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Glyn Moody's look at all levels of the enterprise open source stack. The blog will look at the organisations that are embracing open source, old and new alike (start-ups welcome), and the communities of users and developers that have formed around them (or not, as the case may be).

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Open Enterprise Interview: Bernard Dalle, Index Ventures

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The pragmatic and ethically-rooted world of free software might seem about as far away as possible from the highly abstract and, at times, morally dubious world of high finance. But as Richard Stallman has frequently pointed out, free software is by no means antithetical to making money: it's just a question of how you make money.

The scalability of open source, and its ability to turn markets on their head, represent a huge opportunity for venture capital (VC) companies that are savvy enough to understand that there are important rules within the free software community that must be respected.

One VC group that seems to have twigged this is the European Index Ventures. Companies that it has invested in include MySQL, TrollTech, Zend, Sourcelabs, Pentaho, OpenX and Dimdim. Here Bernard Dalle, one of its partners, provides a fascinating insight into the other side of the investment equation. He explains why Index Ventures is not worried that it may run out of top-flight open source investments, why he, too, hates software patents, and why cloud computing is an opportunity, not a threat, for open source startups.

GM: What's your background? When did you first come across the idea of free software? What were your first thoughts about it?

BD: I am a Partner with Index Ventures, a European venture capital firm which I joined in 1997. Prior to that, I worked as a consultant for McKinsey and as an IT project manager at Procter & Gamble where I led the implementation of various software systems. I really became interested in open source software beyond Linux when, along with my partners, I realized that the innovative web-based businesses that we were backing were increasingly using various open source building blocks.

It was in the 2001-2002 time frame, post-bubble when startups had to do more with less. At first we were mostly curious. Then we became increasingly impressed by the quality coming out of some of open source projects. Finally, we realised that a fundamental opportunity was shaping up, enabled by broadband internet.

GM: What do you think were the defining moments for open source as far as VC investment is concerned?

BD: The market has provided investors with a continuous, increasing flow of evidence that open source and a strong business model can actually go hand-in-hand. The big bang took place with Red Hat going public in 1999. More recently, MySQL's acquisition underlined that substantial value that can be created by commercial open source. The interim period was punctuated by acquisitions such as those of SUSE, Zimbra, Xensource or Trolltech.

GM: What's the attraction of open source for VCs? What do you see as the main business models for open source that are likely to be viable in the long term?

BD: Open source is a better way for startups to develop and distribute software than the traditional closed source model. Prospective customers are more involved in the specification and quality assurance of the software because they typically are already using it and often take part in user community forums either by making suggestions, asking for help or sharing tips with others. This leads to solutions that are more likely to be embraced by customers.

From a go-to-market perspective, open source businesses can leverage inside sales teams effectively because sales opportunities are with well-qualified prospects. While incumbents can afford to invest vast sums in sales & marketing (e.g. Microsoft for example spends 50% more in sales and marketing than it does in research and development), such capital intensive model is usually inappropriate for startups.

Open source enables them to achieve a better economic model which benefits their customers and which will typically contain one or several elements of charging for support, assembly and maintenance, add-ons or a hosted version.

GM: It is almost universally accepted within the open source world that software patents are antithetical to free software; typically, though, investors regard intellectual monopolies like patents as part of the nominal value of a company. What's your position on this?

BD: Copyright is important for any software company as it forms the basis of licensing. The startup world would however be significantly better off without the existence of software patents. I have never seen patents creating value for our companies but I have witnessed patent trolls unfairly targeting startups or incumbents attempting to use them to create fear in the minds of customers thereby stifling innovation.

GM: What open source companies has Index Ventures invested in?

BD: We invested in Zend, MySQL, TrollTech, Sourcelabs, Pentaho, OpenX, Dimdim. We have experienced first-hand how powerful commercial open source models can be and we have a strong belief that this is a very effective way to build software companies.

GM: How does the European open source startup scene differ from that in the US?

BD: It is true that Europe has had its fair share of interesting open source projects but I don't believe there is a difference with the US. MySQL was started in Sweden, OpenX in London, Zend in Israel, Dimdim in India and Pentaho in Florida. Each of these companies has employees and contributors on several continents. Each was amazed at the early global dispersion of their user base and has typically expanded internationally faster than other closed source startups.

GM: Why are there so few open source companies in the UK? What could be done to encourage more of them to be set up?

BD: It is obvious because of where Linux emerged that Scandinavia had a stronger start. But the UK has since caught up with highly visible companies such as Alfresco or OpenX. Let's not forget as well that the Xen project, which came to play a key role in the future of infrastructure software, originated at the University of Cambridge.

GM: There seems to be a tendency for one open source company to dominate a particular category - for example, MySQL and databases. As leaders emerge in each market sector, is there a danger that you will run out of major investments, and be left with niche companies?

BD: We are not worried about that. There will be occasional periods where it will be more difficult to put money to work but software innovation will not suddenly stop. There will always be the next wave of disruptive companies and it is likely that a good number of them will leverage open

GM: What effect do you think cloud computing will have on open source startups: is it a threat or an opportunity?

BD: Cloud computing is another disruptive trend and as such creates an opportunity for startups in general. Similarly to the way commodity hardware and open source software have significantly lowered the capital barrier for startups, services such as Amazon web services allow them to outsource infrastructure components and consume them on a "utility basis".

As more viable cloud computing services appear, prices for storage and server provisioning will further enable startups to get going with little capital investment. Cloud computing also provides an opportunity for startups to provide the required infrastructure to take advantage of public or private clouds.

GM: Given the evident efficiencies of open source, in terms of development, marketing and sales, what proportion of the software market do you expect open source companies to represent in the future?

BD: I expect that most software startups will come to market with solutions either leveraging open source or delivered as a service. The market will however remain largely dominated by incumbents that will not suddenly switch widely to open source. Software-as-a-service is likely to have a much more radical impact on the future software landscape as illustrated by the impressive pick up of Amazon Web Services.

GM: Any other thoughts or comments?

BD: Open source has become pervasive, forming the infrastructure backbone of some of the most innovative companies such as Google and Facebook. Observers expressing doubts about the suitability of open source as a core element of solid business models are becoming few and far between.

At Index, we remain very excited about the innovation that we see happening every day. We will continue to actively invest in smart open source companies and look forward to seeing what's next.

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