Open-source ventures: Where's the money?

Open source has plenty of supporters -- among them venture capitalists who view the software as a disruptive technology with huge potential. But that doesn't mean they're about to throw cash at open-source startups as they did at new companies during the dot-com rush.

Venture capitalists have learned some tough lessons from the dot-com meltdown and, not surprisingly, asked some tough questions at an event near Berlin on Tuesday.

Eran Davidson, president and chief executive officer of Hasso Plattner Ventures Management, had five questions, which permeated debate throughout the one-day Open Source Forum in Potsdam, Germany. As Davidson pointed out to the more than 100 people attending the forum, if startups struggle to answer these questions, venture capitalists will struggle to cough up money.

At the top of his list was the question: Can startups design open-source software products for non-IT people to use?

Yes, and they must, according to Don Wight, vice president of worldwide field operations at open-source business intelligence software vendor JasperSoft. "Software design is crucial," he said. "You need to put an easy front-end on your software to make it appealing to normal users, like accountants. You need to make it stick like glue."

Davidson's second question -- Can startups get their intellectual property rights in order? -- drew a quick response from experts in the audience: If they don't, they could face some messy litigation down the road.

"Hire a lawyer early to get the licensing issue right from the very start," warned Rafael Laguna de la Vera, chairman of open-source collaboration provider Open-Xchange.

Till Kreutzer, a lawyer at the Office for Information Law and Expertise who specializes in open-source copyrights and licensing, pointed to a German developer with three patents for open-source code embedded in numerous routing products who has successfully won patent infringement lawsuits in court. This is the type of developer who, if ignored, could trip up a great business model, Kreutzer said.

Speaking about business models, that was Davidson's third question: Can startups show a valid business case?

It's tough when the product is essentially free, acknowledged Wight. "I can't speak for Europe but in Silicon Valley, if you don't have a commercial open-source strategy, you don't have much of a chance with venture capitalists," he said.

Like many open-source startups, JasperSoft offers a "community" product, which is free, and a commercial "pro" offering. "With the community product, we're not only giving something back to the open-source community but also giving potential customers an opportunity to try our software with no strings attached," Wight said. "With the commercial product, we have a dual-license revenue mode."

Davidson's fourth question was marketing driven: Can startups differentiate their products, especially from proprietary software?

Product differentiation is always a challenge but particularly so in the open-source community where most or all of the code is accessible to everyone, according to Wight. "There is always a risk of people seeing what you're doing and copying some of ideas," he said.