During the early 1990s, Bob Young was down on his luck. Even though he sold his company, the shares he got went to zero. Oh, and he was laid off!
But it was really the best thing that could happen to him. You see, Young would start a business -- called Red Hat -- in the emerging category of open source software, with a focus on the Linux operating system. The early years were a struggle but he persisted.
Of course, as of now, Red Hat is a massive company and has recently sold out to IBM for a hefty $33 billion. It’s actually Big Blue's biggest deal in its 107 years. What’s more, the move is not necessarily surprising either. “It is important to note that IBM has embraced open source for quite some time, at over 20 years,” said Mark Brewer, who is the CEO of Lightbend.
So what does this all mean for the open source community? How might the deal impact startups?
Well, first of all, there are considerable risks. Let’s face it, tech deals do not have particularly good track records.
“If IBM uses a heavy-handed approach to try to change Red Hat to fit into their corporate mold, I don’t see anything good coming from that,” said Peter Zaitsev, who is the co-founder and CEO of Percona, a provider of open source database software and services. “I’m sure a lot of Red Hat customers and partners are concerned about which direction this will go. This will be a great time for alternative Linux distributions like Ubuntu on SUSE to gain market share.”
Karthik Ramasamy, who is the co-creator of Apache Heron and the co-founder of Streamlio, also has some concerns: “One risk is that large, established companies may make more direct efforts to gain control over key open source technologies, attempting to crowd out startups and other smaller players. Although large companies have for a very long time aimed to influence and leverage open source projects, this acquisition represents the boldest step yet by a large vendor to gain control over the commercialization of open source technology. Another risk is that innovating in core platform technologies becomes difficult because of the consolidation of core platform technologies into the hands of a few large vendors. In both cases, startups built around open source need to focus on differentiation that delivers clear benefits and addresses important pain points.”
Interestingly enough, if the IBM deal falters, this could open up some interesting opportunities for startups. It could mean that there will be new avenues for innovation. “This acquisition could give rise to other Linux distributions, container platforms and cloud solutions as customers seek to maintain agility and vendor independence,” said Gary Tyreman, who is the CEO of Univa (a developer of intelligent cluster management software).
But the core business model for a startup is likely to be essential. “Many open source companies try to sell ‘consulting and support’ but there just isn't enough margin in that to become the next Red Hat,” said Mathew Lodge, who is the SVP of Products & Marketing at Anaconda. “Instead, a new breed of start-ups is following the RedHat model of building strong subscription software businesses around open source.”
Regardless, the IBM deal is still a big-time validation, showing that there is strategic value to open source. And the transaction is not a one-off. There have been other large deals for open source companies this year, such as Microsoft's $7.5 billion purchase of Github and Salesforce.com's $6.5 billion acquisition of MuleSoft. More importantly, the consolidation is likely to continue. “I think the next wave of consolidation and acquisition is going to be around developer productivity,” said Fred Stevens Smith, who is the co-founder and CEO of Rainforest QA (the company operates an on-demand QA platform). “You have a ton of super interesting companies in the space right now, especially the continuous integration, continuous delivery players – like Travis, CircleCI and Jenkins.”
But for the most part, success for a startup is more than just picking a certain technology roadmap. It’s also about finding real solutions for customers.
This is how Jyoti Bansal looks at things (last year he sold his company, AppDynamics, for $3.7 billion to Cisco). “Whether open-source or closed source, what really matters are great products, and for the business's ability to monetize those products at scale to generate sustainable revenue and profits. Red Hat has solutions that consumers love, and it has done a great job at commercializing its products at scale.”
Tom serves on the advisory boards of tech startups and can be reached at his site.
