
Why Open Source Startups Fail - simas
http://techcrunch.com/2015/04/12/the-real-reason-open-source-startups-fail/
======
MCRed
Several times I've seen VCs force the shutdown of consulting businesses in
companies to make them "focus" on the product.

This is an example of where VC's interests and the companies are not aligned
and VCs are pursuing short term goals.

Specifically, they often "request" this be done well before a term sheet. If
the company complies then they start running out of cash, making them more
dependent on the VC money and less able to negotiate terms.

Further, it's a mistake. These companies were using the income from other
companies they were consulting for to build out the product. It's like free
development. You get your engineer time paid for, and make a profit on it, and
much of the work goes into the product side of things. All you need is to take
some of those profits and build up a separate team that is focused on
productizing the core product.

IF you do it right, you can bootstrap and never need to take VC funding.
Either way, a successful consulting business extends your runway.

The claim about lacking focus is BS. Because the consulting- if being done
right-- is in the exact area where the product is being built.

You know what takes focus away? Running the senior management team all over
the country or the valley talking to VCs who are mostly going to waste their
time because they don't have the balls to say "no"... looking for the 1 in 100
that will invest in the company.

I've seen this many times.

If you're able to secure consulting for your company and it's in the core area
of what you want the company to do long term, do it.

~~~
ig1
You're mistaken about why VCs want firms to focus on product rather
consultancy, it's not for the short-term as you suggest but rather the long
term.

Time spent on consultancy today gets you revenue today but time spent on
product gets you revenue tomorrow. Focusing on product rather than consultancy
is the long-term play because you're focusing on what maximizes your value
5-10 years down the line rather than what pays the bill today.

The big difference between consultancy and product based development is that
with consultancy you're building what the individual customer needs rather
than building what your product needs strategically in the long term (if
they're both the same thing that great but doesn't happen that often in
practice).

There's also a distinctively different mindset between product and consultancy
companies. At a consultancy the consultants are seen as the revenue generators
and the product developers as a cost base; at a product company developers are
seen as revenue creators. It's easy to underestimate the cultural impact that
has on companies.

~~~
bitcrusher
I think you're mistaken on a couple of points:

\- VCs aren't interested in "revenue tomorrow" unless you mean a 10x+ exit
multiple. VCs want you you to focus on your product because there's an
invisible( and sometimes not so invisible) clock running as soon as you take
the investment.

\- VCs aren't interested in 5-10 year tails on their investments. Most are
looking for an 18mo.-3.yr ROI. If you can prove revenue and 'market traction'
they'll extend your runway accordingly, however that's a constantly moving
target and generally the types of VCs who are interested in the 'long tail'
aren't the same that want to give you money at the infancy of your company.

\- There is definitely a big difference between a traditional consultancy and
a product focused organization but only in the sense of the 'end goal'. If
your entire plan is to bootstrap your company by building a consultancy, it's
easy to keep a separation of concerns between the two halves of your
organization. Usually the "clash" that you're talking about is when a
consultancy based/focused organization decides to build a product, not when a
product company decides to do some consultancy.

Developers (in fact, all of technology) are considered cost centers at ALL
businesses. There's not an MBA on the planet that wouldn't jettison the entire
technology cost-center of their business in a heart-beat if they could figure
out how to do it and still achieve their monetary objectives.

~~~
DannoHung
> Developers (in fact, all of technology) are considered cost centers at ALL
> businesses. There's not an MBA on the planet that wouldn't jettison the
> entire technology cost-center of their business in a heart-beat if they
> could figure out how to do it and still achieve their monetary objectives.

This is pretty funny because in a software company, devs are the only ones
creating _actual_ global value (as in, something that a customer could
realistically derive value from). Every other instrument in the company is
pretty much how to turn value into incoming cash flow or reduce outgoing cash
flow.

It'd be like Apple trying to jettison its designers.

~~~
juliangregorian
This is an extremely cynical comment. First, hard-line profit/cost center
thinking is falling out of fashion at top MBA schools like Harvard and has
been for years. But also, a reasonable MBA would be able to recognize when the
tech team is actually creating value vs. when they are dead weight that could
be outsourced. And, it's really myopic (and the kind of thing that people make
fun of engineers for) to believe that tech is the only ones adding value.
Value (perceived, communicated) is potentially created all up and down the
chain.

~~~
teacup50
Either they're dead weights or they're not. How does outsourcing change the
equation? Certainly not by reducing cost -- not if you want to outsource to
non-dead-weight development group.

~~~
juliangregorian
Seriously? Take a bunch of do-nothing office drones, can them all and get a
maintenance contract with some consultant in eastern Europe. What's hard to
understand about that?

~~~
LunaSea
You will probably lose the same amount of money you thought you were saving in
management and communication.

------
vgabios
Some open source startups fail because they are non-scalable service companies
deluding themselves that they are product companies. Furthermore, they do not
own enough of any durable advantage (IP, talent, mindshare), and so multiple
"product" companies pretend to not compete while offering similar services in
a niche that does not have that much demand. Furthermore with FOSS, most
potential customers are often politically incentivized to poach upstream code
and talent, give nothing back and eschew overpriced "consulting" services
entirely. So it's almost always the wrong business model, unless you dominate
it.

(I've plenty of enterprise FOSS consulting to realize there are easier ways to
make much more $/time, like enterprise startups that are product companies.
Also, PGs essays about "consultingish.")

~~~
raincom
Yeah, you are right; look at companies in the hadoop eco system: cloudera,
hortonworks, mapr. They are just burning the cash; most of the money comes
from the services/consulting. This will succeed if one dominates the sector,
the way Redhat does in the area of enterprise linux.

------
waterisnewcloud
I worked at Cloudscaling for several years. It seems like this article
simplified (actually complicated, read on) the issue too much by truncating it
into its two "playbooks." I think the first thing that needs to be argued
properly is why open source startups need to be analyzed differently from
other startups. If you have a feasible (scalable, sustainable, etc) business
model to make money with using open source software - say by deploying it and
supporting it - then that business model can be judged by the same criteria as
other startup's business models.

The issue of productizing software which several OpenStack companies have
attempted is part a basic part of their business requirement for scaling -
because supporting dozens of heterogeneous deployments is impossible with
reasonably sized engineering & support teams.

This article implies that Cloudscaling used the first playbook. It did do the
items listed on the first playbook, but it also did all of the ones on the
second playbook too (though, while being a smaller startup didn't contribute
as much code back to OpenStack as some of the larger companies/contributors).

Creating new success formulas - like these "playbooks" \- ignores what we know
to be true about the success of many great startups in our midst. There are
patterns behind that success which are consistent. These patterns and factors
have been written about extensively by folks like Paul Graham, Eric Schmidt,
and the like. They rarely synthesize new complexities or factors when talking
about what creates success. What they do is go back to basic principles.
However, the data to analyze failed startups well enough to determine which
fundamentals were lacking is rarely available - so we make stuff up. Company
culture is a big one - and it may or may not have had a significant impact on
Cloudscaling.

------
agibsonccc
We're going with the open core model ourselves. In our case focusing on
commoditizing our competitors by giving away the algorithms while at the same
time enabling companies to build their own solutions.

One interesting aspect of open source is the pitch for enterprise. It aligns
your business model with the consumer's needs and if it's close to data
(storage or analytics) the risk of a company going under or getting acquired
doesn't leave them in the dust (ala apple/foundationdb)

Open core (like cloudera worth 4x horton) allows for the best of both worlds
where you don't leave your customers locked in but you can still get licensing
fees for added layers on top.

Edit: Let me clarify a bit. Open core is for company's who just want to pay
for solutions also allowing them to serve companies who want to build their
own infrastructure. There's some amount of lock in with open core, but if the
core infra is open source it still allows the customer an easier migration
path. In our case we went with an apache license for the core tech and sell a
layer on top that allows for easier deployments.

While open source startups are rare I think it's critical for core
infrastructure to be open source.

------
ericsink
I think maybe the most interesting open source companies today are Couchbase
and Mongo.

AFAICT, everything Couchbase does is Apache Licensed. An old-school
traditionalist could look at them and conclude that they have no proprietary
IP at all.

Mongo has perhaps a little more of a boundary because they use the AGPL (which
will scare away more enterprise customers than the Apache license will). But
still.

AFAIK, both of these firms are paying the significant costs of developing
their own software. Neither of them can be characterized as building their
business model on low dev costs from the use of community-developed code.

These firms have more funding than many open source firms get from an exit.
Both of them seem to have significant and fast-growing revenue. Both of them
seem to be on track to a successful IPO with reasonable expectations for
continued growth thereafter.

Even in today's open source world, what these two companies are apparently
doing seems kind of amazing.

------
kluck
This could be simplified: A company needs something that cannot be dublicated
using a significant effort. A company that releases their source code to the
public really _has_ to build up some knowledge in their domain (because the
public source can be easily dublicated), while another closed source company
gets away with just selling their product.

~~~
plantbased
"I want to believe." ~Poster on Mulder's wall.

You can interpret "get's away with" as "makes better business sense". On a
slight tangent - in the infosec space those with closed source products (e.g.
WAF's) laugh at those with open source products when it comes to the numbers
of embarrassing and business-damaging zero-days reported.

Closed source rocks if you're a capitalist. Those who sell closed source love
that open sourcers are so distracted by singing-it from the mountain.

~From a guy who runs a not-that-small open source biz.

~~~
shmerl
_> in the infosec space those with closed source products (e.g. WAF's) laugh
at those with open source products when it comes to the numbers of
embarrassing and business-damaging zero-days reported._

Because no one reports theirs? It's not a good reason to laugh if you think of
it.

------
velox_io
You could switch "open source" with "zero-revenue business model" (not quite
as catchy).

This is something unique to startups, who can raise huge sums of money (with
insane valuations), yet have no revenue model. Having no revenue stream can
(and has worked) for many startups, but it is incredibly risky. How long you
can keep going until the money/ luck runs out is massive uncertainty (there's
enough uncertainty as it is).

~~~
Udo
Fundamentally open source companies and no-revenue model companies are very
different, I think it's a mistake to lump them together. The defining trait of
a no-revenue company is the investors' confidence that massive revenues or at
least a bombastic acquisition will come further down the line.

This model does not work for open source companies, because the "figuring out
how to make money later" step typically can't happen without a massive pivot
(whether it's all that likely to happen with your typical no-revenue company
either is open to debate).

Maybe the break-even point in open source companies tends to come at a later
point, but the path to revenue needs to be baked in from the start. Typically,
switching on a revenue generator later will require more than just putting
some ads up on the company site, so if massive changes are required to make
that happen you must include those plans in your DNA from the start.

Open source and zero-revenue companies share the assumption that reach and
influence can be translated into money, but when running an open source
company the nature of that reach has to be designed more carefully.

------
ralmidani
I am working on a Free Software startup. What I think makes it unique is it
caters to an underserved market, and customers in that market usually don't
have the resources to implement our solutions themselves.

Of course, respecting our (potential) customers' freedom and not withholding
knowledge means we have to be innovative in areas other than technology such
as marketing, sales, and support. And if we cannot keep customers happy,
another company can eventually come in and compete with us by offering better
service and/or lower prices.

Edit: fixed a typo.

~~~
mikekchar
This is probably my most shared link:
[http://www.oreilly.com/openbook/opensources/book/tiemans.htm...](http://www.oreilly.com/openbook/opensources/book/tiemans.html)

My favourite quote from that link:

"At first I tried to make my argument the way that Stallman made his: on the
merits. I would explain how freedom to share would lead to greater innovation
at lower cost, greater economies of scale through more open standards, etc.,
and people would universally respond "It's a great idea, but it will never
work, because nobody is going to pay money for free software." After two years
of polishing my rhetoric, refining my arguments, and delivering my messages to
people who paid for me to fly all over the world, I never got farther than
"It's a great idea, but . . .," when I had my second insight: if everybody
thinks it's a great idea, it probably is, and if nobody thinks it will work,
I'll have no competition!"

My favourite free advice (worth what you paid for it): similar to what the
original article stated, the "innovation path" is for the gold prospectors
going out to make it rich. Trying to make a differentiator and then get paid
multiples on your good idea won't work for free software because everybody
gets to use your good idea.

Free software business models require you to execute at a level higher than
anyone else can execute. Usually if you are the person who built that
infrastructure, you have an edge, but it really is all about building a viable
business, not building crazy software.

In that way, I think free software businesses are inherently less risky. Often
you don't need VC, because if you can't get people to pay for your services,
you are SOL anyway.

From your short message, you seem to understand this. I wish you good luck!

~~~
bjelkeman-again
An interesting aspect of the discussion here is that the opinion is that there
seems to be only a few options for funding an open source organisation:
venture funded or organic growth. Venture funded is challenging, as it is all
about gold digging. Organic growth is generally a slow and hard path.

If you have other goals than just money, there is actually quite a lot of
opportunity to work on open source software, with viable business models and
interesting things to work on.

------
rushabh
Along with building customer engagement it is important to build a brand. The
brand becomes a gateway to other services like certification, training and
consulting.

For an open source OEM, a brand is obvious, but for a community player, it is
not so intuitive. The brand is built by focusing on contribution, good writing
(blogs, articles etc) and showing visibility on the forum. Like the OP
mentioned, you cannot be too invested in the IP as a non-core player.

~~~
agibsonccc
That's been huge for me as well. Speaking at conferences and writing my book
over the past year has been a great entrance in to getting business. It's
really paying dividends.

------
firasd
This is a good article but I think the focus on “the IP-​based ​product
playbook” vs “the ecosystem-​based services playbook” exposes an issue without
making it explicit: that these are very different kinds of businesses. Maybe
the swing-​for-​the-​fences returns VCs are looking for are not possible in
businesses that have such a large services component because of the inability
to scale up quickly.

------
ig1
Techcrunch is somewhat behind the curve here, ever since IBM started
undercutting RedHat on support and stealing their customers open source
companies have stepped away from having consultancy as their only form of
revenue.

Modern open source based business tend to be about network effect and building
ecosystem business (Android, Github, Docker).

(I wrote a blog post on this a while back [http://blog.imranghory.org/open-
source-business-models](http://blog.imranghory.org/open-source-business-
models))

~~~
sytse
GitLab CEO here, regarding GitHub, hosting open source is not the same thing
as being open source.

~~~
ig1
Sure but they're based around commercializing an open source product (Git).

~~~
sytse
Ah, if you see it like that I understand, thanks!

------
falcolas
The concept of a SV style startup is orthogonal to that of a consultancy.
Consultancies face one major problem: scaling.

The problem with growing a consultancy is that their growth is limited to the
the number of a consultant's hours they can sell. If you can't scale your
income exponentially to the number of man-hours you have available to you,
you'll never be capable of evolving into a 100% + growth-per-quarter business.

I can't say I'm surprised that VCs looking for the big winners would not want
to invest in a consultancy.

------
mpdehaan2
This article wasn't really so much about it's headline, but someone in the
same industry saying "we are not also in bad shape".

I suspect to answer the actual headline "The Real Reason Open Source Startups
Fail", is pretty much why all companies may fail - PLUS the possibility that
their paid component is not sufficiently compelling or that while their open
source piece is compelling, they have trouble competing iwth their open source
component or are becoming too services heavy, which can cut into margins.

It seems the article tries to claim Nebula wasn't "operatioanlly excellent",
which is something a competitor would naturally say, but Nebula was trying to
make a proprietary "appliance" approach to wrapping OpenStack (apologies if
I've mistranslated this) - which I think might have just been too weird.

And that's a reason any company can crash - the product idea was perhaps not
something the market wanted.

OpenStack, increasingly, is one of those things large companies are interested
in, and if you have a large team of people to wrangle OpenStack, you likely
need more flexibility, and want to put the components together yourself.

So were they making OpenStack for the little guy? Probably not, and OpenStack
for the little guy is a bit of an oxymoron. It's pretty hands on. I can see
where they'd have problems, and I also think it's likely is that there aren't
a lot of OpenStack customers - but there are some very very large ones, so
it's a huge fight to get someone to pay you - and not someone else - for
something.

But most of the time, there's nothing particularly interesting in OSS business
models except finding the right line of how much you are going to give away.
In fact, I'd say you have an advantage out of the gate in getting people to be
interested in what you do, that makes some parts easier.

I still think SaaS models (.com's, websites), etc, may be more easier though,
to avoid the need to maintain that balance. But can you do that in systems
software? Not so much, with a few exceptions for hosted monitoring.

Anyway, it's possible to build a good product company on OSS bits - and a
services company can be something a lot of companies don't want to build. You
just have to find the right line, but I think this was really about
product/market fit, and not about open source business model failure, per se.

------
spectrum1234
What this is saying is that open source startups are just a PaaS. Act
accordingly.

------
Tossrock
It recently occurred to me, free open source project + paid enterprise service
companies are the software world equivalent of freemium games.

~~~
ralmidani
Not always. Some companies distribute 'open source' crippleware and try to
sell proprietary extensions, just like 'freemium' games, but you seem to be
talking about paid services, not proprietary extensions.

If all of the product is released under a Free Software license, what is there
to complain about? Not receiving free consulting services?

------
shadeless
This article made me realize that I don't know of any open source startup
which got acquired for a significant sum of money.

Can you name some that did?

~~~
declan
There was Cygnus Solutions, which I believe maintained GNU software (debugger,
binutils) and contributed large parts of gcc. Cygnus was bought by Red Hat for
$674M in 1999.

HN folks may recognize EFF board member John Gilmore as the founder.

~~~
DonHopkins
And also Michael Tiemann (now at RedHat), and David Henkel-Wallace (now at
Technical Illusions, making CastAR).

Their slogan was "We make free software affordable". (In answer to the anti-
slogans: "Free software: more expensive than money" and "Linux is only free if
your time is worthless".)

I asked David if they named the company "Cygnus" after grepping
/usr/dict/words for "gnu". He answered no, because if they'd thought of doing
that, they would have named it "Wingnut".

~~~
juliangregorian
Funny, but "wingnut" doesn't actually appear in /usr/dict/words

~~~
DonHopkins
The funniest thing is that David shot that back without missing a beat, with a
perfectly straight face, and a somber tone that suggested he deeply regretted
the missed opportunity.

Did you know that the word "gnullable" wasn't in /usr/dict/words either?

~~~
juliangregorian
Yup, because I took 0.2 seconds to actually grep /usr/dict/words for "gnu"
just recently.

~~~
DonHopkins
I think Gumby was either making a self-effacing joke, or a gratuitous dig at
RMS -- I'm not sure which.

[http://en.wikipedia.org/wiki/Wingnut_%28politics%29](http://en.wikipedia.org/wiki/Wingnut_%28politics%29)

"Wingnut" (sometimes "wing-nut") is an American political term used as a slur
referring to a person who holds extreme, and often irrational, political views
usually with a religious overtone. According to Merriam-Webster, it is "a
mentally deranged person" or "one who advocates extreme measures or changes :
radical."

