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Forbes Books presents the Startup Science Podcast
with Gregory Shepherd, brought to you by
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Startupscience dot Io. Greg is an
entrepreneur who has built and sold twelve businesses.
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He's a recipient of four private equity
awards and is a featured ten X
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speaker and Forbes author. Here's Gregory
Shepherd. I'm back with Heather Meeaker,
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general partner OFSS Capital and early stage
venture capital fund that only invests in commercial
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open source software development. A couple
of years ago, Heather was named by
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Business Insider as one of the top
and most transformative people in the tech industry,
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alongside the CEO of Salesforce, Stripe
and Microsoft. We covered the entrepreneurial
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side of open source in part one
and now Heather. If you're an investor
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and you're looking to invest in open
source, what are the things they need
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to be looking for? What we
do at our fund. Maybe the answer
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is a little bit different for what
we do at our fund to some other
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investors, but I'll start with what
we do because that's known territory for me.
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So we're really early stage investors,
and so what we want to see
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when we're looking at businesses is want
we want to see great project. Obviously,
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that's kind of the price of admission, right. We want to see
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that it is going to have a
good market. And one of my favorite
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things to ask people about open source
businesses is think of a software product that
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everyone uses and they hate, right, and then do the open source alternative
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to that, because the open source
alternative is likely to be like more right
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sized in terms of features and functionality
than proprietary products. One of the problems
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with proprietary products is that the way
that the companies sell, like upsell is
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by just adding features. And we've
all experienced using software and it's got ten
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billion features of which we only want
to use like five, right, and
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they keep adding features because they're selling
maybe to the next biggest user, they're
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maybe trying to sell updates. That
doesn't tend to happen as much with open
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source based products because the community will
vote with their feet, right, So
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it keeps people honest. It's really
great to say, Okay, here's a
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product that everybody uses and everybody hates, which means there's a big market for
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it, but we're going to do
something that satisfies the needs of users more
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well. I mean there's that's a
great formula for that's right. So that's
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that's definitely one thing to look at. So it's also a lot, I
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mean, any investor would tell you
this, but it's a lot about the
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people. You have to have people
who are going to be excited about running
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a potentially big business if you're doing
venture investing, and you know, some
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developers are great at development that they
don't really want to run a business.
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And if that's the case, sometimes
they partner up with someone who's kind of
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more on the business side. But
some of the developers also really grow into
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a business leadership role. So we
want to make sure that we have people
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who are really committed to running something
as a business as opposed to I want
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this to be a government funded project, or I want it to be just
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a nonprofit or something like that.
And you get great developers who are in
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open source, but they really just
they want to do something smaller. We
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need to make sure that there are
people who are going to be leaders and
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also going to be business leaders.
One of my specialties is I studied why
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win and how founders fail and wrote
a book about that, and so I
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understand this really well and what I
saw in the data is that a lot
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of the founders that are failing are
actually engineers that came in, you know,
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thinking I'm going to build an amazing
product and build a business, is
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going to build itself. Yeah.
Right. When I talk to investors,
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a lot they they're like, look, there's a whole lot more going on
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here than building a great product.
I've seen good products fail and bad products
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win, right, all based on
the founder. So you know, what
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would you how would you if you're
talking to these investors and you're trying to
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help them understand how to understand the
risk profile associated with this founder, not
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the product. Because when you look
at investing in open source, as you
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said, a lot of the data
is visible and transparent, so you can
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kind of go, oh, it's
got product market fit. People like it.
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You know, it's moving a lot. You can see that they're fixing
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the problems that the users care about, blah blah blah. But it doesn't
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tell you anything about the founder,
right, and whether or not the founder
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can can support the stress weight and
you know, the management duties and some
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of the soft skills that go along
with building a business. Yeah, is
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there something that you could say that
would help investors understand this side of the
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world. Now it's time for the
harsh reality of business right, which is
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that if you're going to start a
business and you want it to be a
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really successful business, you are going
to spend minimum two three years of your
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life minimum right, completely devoted to
this business. It is going to take
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over your life. You're not going
to do anything else. And some people
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are not in the right place in
their life to do that, you know,
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I mean, And I'm just being
you know, practical about this,
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Like I couldn't do that at the
place that I'm at my life right because
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I'm further on in my career.
Mostly it's going to be people who have
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more runway ahead of them. They
vary in age a lot, but you
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can tell from talking to founders like
how committed they have to be totally committed
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to the business. Right. As
a corollary for that, I would say
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that I talk to founders who say, we have this really great proct project,
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we want to turn it into a
business, and we know we can
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get some government grants to do that, and that's nice, but I don't
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even like them to have that mindset. I want them to have the mindset
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of we're going to go out and
we're going to create a great product and
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sell the product and get revenue and
finance the business right way. Yeah,
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because those grants need delay the inevitables
sometimes. Well also they like they can
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cause the project to be too client
on that, like there's not as much
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immediacy of need to get a product
out there and go to market and scale.
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Yeah. Yeah, yeah, you're
totally right, because they'll get the
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couple hundred grand, five hundred grand, a million, whatever, and they'll
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be burning through that and then all
of a sudden, we're out of money
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and they don't they don't any customers, and then investors are like, hey,
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that's great, you got a great
product and you got a grant,
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but where's the proof. Yeah,
I'd rather have them engaging with customers potential
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customers, even if at the beginning
they're giving it away, right, But
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they need to be engaged in commerce, and they need to be looking towards
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funding the business with revenue instead of
funding it with grants or you know,
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or or even a lot more investment. The whole thing about open source businesses,
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they usually don't take a ton of
capital to create and so if everything
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works correctly, you do maybe a
seed, maybe be an A, and
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you don't have to go too much
further than a series A, right because
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by that time they should be getting
revenue, right. I just don't like
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to see them relying on the idea
of getting a grant so that like,
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Okay, that's going to give us
another year runway, Well, no,
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I want you to. I want
you to get a customer to pay that
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money instead of the gap. And
also like where you you know, where
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you're getting your requirements from. Are
you getting you requirements from your base of
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engineers that are building stuff or the
actual customer that's buying it? Yeah,
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exactly. You've got a lot too
where they're just they're just building and building
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and building because there's all this excitement
in the community and the actual customer hasn't
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been approached yet. Yeah. Right, then, you know, and it's
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like Mike Tyson said, you know, everybody's got a plan until you get
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punched in the face. Well,
that's what business is like, you know.
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So why is open source a really
good business bet for investors and for
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entrepreneors During inflation and recession? You
had brought this up a couple of times
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and things I've read, and I
was fascinated and wanted to share that with
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the listeners. Well, so I
started thinking about that idea based on through
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my own anecdotal experience with open source. The like open source skyrocketed during the
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Internet bust, okay, which is
kind of near the beginning of my career,
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and I was just so blown away
by the trajectory of adoption during that
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time, because things were writing really
high, and all of a sudden,
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everything goes to helen and hand basket, and then everybody's looking to open source
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because it's not free if it's a
product, but it's cheaper and better than
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the proprietarial alternatives. So people started
a in an in proprietary and going towards
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open source during the Internet bust.
And so then I thought I should do
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a little bit of analysis of this, and I took a whole bunch of
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successful open source businesses and I looked
at when they were started, and an
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amazing number of them were started during
recessions. Open source businesses do really well
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during recessions for a few reasons.
One is a lot of developers are out
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of work during the recession. Yes, so they'll go and they'll start working
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on a pet project and then once
the recession starts to turn the corner,
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which hopefully is in like one,
two, three years, Right, they've
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got something they can really sell.
And when I looked at the data that
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really seemed to be worn out people
were doing development during recessionary times and then
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catching the wave when the economy came
back. Plus, as I said,
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they're so capital efficient that you know, during recession and inflationary periods, capital
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really dries up and you need to
be really lean and mean to get through
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those times. I'm just like with
our fund, I'm just so impressed at
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what the founders do with so little, Right. They are really like,
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really run a tight ship. They
don't spend money on stuff that's unnecessary.
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They don't have to spend a lot
on marketing. It's mostly kind of word
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of mouth. They don't have to
spend money on market research. That stuff
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mostly comes to them. So,
you know, as an investor, when
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it's difficult for you to be raising
capital from your own investors your LPs,
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right, you want to make sure
to use the money as efficiently as possible
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because during the recessionary times it's hard
to get stuff During inflationary times, the
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money is going into other places and
it's much harder to get into something like
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venture. We've been seeing that in
the past year. So it's a great
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thing to be doing during that time
because you're squeezing like all the utility out
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of the money that you have.
Yeah, I've noticed that they are extremely
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frugal with how they go about it, sometimes too frugal, you know,
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they get into to market and that
they're not spending your like, hey,
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we need to get this rind of
customers, you know. Yeah, it's
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a delicate balance. I mean,
I don't mean to say that it's easy.
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It's never easy to run a business, but you can take advantage of
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so many efficiencies with open source.
Also, like I would say that almost
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every business we've invested in has people
all over the world working for it,
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right, So it's very geographically dispersed. So that means when one country goes
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through bad times, you can employ
people there. It helps even out the
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work for them. It makes the
human resources less expensive for the company.
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So people can really take advantage of
different markets and different locations. Because open
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source has always been geographically dispersed.
That's one thing open source did before,
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like the rest of the economy had
to do it during the pandemic. Yeah,
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it was interesting when the whole Russian
thing started. I saw the number
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of engineers available drop significantly. Yeah, even the price for those that are
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available go way up. Yeah.
It as we lost a lot of the
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Eastern European engineers and the Russian engineers, which I mean, it's a shame
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that is just really awful. Yeah, in Eastern Europe. It's kind of
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a pet topic of mine, Like
a lot of the former socialist republics when
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they kind of restarted their economies after
the end of the Cold War. Software
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was a really attractive business because it
didn't require a ton of infrastructure and that
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at a lot of smart people to
throw at it. And so there were
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a lot of you know, really
successful people in coming out of the former
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USSR, and there still are today. So it's great to be able to
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enfranchise those people into the technology community
and have them work with people all over
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the world. When the pandemic and
then the war started, at what a
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lot of people were asking me as
a lawyer is how do I pay my
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developers with bitcoin? Right? Yeah, Yeah, I've heard that too.
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It's we share a lot of I
have fourteen companies in my portfolio, and
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you know, so a lot of
times I'm having these conversations and running into
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the same stuff. And I really
favor open source too. I'm a huge
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fan of open source back in the
day, in the eighties. I was
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coding when it first started, you
know, and I haven't touched the command
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line for like twenty years, but
for a lot, but for a long
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time, I really got into it. I still keep up with it and
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understand it. Let me ask you, what business models do you think would
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perform best in open source if you
were to break that, you know,
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Like so if you look at CRM, you had Sugar who came out with
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their open source, you know,
and so on and sofa. So what
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would you say is a good vertical
to dive into for open source? I'm
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sure that the engineers listening have their
pens out or they're actually who uses a
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pen anymore? Well, there's stylus
is Yeah, this kind of goes beyond
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market verticals. But if you had
to pick one business model that tends to
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work really well with open source,
it's it's what we call an open core
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model backed up by SaaS. So
what you do is you develop some core
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functionality and you release that as open
source, and then around that you build
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software as a service. That model
seems to work really well. The interesting
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thing that's happened in the past,
I don't know, five to ten years,
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is that we knew that was a
proven model in infrastructure software, right.
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But what's happening today is it's becoming
a much more popular model in applications
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as well. Like open source businesses
used to be really centered around infrastructure,
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you know, from red Hat to
all the database companies, and you know,
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content management and so forth. But
now when you look there a lot
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of top level applications and it's also
working for them. So so most of
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those businesses have some core of open
source software, and then they have some
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additional services or software that they sell
that is complementary to the open source software.
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Do you think that you know,
sometimes you get investors or corporates,
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you know, corporates that are looking
at making an acquisition into a space,
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concerned about the transparency that's in open
source. You know, they'll say,
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well, I need to own this. I don't want it to be available
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to you know, you know what
I'm talking about I could tell by that
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smile. How would you combat that
sort of comment? I you know,
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I hear that all the time,
right. I actually think that it's usually
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an overblown concern. There. There
are definitely situations where you might have a
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lot of sensitivity about looking people looking
into how the software works. But I
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really think that people fear that a
lot more than it really needs to be
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feared. If it's if it's an
issue because of security, yeah I would
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like pay a little more attention to
it. But if it's just an issue
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because you don't want people to figure
out what you're doing, I don't think
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that's actually a very effective business strategy. You need to be selling based on
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great products that solve problems for people, and you shouldn't have to worry about
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people copying you just because they can
see what you're doing, because they should
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not be able to do the products
as well as you do. It's it's
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not enough to just see how you're
doing things. It's how you execute that
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matters, and that's you know,
that's where people really add value and make
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money. Plus, you know,
users really want transparency. That's something that
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like the whole open source movement has
changed user expectations about what transparency you should
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have for your software build materials.
And these days you can't just tell users,
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well, we won't tell you that
because we're sensitive about it or some
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kind of you know, oh,
well, you know, it might expose
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us to our competitors or something they
want. They want the transparency, and
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it's something that they actually demand in
the marketplace now. So one of the
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things I hear is, you know, somebody will say, well, you
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know, if they can see everything
you did to your point, right,
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if they can see everything you did, can't they just create the same thing?
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And where's the you know, they
say the quote special sauce, right,
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yeah, And you know, and
I tell them, I say,
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well, how many deals have you
invested in where there's a patent? And
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they tell you and I'm like,
well, the same thing, right.
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They just gave you the instructions on
how to build a person engineer or work
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around the patent that you have.
Yeah, right, So there is no
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escaping competitors' abilities to go figure out
what you're doing and try to do it
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better. And that's just better.
You're exactly right. I would extrapolate that
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I one hundred percent agree with you, And I would extrapolate it to say
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people overvalue the pure intellectual property value
of things which would be patents, or
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it would be like algorithms and secret
sauce and so forth, when actually most
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of what customers pay for is execution. What people are worried about with secret
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sauce is forestalling competition. But it's
a lot better to blow your competition out
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of the water with great products than
it is to just rely on them,
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you know, not being able to
copy you because of an intellectual property right.
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That is a short term solution,
believe me. But if you make
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great products, that's how you really
blow your competition out of the water.
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Yeah. I mean, look what
Google did continue with Microsoft, you know,
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with the Office Suite. It's very
interesting, and I agree with you
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on a just make something better,
Yeah exactly. I'm not a big fan
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of the coin operated approach that a
lot of people take in building startups and
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more focusing on what problems does it
solve and does it solve the problems better
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than anybody else? And then to
your point, I think that the user
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experience is what it comes down through. The user doesn't care about what's behind
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there no they don't care. They
don't care at all, Right, they
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don't they don't care if you have
a whizbang algorithm. What they want to
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know is I have this problem.
Can you solve this for me with the
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least amount of expense and pain?
Yeah, exactly, That's what the right
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like people always think about. You
know, you look at user interface UI
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UX, right, and people oftentimes
I find forget about the UX part,
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like how do they feel when they're
using it? Are they feeling frustration or
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are they feeling like, oh,
this isn't They're just kind of going through
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the process. And if you look
at sort of like engineering product big companies
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like Apple. You look at Apple's
process. In the beginning, Apple's process
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was beautiful, right, so easy, and then they started to add all
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these different functions and now you start
to get people that are frustrated, like
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you know, and the you know, the idea of changing the power cord.
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I know that the most recent one
had to do with Europe changing the
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standards on the plug. But they
still got blamed for it because they had
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a reputation of changing out the plug, you know, Yeah, and it
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frustrated the users and even to Apple, they forget where they came from.
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They forget that the whole concept was
super easy user experience, Like you shouldn't
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have to be thinking when you're using
software, you should be floating through the
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software. Yeah, exactly, and
you know so. Uh. One of
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the people I've been fortunate to meet
during my my adventures in in venture capital
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is Bob Young, who was one
of the founders of red Hat right and
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and he he's a great guy.
By the way that he was. He
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was a typewriter salesman basically, and
then he started to find out about software,
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and his idea about it was,
wait a minute, you can give
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people exactly the software they want and
access to source code. You can still
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sell that. Why would we not
do that? Right? But part of
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that was because he had not come
from a background of the technology industry where
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people are like, we got to
protect our IP, we got to protect
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our IP. He was a salesman, right, and he was like,
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this is what people want, I'm
going to give it to them. And
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that's really kind of the whole mentality
of the open source business model. It's
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like, don't don't worry so much
about protecting your IP, worry about winning
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in the marketplace and in an atmosphere
of transparency, and that's incredibly powerful.
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In closing her, I want to
just sort of plug your book, your
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Ted talk, your tube YouTube channel. I was going through all this stuff
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and I was like, this is
incredible, and I would urge everybody to
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go watch the Ted talk on why
we need open source because it is epic.
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I also think her YouTube channel is
incredible. And then why don't you
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talk a little bit about the book
and what it's about and so we can
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sort of get that out there.
Sure, thank you so much, and
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I'm glad you were like the videos
those are They're fun to do, you
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know. I felt audacious even thinking
I could do them, But it's been
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fun to do them. Yeah.
So my most recent book is called from
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Project to Profit, and those who've
been listening won't be surprised to hear that
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it's about how to build businesses around
open source projects. And it's it's a
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short book and it's really just kind
of a guide for developers also investors who
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are interested in how to build businesses
in this area, what questions they should
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be asking themselves. And then it
actually goes through a fair amount of detail
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about how to execute on different kinds
of business models in open source. It's
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written in a way that I hope
is accessible and easy to understand for people,
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and you know, I hope that
people can use the book to start
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wonderful businesses. I just finished the
audiobook, which was a lot of work,
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but so it's now I did a
vice. I'm not doing mine.
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00:25:48.599 --> 00:25:57.160
I can't even I started difficult.
It's difficult to do. I managed my
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00:25:57.279 --> 00:26:03.880
way through it, but so now
it's paperback kindle in audiobook. Well,
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I want to thank you so much
for joining the podcast. I mean,
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you're an epic person and you're very
busy, and I think it's really nice
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00:26:11.119 --> 00:26:15.359
that you're giving out. It's like
open source podcasting, you know, open
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00:26:15.880 --> 00:26:18.759
knowledge, you know, and you're
out here doing this and I'm sure everybody
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is grateful, and I certainly am. Thank you so much for your time
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and energy today. Well, thank
you, this has been great fun talking.
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00:26:26.440 --> 00:26:30.279
I really appreciate the opportunity to talk
to you today. And that's it
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00:26:30.319 --> 00:26:33.200
for another episode of Startup Science Podcast. If you can, please leave a
321
00:26:33.240 --> 00:26:37.559
five star review on Apple or Spotify, I would really really appreciate it,
322
00:26:38.160 --> 00:26:41.480
and founders as a thank you,
for leading the changes in our world.
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00:26:41.559 --> 00:26:47.880
I'm offering free access to the startup
science platform called Visionaries, the one stop
324
00:26:47.880 --> 00:26:52.480
shop for founders. It has everything
from a startup academy, investor match,
325
00:26:52.559 --> 00:26:56.440
grand Finders, pitch Finders, and
a whole lot more. Go to Gregory
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00:26:56.480 --> 00:27:02.119
shephard dot com, click on Visionaries
and use the code Founders in all capitals.
327
00:27:02.559 --> 00:27:06.240
You'll be able to check it out
for yourself until next time. Now
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00:27:06.359 --> 00:27:11.000
misday, my friends. This startup
science podcast with Gregory Shepherd is brought to
329
00:27:11.000 --> 00:27:18.799
you by startupscience dot Io. Founders
can log on too startupscience dot io and
330
00:27:18.920 --> 00:27:22.960
use code Forbes to get free access. To connect and find out more about
331
00:27:22.960 --> 00:27:30.440
greg Go to Gregory sheepherd dot com. The Startup Science Podcast is a production
332
00:27:30.759 --> 00:27:30.839
of Forbes Books.
1
00:00:01.280 --> 00:00:07.040
Forbes Books presents the Startup Science Podcast
with Gregory Shepherd, brought to you by
2
00:00:07.080 --> 00:00:13.720
Startupscience dot Io. Greg is an
entrepreneur who has built and sold twelve businesses.
3
00:00:14.160 --> 00:00:18.760
He's a recipient of four private equity
awards and is a featured ten X
4
00:00:18.800 --> 00:00:24.359
speaker and Forbes author. Here's Gregory
Shepherd. I'm back with Heather Meeaker,
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00:00:24.480 --> 00:00:30.320
general partner OFSS Capital and early stage
venture capital fund that only invests in commercial
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00:00:30.359 --> 00:00:35.560
open source software development. A couple
of years ago, Heather was named by
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00:00:35.640 --> 00:00:41.679
Business Insider as one of the top
and most transformative people in the tech industry,
8
00:00:42.479 --> 00:00:49.600
alongside the CEO of Salesforce, Stripe
and Microsoft. We covered the entrepreneurial
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00:00:49.679 --> 00:00:54.039
side of open source in part one
and now Heather. If you're an investor
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and you're looking to invest in open
source, what are the things they need
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to be looking for? What we
do at our fund. Maybe the answer
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00:01:03.520 --> 00:01:06.319
is a little bit different for what
we do at our fund to some other
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investors, but I'll start with what
we do because that's known territory for me.
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So we're really early stage investors,
and so what we want to see
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when we're looking at businesses is want
we want to see great project. Obviously,
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that's kind of the price of admission, right. We want to see
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that it is going to have a
good market. And one of my favorite
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things to ask people about open source
businesses is think of a software product that
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everyone uses and they hate, right, and then do the open source alternative
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to that, because the open source
alternative is likely to be like more right
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sized in terms of features and functionality
than proprietary products. One of the problems
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00:02:00.359 --> 00:02:06.159
with proprietary products is that the way
that the companies sell, like upsell is
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by just adding features. And we've
all experienced using software and it's got ten
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billion features of which we only want
to use like five, right, and
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they keep adding features because they're selling
maybe to the next biggest user, they're
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maybe trying to sell updates. That
doesn't tend to happen as much with open
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source based products because the community will
vote with their feet, right, So
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it keeps people honest. It's really
great to say, Okay, here's a
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product that everybody uses and everybody hates, which means there's a big market for
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it, but we're going to do
something that satisfies the needs of users more
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well. I mean there's that's a
great formula for that's right. So that's
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that's definitely one thing to look at. So it's also a lot, I
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mean, any investor would tell you
this, but it's a lot about the
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people. You have to have people
who are going to be excited about running
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a potentially big business if you're doing
venture investing, and you know, some
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developers are great at development that they
don't really want to run a business.
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And if that's the case, sometimes
they partner up with someone who's kind of
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more on the business side. But
some of the developers also really grow into
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a business leadership role. So we
want to make sure that we have people
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who are really committed to running something
as a business as opposed to I want
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this to be a government funded project, or I want it to be just
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a nonprofit or something like that.
And you get great developers who are in
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open source, but they really just
they want to do something smaller. We
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need to make sure that there are
people who are going to be leaders and
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also going to be business leaders.
One of my specialties is I studied why
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win and how founders fail and wrote
a book about that, and so I
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understand this really well and what I
saw in the data is that a lot
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of the founders that are failing are
actually engineers that came in, you know,
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thinking I'm going to build an amazing
product and build a business, is
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going to build itself. Yeah.
Right. When I talk to investors,
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a lot they they're like, look, there's a whole lot more going on
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here than building a great product.
I've seen good products fail and bad products
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win, right, all based on
the founder. So you know, what
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would you how would you if you're
talking to these investors and you're trying to
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help them understand how to understand the
risk profile associated with this founder, not
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the product. Because when you look
at investing in open source, as you
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said, a lot of the data
is visible and transparent, so you can
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kind of go, oh, it's
got product market fit. People like it.
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You know, it's moving a lot. You can see that they're fixing
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the problems that the users care about, blah blah blah. But it doesn't
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tell you anything about the founder,
right, and whether or not the founder
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can can support the stress weight and
you know, the management duties and some
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of the soft skills that go along
with building a business. Yeah, is
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there something that you could say that
would help investors understand this side of the
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world. Now it's time for the
harsh reality of business right, which is
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that if you're going to start a
business and you want it to be a
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really successful business, you are going
to spend minimum two three years of your
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life minimum right, completely devoted to
this business. It is going to take
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over your life. You're not going
to do anything else. And some people
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are not in the right place in
their life to do that, you know,
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I mean, And I'm just being
you know, practical about this,
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Like I couldn't do that at the
place that I'm at my life right because
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I'm further on in my career.
Mostly it's going to be people who have
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more runway ahead of them. They
vary in age a lot, but you
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can tell from talking to founders like
how committed they have to be totally committed
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to the business. Right. As
a corollary for that, I would say
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that I talk to founders who say, we have this really great proct project,
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we want to turn it into a
business, and we know we can
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get some government grants to do that, and that's nice, but I don't
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even like them to have that mindset. I want them to have the mindset
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of we're going to go out and
we're going to create a great product and
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sell the product and get revenue and
finance the business right way. Yeah,
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because those grants need delay the inevitables
sometimes. Well also they like they can
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cause the project to be too client
on that, like there's not as much
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immediacy of need to get a product
out there and go to market and scale.
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Yeah. Yeah, yeah, you're
totally right, because they'll get the
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couple hundred grand, five hundred grand, a million, whatever, and they'll
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be burning through that and then all
of a sudden, we're out of money
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and they don't they don't any customers, and then investors are like, hey,
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that's great, you got a great
product and you got a grant,
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but where's the proof. Yeah,
I'd rather have them engaging with customers potential
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customers, even if at the beginning
they're giving it away, right, But
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they need to be engaged in commerce, and they need to be looking towards
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funding the business with revenue instead of
funding it with grants or you know,
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or or even a lot more investment. The whole thing about open source businesses,
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they usually don't take a ton of
capital to create and so if everything
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works correctly, you do maybe a
seed, maybe be an A, and
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you don't have to go too much
further than a series A, right because
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by that time they should be getting
revenue, right. I just don't like
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to see them relying on the idea
of getting a grant so that like,
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Okay, that's going to give us
another year runway, Well, no,
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I want you to. I want
you to get a customer to pay that
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money instead of the gap. And
also like where you you know, where
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you're getting your requirements from. Are
you getting you requirements from your base of
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engineers that are building stuff or the
actual customer that's buying it? Yeah,
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exactly. You've got a lot too
where they're just they're just building and building
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and building because there's all this excitement
in the community and the actual customer hasn't
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been approached yet. Yeah. Right, then, you know, and it's
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like Mike Tyson said, you know, everybody's got a plan until you get
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punched in the face. Well,
that's what business is like, you know.
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So why is open source a really
good business bet for investors and for
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entrepreneors During inflation and recession? You
had brought this up a couple of times
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and things I've read, and I
was fascinated and wanted to share that with
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the listeners. Well, so I
started thinking about that idea based on through
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my own anecdotal experience with open source. The like open source skyrocketed during the
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Internet bust, okay, which is
kind of near the beginning of my career,
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and I was just so blown away
by the trajectory of adoption during that
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time, because things were writing really
high, and all of a sudden,
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everything goes to helen and hand basket, and then everybody's looking to open source
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because it's not free if it's a
product, but it's cheaper and better than
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the proprietarial alternatives. So people started
a in an in proprietary and going towards
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open source during the Internet bust.
And so then I thought I should do
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a little bit of analysis of this, and I took a whole bunch of
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successful open source businesses and I looked
at when they were started, and an
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amazing number of them were started during
recessions. Open source businesses do really well
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during recessions for a few reasons.
One is a lot of developers are out
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of work during the recession. Yes, so they'll go and they'll start working
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on a pet project and then once
the recession starts to turn the corner,
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which hopefully is in like one,
two, three years, Right, they've
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got something they can really sell.
And when I looked at the data that
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really seemed to be worn out people
were doing development during recessionary times and then
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catching the wave when the economy came
back. Plus, as I said,
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they're so capital efficient that you know, during recession and inflationary periods, capital
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really dries up and you need to
be really lean and mean to get through
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those times. I'm just like with
our fund, I'm just so impressed at
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what the founders do with so little, Right. They are really like,
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really run a tight ship. They
don't spend money on stuff that's unnecessary.
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They don't have to spend a lot
on marketing. It's mostly kind of word
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of mouth. They don't have to
spend money on market research. That stuff
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mostly comes to them. So,
you know, as an investor, when
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it's difficult for you to be raising
capital from your own investors your LPs,
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right, you want to make sure
to use the money as efficiently as possible
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because during the recessionary times it's hard
to get stuff During inflationary times, the
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money is going into other places and
it's much harder to get into something like
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venture. We've been seeing that in
the past year. So it's a great
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thing to be doing during that time
because you're squeezing like all the utility out
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of the money that you have.
Yeah, I've noticed that they are extremely
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frugal with how they go about it, sometimes too frugal, you know,
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they get into to market and that
they're not spending your like, hey,
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we need to get this rind of
customers, you know. Yeah, it's
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a delicate balance. I mean,
I don't mean to say that it's easy.
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It's never easy to run a business, but you can take advantage of
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so many efficiencies with open source.
Also, like I would say that almost
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every business we've invested in has people
all over the world working for it,
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right, So it's very geographically dispersed. So that means when one country goes
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through bad times, you can employ
people there. It helps even out the
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work for them. It makes the
human resources less expensive for the company.
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So people can really take advantage of
different markets and different locations. Because open
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source has always been geographically dispersed.
That's one thing open source did before,
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like the rest of the economy had
to do it during the pandemic. Yeah,
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it was interesting when the whole Russian
thing started. I saw the number
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of engineers available drop significantly. Yeah, even the price for those that are
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available go way up. Yeah.
It as we lost a lot of the
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Eastern European engineers and the Russian engineers, which I mean, it's a shame
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that is just really awful. Yeah, in Eastern Europe. It's kind of
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a pet topic of mine, Like
a lot of the former socialist republics when
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they kind of restarted their economies after
the end of the Cold War. Software
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was a really attractive business because it
didn't require a ton of infrastructure and that
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at a lot of smart people to
throw at it. And so there were
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a lot of you know, really
successful people in coming out of the former
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USSR, and there still are today. So it's great to be able to
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enfranchise those people into the technology community
and have them work with people all over
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the world. When the pandemic and
then the war started, at what a
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lot of people were asking me as
a lawyer is how do I pay my
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developers with bitcoin? Right? Yeah, Yeah, I've heard that too.
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It's we share a lot of I
have fourteen companies in my portfolio, and
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you know, so a lot of
times I'm having these conversations and running into
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the same stuff. And I really
favor open source too. I'm a huge
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fan of open source back in the
day, in the eighties. I was
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coding when it first started, you
know, and I haven't touched the command
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line for like twenty years, but
for a lot, but for a long
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time, I really got into it. I still keep up with it and
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understand it. Let me ask you, what business models do you think would
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perform best in open source if you
were to break that, you know,
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Like so if you look at CRM, you had Sugar who came out with
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their open source, you know,
and so on and sofa. So what
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would you say is a good vertical
to dive into for open source? I'm
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sure that the engineers listening have their
pens out or they're actually who uses a
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pen anymore? Well, there's stylus
is Yeah, this kind of goes beyond
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market verticals. But if you had
to pick one business model that tends to
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work really well with open source,
it's it's what we call an open core
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model backed up by SaaS. So
what you do is you develop some core
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functionality and you release that as open
source, and then around that you build
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software as a service. That model
seems to work really well. The interesting
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thing that's happened in the past,
I don't know, five to ten years,
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is that we knew that was a
proven model in infrastructure software, right.
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But what's happening today is it's becoming
a much more popular model in applications
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as well. Like open source businesses
used to be really centered around infrastructure,
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you know, from red Hat to
all the database companies, and you know,
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content management and so forth. But
now when you look there a lot
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of top level applications and it's also
working for them. So so most of
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those businesses have some core of open
source software, and then they have some
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additional services or software that they sell
that is complementary to the open source software.
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Do you think that you know,
sometimes you get investors or corporates,
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you know, corporates that are looking
at making an acquisition into a space,
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concerned about the transparency that's in open
source. You know, they'll say,
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well, I need to own this. I don't want it to be available
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to you know, you know what
I'm talking about I could tell by that
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smile. How would you combat that
sort of comment? I you know,
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I hear that all the time,
right. I actually think that it's usually
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an overblown concern. There. There
are definitely situations where you might have a
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lot of sensitivity about looking people looking
into how the software works. But I
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really think that people fear that a
lot more than it really needs to be
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feared. If it's if it's an
issue because of security, yeah I would
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like pay a little more attention to
it. But if it's just an issue
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because you don't want people to figure
out what you're doing, I don't think
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that's actually a very effective business strategy. You need to be selling based on
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great products that solve problems for people, and you shouldn't have to worry about
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people copying you just because they can
see what you're doing, because they should
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not be able to do the products
as well as you do. It's it's
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not enough to just see how you're
doing things. It's how you execute that
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matters, and that's you know,
that's where people really add value and make
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money. Plus, you know,
users really want transparency. That's something that
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like the whole open source movement has
changed user expectations about what transparency you should
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have for your software build materials.
And these days you can't just tell users,
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well, we won't tell you that
because we're sensitive about it or some
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kind of you know, oh,
well, you know, it might expose
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us to our competitors or something they
want. They want the transparency, and
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it's something that they actually demand in
the marketplace now. So one of the
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things I hear is, you know, somebody will say, well, you
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know, if they can see everything
you did to your point, right,
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if they can see everything you did, can't they just create the same thing?
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And where's the you know, they
say the quote special sauce, right,
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yeah, And you know, and
I tell them, I say,
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well, how many deals have you
invested in where there's a patent? And
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they tell you and I'm like,
well, the same thing, right.
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They just gave you the instructions on
how to build a person engineer or work
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around the patent that you have.
Yeah, right, So there is no
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escaping competitors' abilities to go figure out
what you're doing and try to do it
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better. And that's just better.
You're exactly right. I would extrapolate that
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I one hundred percent agree with you, And I would extrapolate it to say
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people overvalue the pure intellectual property value
of things which would be patents, or
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it would be like algorithms and secret
sauce and so forth, when actually most
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of what customers pay for is execution. What people are worried about with secret
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sauce is forestalling competition. But it's
a lot better to blow your competition out
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of the water with great products than
it is to just rely on them,
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you know, not being able to
copy you because of an intellectual property right.
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That is a short term solution,
believe me. But if you make
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great products, that's how you really
blow your competition out of the water.
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Yeah. I mean, look what
Google did continue with Microsoft, you know,
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with the Office Suite. It's very
interesting, and I agree with you
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on a just make something better,
Yeah exactly. I'm not a big fan
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of the coin operated approach that a
lot of people take in building startups and
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more focusing on what problems does it
solve and does it solve the problems better
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than anybody else? And then to
your point, I think that the user
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experience is what it comes down through. The user doesn't care about what's behind
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there no they don't care. They
don't care at all, Right, they
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don't they don't care if you have
a whizbang algorithm. What they want to
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know is I have this problem.
Can you solve this for me with the
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least amount of expense and pain?
Yeah, exactly, That's what the right
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like people always think about. You
know, you look at user interface UI
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UX, right, and people oftentimes
I find forget about the UX part,
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like how do they feel when they're
using it? Are they feeling frustration or
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are they feeling like, oh,
this isn't They're just kind of going through
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the process. And if you look
at sort of like engineering product big companies
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like Apple. You look at Apple's
process. In the beginning, Apple's process
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was beautiful, right, so easy, and then they started to add all
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these different functions and now you start
to get people that are frustrated, like
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you know, and the you know, the idea of changing the power cord.
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I know that the most recent one
had to do with Europe changing the
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standards on the plug. But they
still got blamed for it because they had
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a reputation of changing out the plug, you know, Yeah, and it
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frustrated the users and even to Apple, they forget where they came from.
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They forget that the whole concept was
super easy user experience, Like you shouldn't
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have to be thinking when you're using
software, you should be floating through the
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software. Yeah, exactly, and
you know so. Uh. One of
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the people I've been fortunate to meet
during my my adventures in in venture capital
278
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is Bob Young, who was one
of the founders of red Hat right and
279
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and he he's a great guy.
By the way that he was. He
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was a typewriter salesman basically, and
then he started to find out about software,
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and his idea about it was,
wait a minute, you can give
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people exactly the software they want and
access to source code. You can still
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sell that. Why would we not
do that? Right? But part of
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that was because he had not come
from a background of the technology industry where
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people are like, we got to
protect our IP, we got to protect
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our IP. He was a salesman, right, and he was like,
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this is what people want, I'm
going to give it to them. And
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that's really kind of the whole mentality
of the open source business model. It's
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like, don't don't worry so much
about protecting your IP, worry about winning
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in the marketplace and in an atmosphere
of transparency, and that's incredibly powerful.
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In closing her, I want to
just sort of plug your book, your
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Ted talk, your tube YouTube channel. I was going through all this stuff
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and I was like, this is
incredible, and I would urge everybody to
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go watch the Ted talk on why
we need open source because it is epic.
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I also think her YouTube channel is
incredible. And then why don't you
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talk a little bit about the book
and what it's about and so we can
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sort of get that out there.
Sure, thank you so much, and
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I'm glad you were like the videos
those are They're fun to do, you
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know. I felt audacious even thinking
I could do them, But it's been
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fun to do them. Yeah.
So my most recent book is called from
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Project to Profit, and those who've
been listening won't be surprised to hear that
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it's about how to build businesses around
open source projects. And it's it's a
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short book and it's really just kind
of a guide for developers also investors who
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are interested in how to build businesses
in this area, what questions they should
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be asking themselves. And then it
actually goes through a fair amount of detail
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about how to execute on different kinds
of business models in open source. It's
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written in a way that I hope
is accessible and easy to understand for people,
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and you know, I hope that
people can use the book to start
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wonderful businesses. I just finished the
audiobook, which was a lot of work,
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but so it's now I did a
vice. I'm not doing mine.
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I can't even I started difficult.
It's difficult to do. I managed my
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00:25:57.279 --> 00:26:03.880
way through it, but so now
it's paperback kindle in audiobook. Well,
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I want to thank you so much
for joining the podcast. I mean,
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you're an epic person and you're very
busy, and I think it's really nice
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that you're giving out. It's like
open source podcasting, you know, open
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00:26:15.880 --> 00:26:18.759
knowledge, you know, and you're
out here doing this and I'm sure everybody
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is grateful, and I certainly am. Thank you so much for your time
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and energy today. Well, thank
you, this has been great fun talking.
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I really appreciate the opportunity to talk
to you today. And that's it
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for another episode of Startup Science Podcast. If you can, please leave a
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00:26:33.240 --> 00:26:37.559
five star review on Apple or Spotify, I would really really appreciate it,
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00:26:38.160 --> 00:26:41.480
and founders as a thank you,
for leading the changes in our world.
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00:26:41.559 --> 00:26:47.880
I'm offering free access to the startup
science platform called Visionaries, the one stop
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00:26:47.880 --> 00:26:52.480
shop for founders. It has everything
from a startup academy, investor match,
325
00:26:52.559 --> 00:26:56.440
grand Finders, pitch Finders, and
a whole lot more. Go to Gregory
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00:26:56.480 --> 00:27:02.119
shephard dot com, click on Visionaries
and use the code Founders in all capitals.
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00:27:02.559 --> 00:27:06.240
You'll be able to check it out
for yourself until next time. Now
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00:27:06.359 --> 00:27:11.000
misday, my friends. This startup
science podcast with Gregory Shepherd is brought to
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you by startupscience dot Io. Founders
can log on too startupscience dot io and
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00:27:18.920 --> 00:27:22.960
use code Forbes to get free access. To connect and find out more about
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greg Go to Gregory sheepherd dot com. The Startup Science Podcast is a production
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of Forbes Books.
