Can you build a business around open source software? You don't have to look much further than RedHat or Cloudera to know that the answer is yes.
If the company is run right, it can take customers from established players and grow to the point where it's poised to go public.
That's what's happening at San Mateo, Calif.-based cloud database supplier DataStax, according to my July 10 interview with CEO Billy Bosworth. (I have no financial interest in the securities mentioned in this post).
Before getting into that, let's look at how to make money with open source software -- which is concocted by unpaid developers who contribute their time and code to various projects. The code is available for free to everyone -- with some stipulations.
But companies can make money in this business by building versions of the technology that can work virtually without glitches in demanding environments like corporate applications where downtime costs big money.
RedHat -- with $2.9 billion in 2017 sales, $259 million in net income, and a $25.8 billion market cap -- did this with the Linux operating system and other open source tools and Cloudera did the same with Hadoop -- a distributed database. Sadly, Cloudera has a less distinguished financial record -- with $367 million in sales, a whopping $386 million net loss, and a $2.1 billion market cap, according to Morningstar.
DataStax is doing the same kind of thing with Apache Cassandra, a distributed database designed for the hybrid cloud. As a private company, I don't know its revenues -- though the company says they're over $100 million, it's probably losing money and its value is unknown.
Cassandra, which was originally developed by Facebook engineers, fell under the umbrella of the Apache Software Foundation starting in 2009. But in 2016, there was a parting of the ways between Apache and DataStax, according to the Register, which reports that new competitors are emerging such as ScyllaDB.
Bosworth, a former football coach who hails from Weirton, West Virginia and majored in computer science at University of Louisville on a football scholarship spent six years at Quest Software, where he was VP and GM of the database business unit.
Bosworth got solid preparation for his current role at Quest where "the database business grew from supporting traditional relational databases to a portfolio that included tools for cloud, NoSQL, columnar, and Hadoop databases, and business intelligence offerings," he said.
Bosworth became CEO in May 2011 and by July 2018, the company had grown from below $1 million in revenue and 25 employees to "more than $100 million in revenue and over 500 employees in 15 to 20 countries."
Bosworth says that customers buy its product because it's the leading always-on, distributed cloud database; it works well for companies facing "geo-distributed, real-time demands on their applications;" and it offers unmatched expertise, services, and support."
DataStax targets a huge market -- the database industry is growing at 8% annually and is expected to reach $63 billion by 2022.
Back in January 2014, Bosworth told me that its customers included Netflix and eBay. What's more he said, "Other customers don't want to say they are using our product because they see it as a competitive advantage."
Last November, Bosworth said that DataStax enjoyed "over 75% gross margins. We have line of sight to becoming cash flow positive and a three-year compound annual growth rate of 40%. We have raised $190 million [from Comcast Ventures, Crosslink Capital, Lightspeed Venture Partners, Kleiner Perkins Caufield & Byers, and Meritech Capital]." Its latest round, a $106 million Series E, valued the company at $724 million.
It's coming up on four years since its latest round of funding -- which raises a question in my mind: Will DataStax be able to go public without another round of funding or will it need to raise more?
I discussed with Bosworth my model of how startups go from an idea to a big company -- the four stages of scaling:
- Winning the first customers -- which requires a company to fit its product's features to benefits for which a customer is willing to pay;
- Building a scalable business model -- designing business processes that will make the company's costs drop and value to the customer rise as it grows;
- Sprinting to liquidity -- rapidly expanding the company until investors achieve liquidity through an acquisition or IPO; and
- Running the marathon -- growing the company after the IPO so it is big enough to change the world.
It seems that DataStax is following these stages in a different way -- doing Stage 3 before Stage 2. As Bosworth explained on July 10, "Silicon Valley is not worried about the cost model, they're worried about the growth model. We are making investments to achieve long-term growth and our cash flow is under our control."
DataStax's growth trajectory -- the sequence of market-strategy pairings that keeps a company growing, as I described in Disciplined Growth Strategies -- has changed as it's grown. "In stage one -- between 2010 and 2013, we focused on digital natives like Twitter, Spotify, Netflix, and Uber -- we did not target specific industry verticals."
When DataStax began growing fast -- between 2013 and 2016 -- it adapted to the needs of enterprise customers. "When we went into the enterprise, there was a technical skills gap so we made the product more stable and usable and we built our customer success organization to help close that skills gap. We also focused on use cases such as improving customer experience or the supply chain that helped us target specific verticals," he said.
Since 2016, DataStax has broadened its focus "to the general population not just the enterprise."
It has gotten easier for DataStax to raise capital since Bosworth became CEO. "In 2011, when we raised the Series B, people were getting past the financial crisis. We had a new technology that few people understood. We finally found investors who shared our vision and believed in me as CEO. For the Series C, people invested because they could see our product was catching on and customers liked it. For the last three rounds, it was a matter of weeks to raise money -- we had a tight financial package with audited GAAP results. We could tell investors, 'if we invest $X in sales people in new geographies and segments, we will get $Y in revenue,'" he said.
I wonder how long it will be before the general public has a chance to look at those financial statements? Or will Oracle buy DataStax before that happens?
