Monday, 3 October 2005

Rimer's Rules for Open Source

Danny Rimer of Index Ventures shares some of his insights on the business models of Open Source in an article in BusinessWeek Online:

Venture capitalist Danny Rimer has made investments in companies across the field. He talks about what he looks for in a startup.

An early investment in Internet phone company Skype netted an undisclosed -- but undoubtedly enviable -- return when Skype was purchased by eBay (EBAY ) for $2.6 billion last month (see BW Online, 9/12/05, "eBay Opens a Whole New Channel").

The move [to Europe] also put Rimer at ground zero of the open-source revolution. Open-source companies are just now emerging out of Silicon Valley, but for years the revolution has been rooted in Europe.

Rimer has made investments in companies across the open-source landscape, including MySQL, so far one of the more successful open-source startups.

MySQL was your first open-source investment. How did you get into the deal?

We knew MySQL as a technology, and I was chatting with another VC about different open-source projects, and he mentioned I should check out MySQL. At the time, I didn't realize it was a company.

It ended up being a fairly tough deal to get into primarily because certain U.S. VCs were very interested in it. But no other European VC was interested, and the company wanted one U.S. VC and one European VC. So they picked Benchmark for the U.S. one and picked us for the European.

How does your MySQL investment reflect what you look for in an open-source deal?

Early on we had to come up with key criteria. It's not difficult to create a successful small business if you're an open-source vendor. But we're a VC firm looking to make returns [of 10 times our initial investment] for [our investors]. We're looking for $100 million in revenue potential.

A small business that's highly profitable, making $15 million a year, is not going to move the dial for us. We're looking to invest in major software vendors.

So what are those criteria?

I call them the three Cs. These are necessary from the onset to make it an attractive story. The first is community. There has to be a huge amount of interest in it. [MySQL, Zend, and TrollTech] were already incredibly popular [when we invested]. The community is your marketing and evangelism arm. They're going to contribute and make sure this piece of software truly becomes mainstream.

The second C is commodity. Open-source companies absolutely can't have a new, innovative technology. They have to be smarter approaches to existing technology. They have to be [technologies] that developers and buyers already understand.

In the case of MySQL, because of Oracle [ORCL], everyone already knew the relational database. Open source is about coming up with an alternative that's cheaper, not going after a new area.

The third C is price cushion. There has to be a big enough difference between what proprietary vendors are charging and open source is charging, so that over time open-source companies can charge more and still have enough of a price cushion to make it interesting for customers.

Those three qualities are what help us evaluate companies. We've made four investments and looked at three dozen.

For more, come to listen to Danny Rimer (and David Axmark and me) at EuroOSCON 17-20 October 2005 in Amsterdam!

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