise of LinuxCare can be attributed to many
factors. The first was that enterprises were slow to adopt
Linux
– in the early ‘00s, IT spending came to a grinding
halt
with the dot-com and stock market crash. But the key factor
to
LinuxCare’s spectacular death spiral was the fact that they
were going up
against Red Hat, the very company they were basing their business on.
Red Hat
not only developed their own distribution of Linux, but also started
offering
support for it. Red Hat offered a one-stop shop for Linux software and
services
regardless of hardware. Enterprise
customers decided it was easier to buy from one vendor. This same
sentiment is
what drives sales of Microsoft software in enterprises today.
LinuxCare suffered a painful public death over months
of executive departures and layoffs, VA Linux abandoned hardware for
software,
and RedHat, with the cash to weather the tech spending downturn,
expanded its
revenue streams and became the de-facto enterprise Linux distribution.
It's easy to dismiss LinuxCare as "ahead of their
time", which is definitely true. But the fundamental and fatal flaw was
that they based their products on someone else's IP, with no IP of
their own.
When the market tanked abruptly, LinuxCare didn't have the money to
weather the
storm and didn't have consistent alternative revenue streams to combat
the lack
of services income.
Some of the executives from LinuxCare went on to start a new company called Levanta, which focuses on Linux systems management. They have since developed IP in software and hardware that can sustain the business beyond the services revenue.Their LinuxCare experience taught them how to build a sustainable technology business model on top of open source software. No longer do they rely on IP that walks out the door every night in their employees' heads.
In the end, it all comes down to
IP. Building a
business on top of something you don't own is extremely risky.
Companies need
to develop their own IP to be innovative and have competitive
differentiation.
And if they don't develop it themselves, they need to acquire or
license the
relevant code to protect themselves and ensure they aren't caught
without
alternatives.
An Open Source Danger
Zone?
In my eyes, the bubble associated with open source is less related to the millions of VC dollars and more related to the reliance on software and components that are not part of a company's internal IP. When Oracle acquired InnoDB, it had a less than positive effect on MySQL, but MySQL is a smart enough company to not bet the farm on something it doesn't own. It owns enough IP to sustain its products-and it's business from the risk associated with relying on someone else's code.
IT Groundwork has built a business
on top of an open
source network monitoring project called Nagios. They don't own the
copyrights
and they don't employ the creator. Kleiner-backed SpikeSource offers
"certified stacks" of open source software components, but they don't
actually create the open source components themselves.
And in SpikeSource's case, Red Hat announced that
they too would offer "certified
stacks." Who do think is going to win that battle? Red Hat, the
one-stop
shop that offers the OS and the apps, or the company that offers merely
a
portion of the total package. Does SpikeSource have the IP or
alternative
revenue sources to withstand Red Hat? Let's wish them
luckand hope they
know the LinuxCare tale.
If there is a bubble, it will burst when the open
source projects these new company's products and services depend on go
private,
fork, or get acquired. The market for open source is so new we haven't
seen
much of this yet. Only time will tell if the recently funded open
source
companies can build sustainable businesses, or if this grand experiment
will
result in a few 800 pound gorillas and many tiny monkeys.
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Other not so memorable names .... (Score:2, Interesting)
Aaron
Been there...got killed (Score:4, Interesting)
I think that Open Source businesses are yet to hit their prime, and when they do, it will be big. If I were to do it again, I would offer both open source and proprietary, and sell the benefits to Open Source. Some companies are not ready to try open source yet. However, when you say "Mr. Customer, I can do that for $10,000.00 plus $4,000.00 in services. OR...I can use this open source utility which will give you every thing you want, and it will only cost you the services..."
I think that would have made it better. Just a guess, but it was fun trying.
Re:I hate to be a dick, but . . . (Score:4, Interesting)
These people generally spent a few years working for someone else, got a knowledge of the business, then setup for themselves. In the case of the designer, when he quit, he came away with a ready-made group of clients who followed him from his last job. None of them make millions, but they each make enough to support themselves fairly well.
If you want to work for yourself, work for someone else long enough to learn the ropes. Do a quick management course to help you pickup at least the basics (book-keeping, tax, information privay laws, industry-specific legislation, etc). Save up enough money to keep your head above water for your first year should it prove to be a lean one and give it a shot.
And the really good thing is, I don't have to be worried about all the stupid industrial reforms the government just passed.
I was almost a customer (Score:2, Interesting)
Daniel Feenberg
Re:Been there...got killed (Score:2, Interesting)
Wouldn't you WANT them to buy the proprietary software? More money for you...
I love the concept of Open Source business, but I have trouble envisioning them existing anywhere other than for enterprise-level services. That's not to say OSS won't be used on the desktop--that's already happening with products such as Firefox or OOo. It's just that I would imagine that, at the home-user level, nobody would pay for the service.
Clearly Dave, you were not at Linuxcare back then, (Score:5, Interesting)
While your story is nice it's not factual. Your article while interesting is based upon some assumptions that were prevalent outside the company. The real inside story was much different.
The key factor as you put it "But the key factor to LinuxCare's spectacular death spiral was the fact that they were going up against Red Hat" was not even a factor. The primary factor was bad management brought in by Kleiner Perkins. The original team had a good idea, but the VC's thought they knew better then the guys who understood Linux and the time and place.
KP forced a bad management team, the team made/forced some incredibly bad choices, to the point of criminal activity. Money was spent like water down a drain. Without the help of the bad KP choices LC would still be a going concern, in fact it would be what OSDL is now, it was headed there, just was destroyed by bad management.
There were no executives from that time that went on to become part of Levanta, there was a single executive that was hired after the demise of the KP team, he was a bean counter with no leadership experience.
The real Linuxcare people had IP ideas that could have been developed, but they were not allowed to develop it. The current product that Levanta is currently touting is 4th or 5th generation of one of those ideas that was started on the sly by folks on tiger teams who tried to save the company after the KP management team was forced out. Too little too late.
Linuxcare was ahead of it's time but they had the cash to stay the time, they had the team to make it work, they were forced to take bad management at many senior levels.
Re:Clearly Dave, you were not at Linuxcare back th (Score:2, Interesting)
So I'm not sure what the value of your point is since all of your facts are incorrect. Perhaps you need to go do more research?
Not sure who you were talking with but they were either mis-informed or part of the folks hired by KP, the folks that were the problem. Mismanagement to the point of criminal activity was the sole problem.
Anatomy of a start-up (Score:5, Interesting)
I managed to turn a $25K credit card into a $1mil+/year business in 3 years. Now, granted, that's very, very unusual, but the same principles apply.
The way I'd do a software start-up:
- Keep current job. Unless you're wealthy, you still need income. Don't expect a dime of income for 6 months-year. Work 8 hours a day, and program on nights and the weekends. If you expect ANY free tiem for the first few years, you'll be sorely disappointed. Imagine a newborn baby, but maybe twins.
- No office. They're a complete waste of money. Work at home and meet clients at your local coffee shop. An office is a luxury that you can get any time.
- For a server, grab a used PC for $100. Unless you're doing intensive graphics, or biological number crunching a "server" is a waste.
- Payroll: None. Either do it yourself, or bring in partners. But to expect to be paid at the beginning is unrealistic to the extreme. Remember, you don't even know if your idea is going to generate a nickel at the beginning.
- Food: Ramen Noodles and peanut butter.
I'm completely serious about this. This is how most successful start-ups work. Why? Because with lots of cash at the beginning (like $100K), you don't need to worry about costs, and that's a great way to start a terrible habit. Learn how cheaply you can run your business and still get by early on. Bust your ass, and *make* it work. There's no incentive to make it work if you've got tons of other people's money. Most companies also don't get any kind of financing right out of the gate. We're 3 years old, and just now looking for our first outside investors, and that's considred premature for most new businesses. We can do it beause we've had very strong growth, and most importantly: PROFIT.
What I'm describing is incredibly difficult, but it's the usual way successful companies are formed. Most of those dot-bombs with millions and millions blew threw it at an obscene rate, and still never generated a single dime of income.
Re:Open Source StartUp Bubble (Score:2, Interesting)
Re:What exactly to they mean by "IP"? (Score:3, Interesting)
Seems to me that A is pretty much the standard prelude to B in VC-backed explode-o-pop companies. How else did you want them to go about doing an "IPO in time"? Given that it all came down to gambling that you'd get out before the bubble burst back then, I can't help but think that the problem was that the failure was in not building a viable business...I'll certainly concede that it could have been VC bad apples causing the trouble, but I suspect it was their desire to "IPO in time" that led to their bad decisions. In other words, I bet the VC bad apples you mention probably were trying desperately to pull an IPO out of their hats (or wherever was convenient) as fast as possible. VCs come in the door with the words "exit strategy" first, last, and right smack dab in the middle of their minds (and there's nothing wrong with that, as long as you're aware of it). During the boom an IPO was the most viable exit strategy.
Anyway, maybe I'm wrong, but it seems like these A and B statements are at odds with each other, given the time and the economic state of the world in 2001. And C seems to be the most common story of 2001, and it probably comes back to the mindset of getting to IPO in time, rather than building a viable and self-sustaining business (if you're making money faster than you're spending it, the IPO can wait as long as you need it to or not happen at all and you don't have to give up all control of the company to VCs in order to keep running...interesting concept, I know, and one that was foreign to the era). Actually, I probably am wrong. I also had an Open Source business during the 1999-2001 years, and somehow I didn't come out a millionaire...I must have done something wrong. Maybe I didn't IPO fast enough.
So, to sum up, it seems pretty clear to me that Red Hat would still be around and making money even without the successful IPO, while most of the businesses that disappeared, LinuxCare included, would have failed even without the frenzy of the boom/bust to speed things along (or string them out). I wonder if there are any public studies on "making money before IPO or significant VC investment == still in business ten years later"? Seems like there'd be a mighty strong correlation there, and I don't think anything that happened during the boom would throw off that correlation to any significant degree. Sure, sometimes companies limp along for years after a hugely successful IPO (cough!VALinuxcough!) burning through the cash they made by getting to IPO fast enough, but they might be the exception that proves the rule.