Doug Leone on Open Source Opportunities

Recently, we had the opportunity to interview Doug Leone at Sequoia Capital in Menlo Park, California. Sequoia seems to have a unique perspective on Open Source Software (OSS) and the way it's transforming software and hardware industries.

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Recently, we had the opportunity to interview Doug Leone at Sequoia Capital in Menlo Park, California. Sequoia seems to have a unique perspective on Open Source Software (OSS) and the way it’s transforming software and hardware industries.

Their commitment to OSS principles is strong — they’ve added a member to their board of directors whose sole purpose is to remind them to remain true to open source principles: always remember to give your creations back to the community.

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You Can’t Stop Open Source: Doug Leone, Partner at Sequoia Capital

Sequoia was one of the first venture capital groups to fund an open source company. In late 1998 they made an investment in VA Research, the Mountain View manufacturer of Linux hardware. Again and again Doug reminded me of how important it is for VA to stay true to its open source roots. “If they don’t they’ll lose,” he said.

LM: How do you see Linux and OSS affecting the industry in the long term?

Doug: Well, the issue as we see it is: if you are a traditional “closed source” company, how do you take advantage of the open source model without destroying your base business? Take SunMicrosystems as the ultimate example. They’ve announced that they’re going to support Linux. Now, if you’re Scott McNealy, you don’t want to force Linux on your company or your customers because that would cause your traditional business to suffer. It takes a company a long time to adjust to the challenges posed by open source. So the first thing you do is pay lip service to the open source movement. Grabbing the PR high road is really step number one. Step two would be developing a business plan for integrating open source software with your traditional model. Next is convincing the people within your company to take this seriously. A lot of companies will try to take open source seriously at this stage, but they just don’t get it and their plans are all wrong. Others will take it seriously and get it right. Getting back to the Sun Micro example, they make most of their margin on high-end servers where Linux is nota player yet. So they have some breathing room and they’ve already taken a step toward adjusting business model by announcing their support for Linux.

LM: What business models do you see that are viable for open source? Obviously VA Research has one, but do you see others?

Doug: Sure. There’s the “support” model, which Cygnus software exemplifies. There’s the VA or “hardware” model which you mentioned. We like this model because in UNIX there’s always room to “tweak” the hardware. Hardware is a commodity business. Who makes money in commodity businesses? The companies with the lowest costs, the greatest ability to offer customization, and the best brand name. VA has all of these. The last model we see working is a “hybrid” open and closed Source model. I call these the “half truths”. These are basically proprietary or closed source software packages built to work with opensource products.

LM: So then are you investing in any companies with those models?

Doug: VA is the only one we’ve invested in so far. However, companies with open source models are starting to come out of the woodwork. We’re seeing lots of system management projects, utility projects, and the like. Most of these guys are not open source. But right now there are no mission critical system management programs for Linux that would allow you to control a network with 5000 nodes. That kind of thing is coming down the pipeline.

LM: That’s a good segue into another question: How many open source business plans have you seen in the last year? How many closed source plans have you seen? Has the percentage
of open versus closed source plans changed dramatically?

Doug: More than a year ago I hadn’t seen any open source business plans except for Cygnus. In the last six months I’ve seen 12, but I have also seen 300 closed source business plans. So the ratio of open to closed source plans is still very low, but the growth rate of open source plans is very high.

LM: So with so many more open source business plans coming in, has this changed Sequoia’s view of the closed source plans you are seeing?

Doug: No. We still really like proprietary projects that offer high gross margins.

LM: Well, on a related note, you are on the board of directors of a number of “traditional” hardware and software companies. Are you seeing many of them adopt Linux or OSS strategies?

Doug: Not necessarily. We don’t generally stay on the boards of our companies when they get to be the size of a Sun or a Cisco. I do think that many of the larger players are totally blind to the challenges posed by the open source movement. One factor that makes things difficult for them is that after you go public, you have a fiduciary responsibility to your shareholders to go where the largest market is, for example, NT or Solaris. So this can create a shortsightedness that prevents many of these players from really being able to embrace open source.

LM: If that’s the case, then can you ever see the open source model overwhelming one of these “traditional” companies?

Doug: Well, probably not soon. But in the long run, they will definitely need to face the challenges that open source poses to them.

LM: While we are talking about publicly traded companies, how do you see these open source companies being valued by the market?

Doug: As long as they have strong growth, they will have excellent valuations. In most industries, the number one company in market value is usually worth as much as companies number two, three, and four put together. Just look at Yahoo! So if Linux is real, and we think it is, the value will be there.

LM: Sounds good. So then I guess we should just finish up by asking what you see coming down the road for open source companies?

Doug: Open source is an unstoppable wave. All sorts of hardware, software, and support companies will be harnessing the power of that wave. This is not entirely new. Sun Micro did this
in the early ’80s with Berkeley UNIX. Right now there’s barely an Internet company around where open source
is not an important part of the company. Linux is the unseen foundation upon which many business are built. Basically, our feeling is that the open source train has left the station. No matter what any closed source vendor might like to think, there is nothing they can do to stop it.

Adam Goodman is the Editor and Publisher of Linux Magazine. He can be reached at editors@linux-mag.com.

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