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January 27, 2005


Jeff Clavier

Couple of observations:
- I agree that this model is increasingly used by software startups, excerpt for the ones where the management team has a track record giving them support from VCs very early on (e.g. SocialText vs JotSpot ?). However, it would be fair to say that this fits more easily a consumer play than an enterprise one, where the sustainability test has to be passed (I am not saying that this is impossible, it is just more difficult).
- In early stage plays, I would submit that LAMP and open source infrastructure, standards and the ever dropping cost of computing and bandwidth has allowed startups to get off the ground for a few tens to a few hundred of thousands of dollars. I see offshoring coming later in the process, once the development is ramping up, but at the very beginning (less than 10 people) it introduces an extra dimension of stress to the venture - in most cases.
- Isn't this model essentially linked to the "return of the angels", who will fund and support these companies to reach the first stage milestone ? And in some cases, angels will imply/involve small (seed) funds ?

Charlie Kemper

Great post! But, I would argue that the development of this new model is more likely in response to the Internet - easier & less costly distribution of product. Whereas selling software ten years ago required physical store distribution and the physical publishing of diskettes, now functional software can be sold online and marketed through cheap ads.

Tim Oren

Jeff - some of your observations about penetrating the enterprise market sound reasonable on their face, but I have direct evidence to the contrary, in the form of companies fitting the two stage model that have accomplished that entry, and have pitched to us. I'm not going to use their names, since that would violate my blogging rule of confidentially for those who pitch, but I assure you they exist. The keys seems to be pricing to the individual or at most departmental budget, and being a clean add-on to existing products and processes, at least at the onset.

Likewise, we are regularly seeing seed or A round companies that already have an offshore presence. It's usually facilitated by a cultural tie (e.g., outsource to your old college classmate from IIT), or a team member with prior experience in offshoring (e.g., outsource to the Russians who did a good job for you at Sun, or wherever). This is common enough now that it's not remarkable, instead we collect the most exotic offshore locations: Armenia and Bulgaria, for instance.

The advent of the net is definitely part of this; open source itself would likely not exist without the Internet, since it it radically reduces the coordination costs and time for a distributed team. I think you could in fact argue that my entire observation is simply a time-lagged economic adaption to the Internet.

Brian Flanagan

Tim, If you have the time, would you like to give us a 200-250 word summary of your 2-stage model which might be less software-specific for inclusion as a weekly business planning tip at "www.planware.org/businessplantips.htm" ?? See any "Suggest a Link" there for more info. Your two stage approach has been greatly facilited by the 'Net which allows many businesses (not just in IT) to dip a toe and pilot a concept with minimal funding.
I am associated with a program here in Ireland which works with high-potential startup mainly in IT and have asked all the participants to consider relevance of your model.

Elisha Klein

Can explain to me what this sentance means:
"Code is usually written to published interfaces, rather than integrated into the open source itself, to avoid 'contamination' by GPL and other OS licenses." ?

I understand what GPL is I just don't understand this tactic.

Thanks a lot,

Duncan Krebs

I can't wait to see how things in the software industry are going to shift moving forward. I'm getting closer to getting a startup to market which ships with a set of Java SWT based tools deployable over the web that enables users and managers inside an organization to quickly deploy structured data and directories to the web and intranet.

This blog kind of hit home in the sense that I have not doubt I can make it to market and probably make some nice cash but being able to sustain myself in light of the changes that are happening is what I question. Sooner or later, someone will be able to go to apache.org and download for free what I’ve spent the last two years slaving over.

But I have to think there are some things in the software industry that remain constant and because they are based on capitalism I don’t see them changing anytime soon. First, companies need software and second they need someone to implement or develop that software. Even if all the software in the world is free there is still a long term business model in packaging software as a service. In fact, look at this site that I'm writing this on right now. Blogging software is out there for free but typepad.com bundles it as a serivce and it looks like they are doing alright.

Its also funny to see IT managers in middle sized companies fumble trying to go from IIS to Apache Tomcat. They just don’t get it and probably don’t want to.

All of this leads me to believe there is still economic value and potential in the industry and its interesting to see how big blue and others have made an economic model out of open source software. I thank them for eclipse.org in which I’ve built my software foundation on.

My burning question is however, how long will Microsoft Windows remain the dominant client computing platform? I give Bill Gates about 20 more years.

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