Andy McKay

Mar 18, 2009

Exit strategies for open source companies

A couple of interesting posts on exit strategies on Techvibes Business are supposed to make money and Why market ... matters more than exit strategy.

The second of these is the more interesting one for me, because I can add a fifth local company to that list. ActiveState whom I worked with a long time ago was bought by Sophos, primarily because of it's anti virus tools (Google). That was not one of the main things ActiveState was known for, it was one of several tools it had. But it went into a market it thought there was a space for and sure enough someone was interested in it.

When building Enfold Systems, we made sure there was some sort of exit strategy. Maybe in hindsight a little too much, however I would argue for open source companies, it is especially important to think of what exit strategy there will be. Because an exit will happen a some point, either planned or unplanned. When it happens, you need value.

Getting that value is a challenge for an open source company. Most open source companies start out as consulting companies and that doesn't build much value. You'll likely have no intellectual property (let's leave the questionable IP is evil debate for a moment), you'll likely have no patents (ditto) and you have likely given large amounts of your code away. You might have value for recurring support contracts or from services around the open source product. The value in the company is in the process of completing projects, the brains of the people working for you and the customers that you have.

But really the last one's are a tough sell, unless you have sales chain of the power of a Salesforce or an Oracle, you are going have a tough sell getting much value for that. At Enfold we put time and effort into making sure that we had products that provided the company with value for an investor. We made sure the IP was clear on those products and that if something did happen there wouldn't be hassle.

There's lots of companies building a real value on top of the consulting they do. For example OpenRoad has ThoughtFarmer, Enfold has its products, Six Feet Up has their hosting. All things that create value for the company, solve clients problems and provide revenue and that then feeds back into allowing the open source activities to continue.

And I think that's important to think about if you are starting a company and it's something that is worth doing at the beginning and getting right. I did have a chat with one business owner who felt it had to be all or nothing. All open source or not. I don't buy that will work. Besides, back on the topic at hand - one day and exit will happen of some kind - make sure you have value and that it is clear of issues.