Sunday, November 26, 2006

Going to China

Now this is exciting: in a week's time I will be in Beijing for a week and continue from there to Shanghai for another week...should be very interesting:)

Building OS Businesses

Blueprint to a Billion Dollar Software (Open Source) Business out of Finland

There is a recent book called Blueprint to a Billion concentrating on about something that most Venture Capitalists and Entrepreneurs think about a great deal: how do I beat the 1 in 20,000 odds that my company (or the company I am considering joining or investing in) will scale to $1B in sales in five to seven years?

The book's author, David Thomson, has studied this question through financial analysis of all the US IPO (companies getting listed on a public exchange) companies since 1980, as well as through structured interviews. He has e.g. discovered that if a company did not have ONE of "Seven Essential" traits, it would take 14 years to hit a billion in revenues, versus seven years that a billion dollar company would take on average if it had all seven traits. And if a company failed to have TWO of these seven traits then the likelihood of scaling to a billion in revenues fell to non-existent. In the USA, only five percent of all US IPO companies since 1980 made it to $1B revenue (387 of 7454 companies) and only 29 of those made it to $10B revenue.

What is the ‘secret formula’ then? “The Seven Essentials” by Thomson:

1) Find or create a great value proposition.

2) Find a quickly growing market. Rapidly growing markets (100%+ per year) tend to be much more forgiving of mistakes than slower growing ones.

3) Get some marquee customers. Having big customers help you figure out your business model is a smart move.

4) Leverage a "Big Brother" Partner.

5) Be capital efficient. It's a myth that you need to spend lots and lots of money to build a Billion dollar business. Most companies are self-funding after a certain point (typically around $25M in annual revenues per the author), and they have high margins early on that are sustainable, and they don't consume that much cash to get there.

6) Get paired management teams. You need both an external CEO that focuses on the vision, product, marketing, and sales and an internal CEO/COO that focuses on delivering on that vision profitably.

7) Have at least one board member on your board, outside of your investor or management team that has grown a company to a billion.

My work this fall and winter will focus on exploring whether existing or new Open Source companies have or lack the possibility of becoming billion dollar revenue businesses and further whether it is possible that such a business will emerge from Finland, the birthplace of e.g. Linux operating system. Furthermore, does it make sense to try to build a big business with the open source approach or not.

Despite the success of Linux technology- and usage-wise, and business-wise the mobile-maker Nokia, Finland can claim very few Born Global businesses that have reached a Billion Dollar revenue in a short time; quite frankly, so far we have managed to create none, but I believe we are about to change this.

About OS Businesses

"There is one thing that is stronger than all the armies in the world, and that is an idea whose time has come". –Victor Hugo

I certainly believe that time for businesses embracing the open source based business models have come; and so do some major companies like IBM:

At a recent LinuxWorld, Scott Handy (Vice President of Open Source at IBM) said that:

- IBM will begin to invest more heavily in open source client-side middleware, development tools, Web application servers, data servers, systems management, open hardware architecture, grid computing and technology services businesses. We plan a major expansion beyond Linux into open source. It's poised to be a more disruptive force in the industry in the next three years than Linux has been in the last 15 years. With open source beyond Linux, we'll be as aggressive and leapfrog right to the injection stage.

There is a very good reason for IBM’s bold statement, ever since they decided to invest a Billion Dollars into furthering Linux about six years ago; they have managed to build a very significant service business around it creating billions in revenue annually for them. Arguably one could claim IBM being one of the most successful companies embracing open source (even though Google has not done too bad building their business on top of Linux servers).

IDC has some interesting insights into how open source usage is shaping up, they just conducted a survey in spring 2006 of over 5,000 developers in 116 countries, representing 38 developer networks.

The study declares that open source software represents the most significant all-encompassing and long-term trend that the software industry has seen since the early 1980s. IDC believes that open source will eventually play a role in the lifecycle of every major software category, and will fundamentally change the value proposition of packaged software for customers.

- The use of open source beyond Linux is pervasive, used by almost three-quarters of organizations and spanning hundreds of thousands of projects, said Dr. Anthony Picardi, senior vice president of Global Software Research at IDC.

- Although open source will significantly reduce the industry opportunity over the next ten years, the real impact of open source is to sustain innovations in mature software markets, thus extending the useful life of software assets and saving customers money.

The study finds that of the 5,000 survey respondents, open source software is being used by 71% of the developers in the world and is in production at 54% of their organizations. In addition, half of the global developers claim that the use of open source is increasing in their organizations.

So, the use of open source is there, and so is money for some big businesses like IBM, but what about start-ups? Is it possible that we will have independent open source companies with Billion Dollar revenues in the coming years? Good discussion has taken place online; see e.g. Stephen Walli’s blog.

Basically I believe my initial analysis will focus on the possibility of MySQL growing to a billion dollar revenue as well as things related around ROI (Return Of Investment), and whether the bets around Open Source model actually make sense. If you have any thoughts on this or guesses e.g. on whether the first Billion Dollar OS business will be MySQL (full disclosure, I have a vested interest in MySQL) or someone else, please email me at . In the Open Source fashion, all findings will be available online.

Mikko Puhakka

Friday, November 24, 2006

Back Online

I will start updating this blog once again...the past year has kept me superbusy, but now there is more time to write once again...