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January 17, 2019
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How open source software took over the world

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It was just 5 years ago that there was an ample dose of skepticism from investors about the viability of open source as a business model. The common thesis was that Redhat was a snowflake and that no other open source company would be significant in the software universe.

Fast forward to today and we’ve witnessed the growing excitement in the space: Redhat is being acquired by IBM for $32 billion (3x times its market cap from 2014); Mulesoft was acquired after going public for $6.5 billion; MongoDB is now worth north of $4 billion; Elastic’s IPO now values the company at $6 billion; and, through the merger of Cloudera and Hortonworks, a new company with a market cap north of $4 billion will emerge. In addition, there’s a growing cohort of impressive OSS companies working their way through the growth stages of their evolution: Confluent, HashiCorp, DataBricks, Kong, Cockroach Labs and many others. Given the relative multiples that Wall Street and private investors are assigning to these open source companies, it seems pretty clear that something special is happening.

So, why did this movement that once represented the bleeding edge of software become the hot place to be? There are a number of fundamental changes that have advanced open source businesses and their prospects in the market.

David Paul Morris/Bloomberg via Getty Images

From Open Source to Open Core to SaaS

The original open source projects were not really businesses, they were revolutions against the unfair profits that closed-source software companies were reaping. Microsoft, Oracle, SAP and others were extracting monopoly-like “rents” for software, which the top developers of the time didn’t believe was world class. So, beginning with the most broadly used components of software – operating systems and databases – progressive developers collaborated, often asynchronously, to author great pieces of software. Everyone could not only see the software in the open, but through a loosely-knit governance model, they added, improved and enhanced it.

The software was originally created by and for developers, which meant that at first it wasn’t the most user-friendly. But it was performant, robust and flexible. These merits gradually percolated across the software world and, over a decade, Linux became the second most popular OS for servers (next to Windows); MySQL mirrored that feat by eating away at Oracle’s dominance.

The first entrepreneurial ventures attempted to capitalize on this adoption by offering “enterprise-grade” support subscriptions for these software distributions. Redhat emerged the winner in the Linux race and MySQL (thecompany) for databases. These businesses had some obvious limitations – it was harder to monetize software with just support services, but the market size for OS’s and databases was so large that, in spite of more challenged business models, sizeable companies could be built.

The successful adoption of Linux and MySQL laid the foundation for the second generation of Open Source companies – the poster children of this generation were Cloudera and Hortonworks. These open source projects and businesses were fundamentally different from the first generation on two dimensions. First, the software was principally developed within an existing company and not by a broad, unaffiliated community (in the case of Hadoop, the software took shape within Yahoo!) . Second, these businesses were based on the model that only parts of software in the project were licensed for free, so they could charge customers for use of some of the software under a commercial license. The commercial aspects were specifically built for enterprise production use and thus easier to monetize. These companies, therefore, had the ability to capture more revenue even if the market for their product didn’t have quite as much appeal as operating systems and databases.

However, there were downsides to this second generation model of open source business. The first was that no company singularly held ‘moral authority’ over the software – and therefore the contenders competed for profits by offering increasing parts of their software for free. Second, these companies often balkanized the evolution of the software in an attempt to differentiate themselves. To make matters more difficult, these businesses were not built with a cloud service in mind. Therefore, cloud providers were able to use the open source software to create SaaS businesses of the same software base. Amazon’s EMR is a great example of this.

The latest evolution came when entrepreneurial developers grasped the business model challenges existent in the first two generations – Gen 1 and Gen 2 – of open source companies, and evolved the projects with two important elements. The first is that the open source software is now developed largely within the confines of businesses. Often, more than 90% of the lines of code in these projects are written by the employees of the company that commercialized the software. Second, these businesses offer their own software as a cloud service from very early on. In a sense, these are Open Core / Cloud service hybrid businesses with multiple pathways to monetize their product. By offering the products as SaaS, these businesses can interweave open source software with commercial software so customers no longer have to worry about which license they should be taking. Companies like Elastic, Mongo, and Confluent with services like Elastic Cloud, Confluent Cloud, and MongoDB Atlas are examples of this Gen 3.  The implications of this evolution are that open source software companies now have the opportunity to become the dominant business model for software infrastructure.

The Role of the Community

While the products of these Gen 3 companies are definitely more tightly controlled by the host companies, the open source community still plays a pivotal role in the creation and development of the open source projects. For one, the community still discovers the most innovative and relevant projects. They star the projects on Github, download the software in order to try it, and evangelize what they perceive to be the better project so that others can benefit from great software. Much like how a good blog post or a tweet spreads virally, great open source software leverages network effects. It is the community that is the source of promotion for that virality.

The community also ends up effectively being the “product manager” for these projects. It asks for enhancements and improvements; it points out the shortcomings of the software. The feature requests are not in a product requirements document, but on Github, comments threads and Hacker News. And, if an open source project diligently responds to the community, it will shape itself to the features and capabilities that developers want.

The community also acts as the QA department for open source software. It will identify bugs and shortcomings in the software; test 0.x versions diligently; and give the companies feedback on what is working or what is not.  The community will also reward great software with positive feedback, which will encourage broader use.

What has changed though, is that the community is not as involved as it used to be in the actual coding of the software projects. While that is a drawback relative to Gen 1 and Gen 2 companies, it is also one of the inevitable realities of the evolving business model.

Linus Torvalds was the designer of the open-source operating system Linux.

Rise of the Developer

It is also important to realize the increasing importance of the developer for these open source projects. The traditional go-to-market model of closed source software targeted IT as the purchasing center of software. While IT still plays a role, the real customers of open source are the developers who often discover the software, and then download and integrate it into the prototype versions of the projects that they are working on. Once “infected”by open source software, these projects work their way through the development cycles of organizations from design, to prototyping, to development, to integration and testing, to staging, and finally to production. By the time the open source software gets to production it is rarely, if ever, displaced. Fundamentally, the software is never “sold”; it is adopted by the developers who appreciate the software more because they can see it and use it themselves rather than being subject to it based on executive decisions.

In other words, open source software permeates itself through the true experts, and makes the selection process much more grassroots than it has ever been historically. The developers basically vote with their feet. This is in stark contrast to how software has traditionally been sold.

Virtues of the Open Source Business Model

The resulting business model of an open source company looks quite different than a traditional software business. First of all, the revenue line is different. Side-by-side, a closed source software company will generally be able to charge more per unit than an open source company. Even today, customers do have some level of resistance to paying a high price per unit for software that is theoretically “free.” But, even though open source software is lower cost per unit, it makes up the total market size by leveraging the elasticity in the market. When something is cheaper, more people buy it. That’s why open source companies have such massive and rapid adoption when they achieve product-market fit.

Another great advantage of open source companies is their far more efficient and viral go-to-market motion. The first and most obvious benefit is that a user is already a “customer” before she even pays for it. Because so much of the initial adoption of open source software comes from developers organically downloading and using the software, the companies themselves can often bypass both the marketing pitch and the proof-of-concept stage of the sales cycle. The sales pitch is more along the lines of, “you already use 500 instances of our software in your environment, wouldn’t you like to upgrade to the enterprise edition and get these additional features?”  This translates to much shorter sales cycles, the need for far fewer sales engineers per account executive, and much quicker payback periods of the cost of selling. In fact, in an ideal situation, open source companies can operate with favorable Account Executives to Systems Engineer ratios and can go from sales qualified lead (SQL) to closed sales within one quarter.

This virality allows for open source software businesses to be far more efficient than traditional software businesses from a cash consumption basis. Some of the best open source companies have been able to grow their business at triple-digit growth rates well into their life while  maintaining moderate of burn rates of cash. This is hard to imagine in a traditional software company. Needless to say, less cash consumption equals less dilution for the founders.

Photo courtesy of Getty Images

Open Source to Freemium

One last aspect of the changing open source business that is worth elaborating on is the gradual movement from true open source to community-assisted freemium. As mentioned above, the early open source projects leveraged the community as key contributors to the software base. In addition, even for slight elements of commercially-licensed software, there was significant pushback from the community. These days the community and the customer base are much more knowledgeable about the open source business model, and there is an appreciation for the fact that open source companies deserve to have a “paywall” so that they can continue to build and innovate.

In fact, from a customer perspective the two value propositions of open source software are that you a) read the code; b) treat it as freemium. The notion of freemium is that you can basically use it for free until it’s deployed in production or in some degree of scale. Companies like Elastic and Cockroach Labs have gone as far as actually open sourcing all their software but applying a commercial license to parts of the software base. The rationale being that real enterprise customers would pay whether the software is open or closed, and they are more incentivized to use commercial software if they can actually read the code. Indeed, there is a risk that someone could read the code, modify it slightly, and fork the distribution. But in developed economies – where much of the rents exist anyway, it’s unlikely that enterprise companies will elect the copycat as a supplier.

A key enabler to this movement has been the more modern software licenses that companies have either originally embraced or migrated to over time. Mongo’s new license, as well as those of Elastic and Cockroach are good examples of these. Unlike the Apache incubated license – which was often the starting point for open source projects a decade ago, these licenses are far more business-friendly and most model open source businesses are adopting them.

The Future

When we originally penned this article on open source four years ago, we aspirationally hoped that we would see the birth of iconic open source companies. At a time where there was only one model – Redhat – we believed that there would be many more. Today, we see a healthy cohort of open source businesses, which is quite exciting. I believe we are just scratching the surface of the kind of iconic companies that we will see emerge from the open source gene pool. From one perspective, these companies valued in the billions are a testament to the power of the model. What is clear is that open source is no longer a fringe approach to software. When top companies around the world are polled, few of them intend to have their core software systems be anything but open source. And if the Fortune 5000 migrate their spend on closed source software to open source, we will see the emergence of a whole new landscape of software companies, with the leaders of this new cohort valued in the tens of billions of dollars.

Clearly, that day is not tomorrow. These open source companies will need to grow and mature and develop their products and organization in the coming decade. But the trend is undeniable and here at Index we’re honored to have been here for the early days of this journey.

News Source = techcrunch.com

Oil and gas giants Chevron and Occidental are backing tech to combat carbon emissions

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Carbon Engineering, a Canadian company developing technology to remove carbon dioxide from the atmosphere and process it for use in enhanced oil recovery or in the creation of new synthetic fuels, has locked in financing from two big industry backers — Chevron and Occidental Petroleum — to bring its products to market.

The undisclosed amount of capital Carbon Engineering raised from the investment arms of two of the world’s largest oil and gas companies — Oxy Low Carbon Ventures and Chevron Technology Ventures — will be used to commercialize its technology at a time when legislation in California and British Columbia are making low carbon fuels more economically viable, according to a statement from the company’s chief executive, Steve Oldham. The company had already managed to nab Microsoft co-founder Bill Gates as an investor.

Gates is one of several big-name backers to be drawn to renewable energy technologies in the face of a steadily warming planet that’s rapidly approaching a tipping point-of-no-return when it comes to global climate change. Together with a group of other multi-billionaires including Marc Benioff, Jeff Bezos, Michael Bloomberg, Richard Branson, Jack Ma, Masayoshi Son, and Meg Whitman, Gates launched a $1 billion fund called Breakthrough Energy Ventures last year to back companies that are developing things like new energy storage and water production technologies.

The Squamish, B.C.-based Carbon Engineering isn’t in the Breakthrough portfolio, but is one of several companies working on making a technology called “direct air capture” of carbon dioxide economically viable.

At the company’s pilot plant in Squamish air gets hoovered up by giant fans into a processing facility where it is treated with potassium hydroxide, which captures and holds the carbon dioxide. Then more chemicals and heat are added to the mix to create millions of smell white pellets — which contain higher concentrations of the carbon dioxide.

After that, the pellets are heated again to create a gas which is almost pure carbon dioxide. That gas can be either sequestered underground (a proposition with no economic benefit for Carbon Engineering at the moment) or converted back into fuels, chemicals, or used in enhanced oil recovery.

Carbon Engineering and competitors like ClimeWorks or Global Thermostat claim that they can remove carbon dioxide from the atmosphere for roughly $100 per ton or a bit less once they can get to scale. To make money though, they’ll need to refine that carbon dioxide into some sort of product — likely a fuel, which will return that carbon to the atmosphere.

Other companies tackling carbon capture like Newlight Technologies and Opus12 convert the carbon into plastics or chemicals while companies like CarbonCure aim to turn the captured carbon into a cement replacement.

While these products from carbon emissions are available, they’re not yet commercially viable at a significant scale. Oldham told National Public Radio that the fuel which Carbon Engineering manufactures is roughly 20 percent more expensive than regular gasoline.

That’s why states like California are putting incentives in place to offset the added costs of using these low carbon products.

Carbon Engineering has already spent $30 million to develop its process, while Climeworks raised $31 million last year to develop its own version of this carbon capture technology.

Not all climate watchers are convinced that these kinds of negative emission technologies are the answer. They argue that it’s less expensive to use renewable energy and other carbon-free energy sources than to take carbon dioxide out of the air.

At this point, though, emission reductions may not be enough. Given the dire reports coming out of the Trump Administration and the Intergovernmental Panel on Climate Change, it’s going to take pretty much a combination of everything that humanity’s got to avoid a pretty catastrophic fate for a pretty large portion of the world’s population.

Even the companies that have been notorious for their contributions to the climate crisis that the world faces are waking up to the need for decarbonization (even if it’s an open question of whether they’re being dragged to the table or sitting down of their own free will).

Oxy Low Carbon Ventures is a good example. Reading the writing on the wall the firm has invested not just in Carbon Engineering, but another company called NET Power, which purports to have developed a power plant with zero emissions.

“It is a very important time for the air capture field right now,” said Oldham in a statement. “We’re seeing leading jurisdictions, like California and British Columbia, creating markets for low carbon fuels and technologies like DAC, through effective climate policy. These efficient market-based regulations, and action from energy industry leaders like Occidental and Chevron, show the power of policy in driving innovation and achieving emissions reductions while delivering reliable and affordable energy.”

News Source = techcrunch.com

SoftBank’s Vision Fund is preparing to invest $1 billion in Grab

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SoftBank’s Vision Fund is set to continue its recent spree of investments in Asian tech unicorns. The mega fund — which is targeted at $100 billion — is planning to invest upwards of $1 billion into Southeast Asia’s ride-hailing leader Grab, two sources with knowledge of the plan told TechCrunch. The investment could reach as much as $1.5 billion, one source added.

A SoftBank representative did not respond to a request for comment. Grab declined to comment.

The Vision Fund has made significant investments in three billion-dollar Asian companies in recent months. That includes backing India’s OYO as part of a $1 billion round (which included money from Grab) in September, writing a $2 billion check for Korea’s Coupang in November and co-leading a $1.2 billion round for Tokopedia in Indonesia alongside Alibaba earlier this month.

There is a pattern that SoftBank appears to be following here.

In all three cases, the Japanese company was an existing investor and, having transferred its stakes to the Vision Fund, it then doubled down and invested again via the Vision Fund itself. That’s also the plan for this Grab deal, TechCrunch understands.

SoftBank’s most recent financial report, filed in November, explains that it plans to move its stakes in ride-hailing firms Uber, China’s Didi, India’s Ola and Grab over to the Vision Fund. But that hasn’t happened yet and it isn’t clear when it will.

“The Company expects that the necessary procedures will be made in the future to obtain applicable consent from limited partners of the Fund and regulatory approvals for the transfer,” it explained in the report, which doesn’t include a projected timeframe.

One source told TechCrunch that the investment in Grab is contingent on that equity transfer being made, as was the case with Tokopedia and Coupang, which saw SoftBank-owned stakes transferred to the fund in Q3 of this year.

Grab CEO and co-founder Anthony Tan [Photographer: Ore Huiying/Bloomberg/Getty Images]

While we don’t know how long that wait will be, Grab is hardly short on cash. The Singapore-based company is putting the final touches to its Series H fund which is focused on raising a total of $3 billion. It has already received significant contributions from Toyota, Microsoft, Yamaha Motors, Booking Holdings and a range of institutional investors.

Grab operates across eight markets in Southeast Asia, where it claims over 130 million downloads and more than 2.5 billion completed rides to date. The company acquired Uber’s business earlier this year in a deal that saw the U.S. company pick up a 27.5 percent stake in Grab and turn their rivalry into a partnership. The merger deal, however, was criticized by regulators and, in Singapore, the pair were fined a total of $9.5 million for violating anti-competition laws.

Grab is Southeast Asia’s highest-valued tech startup, having commanded an $11 billion valuation through this Series H round. It isn’t clear how much that figure will increase if, as and when this Vision Fund investment closes. The company has raised around $6.8 billion to date from investors, according to data from Crunchbase.

News Source = techcrunch.com

LemonBox, which brings US vitamins to Chinese consumers, raises $2M

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LemonBox, a Chinese e-commerce startup that imports vitamins and health products from the US, has raised $2 million to develop its business.

The company graduated from Y Combinator’s most recent program in the U.S. and, fuelled by the demo day, it has pulled in the new capital from 10 investors which include Partech, Tekton Ventures, Cathexis Ventures, Scrum Ventures and 122 West Ventures.

LemonBox started when co-founder and CEO Derek Weng, a former employee at Walmart in the U.S, saw an opportunity to organize the common practice of bringing health products back in China. Any Mainland Chinese person who has lived or even just visited the U.S. will be familiar with such requests from family and friends, and LemonBox aims to make it possible for anyone in China to get U.S-quality products without relying on a mule.

The service is primarily a WeChat app — which taps into China’s ubiquitous messaging platform — and a website, although Weng told TechCrunch in an interview this week that the company is contemplating a standalone app of its own. The benefit of that, beyond a potentially more engaging customer experience, could be to broaden LemoonBox’s product selection and use data to offer a more customized selection of products. Related to that, LemonBox said it hopes to work with health and fitness-related services in the future to gather data, with permission, to help refine the personal approach.

LemonBox’s team has now grown to 20 people, with 12 full-time staff and 8 interns, and Weng said that the new funding will also go towards increased marketing, improvements to the WeChat app and upgrading the company’s supply chain. Business, he added, is growing at 35 percent per week as LemonBox has adopted a personal approach to its packaging, much like Amazon-owned PillPack.

“This is the first time people in China have ever seen this level of customization for their vitamins,” Weng told TechCrunch.

Members of the LemonBox team with Qi Lu, who heads up Y Combinator’s China business

Qi Lu, the former Microsoft and Baidu executive who leads YC’s new China unit, said he is “bullish” about the business.

“What LemonBox offers resonates with me and is serving a clear China market needs. Personally, I travel a lot between China and the U.S, and I often was asked by my relatives to help purchase and carry them similar products like vitamins,” he said in a prepared statement.

“More importantly, what LemonBox can do is to build an initial core user base and a growing brand. Over time, by serving their users well, it can reach and engage more users who want to better take care of their broader nutrition needs, use more data and take advantage of increasingly stronger AI technologies to customers and personalize, and become an essential service for more and more users and customers in China,” Lu added.

News Source = techcrunch.com

Microsoft calls on companies to adopt a facial recognition code of conduct

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Over the summer, Microsoft President Brad Smith called for governments to take a closer look at how facial detection technology is being implemented across the globe. This week, he returned with a similar message — only this time the executive is calling out fellow technologies to help address myriad issues around the technology before it becomes too pervasive.

It’s easy enough to suggest that the ship has sailed. After all, facial recognition is already fairly ubiquitous on everything from Facebook to Apple Animojis. But if the past year has taught us anything, it’s that the governments of the world can’t wait to implement the tech in a broader way — and plenty of tech firms are more than happy to help.

Smith points to a trio of potential pitfalls for the tech: biased outcomes, invasion of privacy and mass surveillance. The ACLU has been raising red flags on that first point for some time, asking Congress to implement a moratorium on surveillance technologies. The group found that Amazon’s Rekognition software wrongly associated headshots of members of Congress with criminal mugshots.

The new letter finds Microsoft frustrated at regulatory foot-dragging, instead placing the burden on tech regulation on the companies themselves. “We believe that the only way to protect against this race to the bottom is to build a floor of responsibility that supports healthy market competition,” writes Smith. “And a solid floor requires that we ensure that this technology, and the organizations that develop and use it, are governed by the rule of law.”

In other words, as Smith puts it, “you can’t put the genie back in the bottle.” So Microsoft is looking to set the tone here, committing to its own code, which it plans to implement by the first quarter of next year.

The piece details a number of safeguards and vetting that companies can implement to help avoid some of the more troubling pitfalls here. Among the recommendations are some fairly straightforward suggestions, like transparency, third-party testing, technology reviews by humans and properly identifying where and when the technology is being implemented. All of the above honestly sound pretty straightforward and doable.

Microsoft is set to follow up these suggestions with a more detailed document arriving next week that will more thoroughly detail its plans, while soliciting suggestions from people and groups about how to more broadly implement them.

News Source = techcrunch.com

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