OSNews

Influence of growth capacity

The circumstances of a company's formation can affect its growth capacity and set the stage for later success or failure. Three success stories include Sleepycat, MySQL, and IBPhoenix contrasting Great Bridge as a failed venture. DB4Objects shows the initial signs of success but has not yet posted a profitable year. The successful ventures each followed a similar course; each company started as a small but profitable company that continued on a slow developing growth curve and then experienced rapid growth.

The slow growth period provides time to build support networks while product awareness spreads. This in turn provides growth capacity which contributes to the subsequent rapid growth.

Great Bridge started with a pre-existing code base and the infusion of $16M in investment money. By Batten's account their strategy was to grow the company first and seek profitability second. This is a typical high stakes venture capital strategy. Said Batten about the experience, "We assumed the business was going to be successful and staffed accordingly. In retrospect we should have started with 5 or 6 people, gone to profitability, and then grown."

Two issues of Great Bridge's formation set it apart from the three successful ventures. It started with a product it could not license, and this decreased its potential revenue. It grew so quickly with investment capital that it could not reasonably cover its costs and achieve profitability in its short lifespan. Great Bridge exceeded its growth capacity, was unable to accelerate its growth curve, and ran out of operating capital.

IBPhoenix is well into its growth curve having achieved a greater product awareness and a large customer base, and benefits from a mature support network. Although its profitability is handicapped by its inability to license the database product, IBPhoenix has been careful to manage its cash flow and continues to grow at a moderate rate.

Conclusions

There are some important lessons here for companies looking to adopt an open source business model or invest in an open source company. First and foremost, choose a dual or GPL license so you can charge for the licensing of the product and not just charge for support services. Choosing an open, or BSD license means foregoing 66% of your possible revenue.

It is important to understand the factors influencing the open source adoption curve. This curve traditionally extends over several years as product awareness spreads slowly. It should be possible to accelerate the adoption curve with traditional marketing methods, but the long duration required could be troublesome for companies partnering with investors hoping for short payback periods. This long curve will undoubtedly prove fatal for some of the new generation of OSS startups that have partnered with traditional venture capitalists working with template investment models.

As with all companies it is vital to understand the true growth capacity for a product and to understand its suitability to task. All entrepreneurs should have an unshakeable confidence in their products, but not having thought through the business model or understanding the growth capacity will most definitely prove fatal to a new OSS venture. Running an OSS company means mastering a very lean budget and having saint-like patience.

About the author:
Andrew Hudson is a freelance IT consultant who occasionally does research on database companies.