Thursday, December 6, 2007

Is Venture Money Needed? The Changing Cost of Starting a Business

On a recent plane trip, a colleague of mine brought up something interesting. While attending conferences where speakers have presented or demonstrated open source products, he decided to observe the audience reaction just as much as the presentation itself.

For presentations of a non-commercial open source project, there is a point at which the audience realizes that the product is completely free - and their reaction is one of intriguing amazement. It is a long process, but people are slowly realizing how open source completely changes the cost of IT infrastructure, as in the case of Genuitec, who was able to avoid VC backing by keeping development costs down with open source. This was recently summarized by a former CIO, who said “You can start an emerging technology company for little money - $100k instead of $5M in the '90s - by using open source for most of the technology needs.

Just to remove any confusion, I am not talking about companies developing open source products, but mainly about utilizing open source in every day business as illustrated in "Open Source is a pillar of strength for all startups to build on."

In addition to savings for technology companies, simply using open source for basic desktop applications can generate initial savings of $10,000 for a company with just 10 employees. Then add the use of open source for standard business IT infrastructure, e.g. a directory server (OpenLDAP), file servers (Linux/Samba), a phone system (Asterisk), an email and collaboration server (Zimbra), a database server (MySQL/PostgreSQL), a CRM system (SugarCRM) and a Content Management System (Drupal/Joomla), and the savings can multiply.

I know that many arguments can be made around Total Cost of Ownership (TCO) calculations due to things like ongoing support and expertise, but we will not go into that discussion now - I will, however, leave you with a link to this TCO Tool. Also note another new development over the last couple of years, where many of these applications available as SaaS offerings - again eliminating many initial IT costs.

It's gone relatively unnoticed, but many small businesses are catching on, as numbers from the 2007 Desktop Linux Survey show. According to the survey, 69.5% of Linux desktops are deployed in home offices and small business settings (defined as up to 100 desktops) as opposed to in medium and large organizations.

The mainstream appears to be discovering what has been obvious to the few of us in the open source industry for a while. It is apparent that many businesses can be started with much smaller amount of capital – which in many cases can eliminate the need for the traditional pre-revenue Series A round. However, I believe that it does not eliminate the need for significant investment (and the network some investors bring to the table) in order to expand the business and build out sales channels, but today companies can get further in their early stages of life before looking for investment, and this could change the dynamic of an initial investment round.

Is it easier or harder to start a technology business in 2007 than 10 years ago?


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