The Business of Open-Source: A Conversation with Heather Meeker (Part Two)

Forbes Books presents the Startup Science Podcast with Gregory Shepard, brought to you by startupscience.io. Greg is an entrepreneur who has built and sold 12 businesses. He's a recipient of 4 private equity awards and is a featured TEDx speaker and Forbes author. Here's Gregory Shepard.

I'm back with Heather Meeker, general partner of OSF Ventures. S Capital, an early-stage venture capital fund that only invests in commercial open-source software development. A couple of years ago, Heather was named by Business Insider as one of the top 10 most transformative people in the tech industry, alongside the CEO of Salesforce, Stripe, and Microsoft. We covered the entrepreneurial side of open source in part 1, and now Heather If you're an investor and you're looking to invest in open source, what are the things they need to be looking for?

What we do at our fund, maybe the answer is a little bit different for what we do at our fund to some other investors, but I'll start with what we do because that's known territory for me. So we're really early-stage investors. And so what we want to see when we're looking at businesses is we want, we want to see a great project. Obviously, that's kind of the, the price of admission, right? We want to see that it, it is going to have a good market. And one of my favorite things to ask people about open source businesses is think of a software product that everyone uses and they hate, right? And then do the open source alternative to that, because the open source alternative is likely to be like more right-sized in terms of features and functionality than proprietary products. One of the problems with proprietary products is that the way that the companies sell, like upsell, is by just adding features. And we've all experienced using software and it's got 10 billion features of which we only want to use like 5, right?

Yeah.

And they keep adding features because they're selling maybe to the next biggest user. They're maybe trying to sell updates. That doesn't tend to happen as much with open-source-based products because the community will vote with their feet, right? So it keeps people honest. It's really great to say, okay, here's a product that everybody uses and everybody hates, which means there's a big market for it, but we're going to do something that satisfies the needs of users more. Well, I mean, there's— that's a great formula for a successful business, right? So that's, that's definitely one thing to look at. So it's also a lot— I mean, any investor would tell you this, but it's a lot about the people. You have to have people who are going to be excited about running a potentially big business if you're doing venture investing. And, you know, some, some developers are great at development, but they don't really want to run a business. And if that's the case, sometimes they partner up with someone who's kind of more on the business side. But some of the developers also really grow into a business leadership role. So we want to make sure that we have people who are really committed to running something as a business, as opposed to, I want this to be a government-funded project, or I want it to be just a nonprofit or something like that. And you get great developers who are in open source, but they really just— they want to do something smaller. We need to make sure that there are people who are going to be leaders and also going to be business leaders.

One of my specialties is I studied why, when, and how founders fail and wrote a book about that. And so I understand this really well. And what I saw in the data is that a lot of the founders that are failing are actually engineers that came in, you know, thinking, I'm gonna build an amazing product and then build it, business is gonna build itself.

Yeah, right.

And so when I talk to investors a lot, they, they're like, look, there's a whole lot more going on here than building a great product. I've seen good products fail and bad products win, right? All based on the founder.

Yeah.

So, you know, what would you, how would you, if you're talking to these investors and you're trying to help them understand how to understand the risk profile associated with this founder, not the product, because when you look at investing in open source, as you said, a lot of the data is visible and transparent. So you can kind of go, oh, it's got product-market fit, people like it, you know, it's moving along, you can see that they're fixing the problems that the users care about, blah, blah, blah. But it doesn't tell you anything about the founder, right? And whether or not the founder can, can support the stress, weight, and, you know, the management duties and some of the soft skills that go along with building a business.

Yeah.

Is there something that you could say that would help investors understand this side of the world?

Now it's time for the harsh reality of business, right? Which is that if you're gonna start a business and you want it to be a really successful business, You are going to spend minimum two three years of your life minimum right completely devoted to this business. It is going to take over your life. You're not going to do anything else, and some people are not in the right place in their life to do that. You know, I mean, and I'm just being you know practical about this. Like I couldn't do that at the place that I'm at in my life.

Right.

'Cause I'm further on in my career. Mostly it's gonna be people who have more runway ahead of them. They vary in age a lot, but you can tell from talking to founders, like, how committed, they have to be totally committed to the business, right? As a corollary for that, I would say that I talk to founders who say, We have this really great project. We want to turn it into a business, and we know we can get some government grants to do that. And that's nice, but I don't even like them to have that mindset. I want them to have the mindset of, we're going to go out and we're going to create a great product and sell the product and get revenue and finance the business that way.

Yeah, because those grants, they delay the inevitable sometimes.

Well, also, they, like, they can cause the project to be too reliant on that. Like, there's not as much immediacy of need to get a product out there and go to market and scale.

Yeah, yeah, yeah. You're totally right, 'cause they'll get the couple hundred grand, 500 grand, a million, whatever, and they'll be burning through that. And then all of a sudden, we're outta money, and they don't have any customers. And then investors are like, hey, that's great. You got a great product, and you got a grant, but, Where's the proof?

Yeah, I'd rather have them engaging with customers, potential customers, even if at the beginning they're giving it away, right? But they need to be engaged in commerce and they need to be looking towards funding the business with revenue instead of funding it with grants or, you know, or even a lot more investment. The whole thing about open source businesses, they usually don't take a Ton of capital to create. And so if everything works correctly, you do maybe a seed, maybe an A, and you don't have to go too much further than a Series A, right? Because by that time they should be getting revenue, right? I just don't like to see them relying on the idea of getting a grant so that like, okay, that's going to give us another year runway. Well, no. I, I want you to I want you to get a customer to pay you that money instead of the government.

Yeah.

And also, like, where are you, you know, where are you getting your requirements from? Are you getting requirements from your base of engineers that are building stuff or the actual customer that's buying it?

Yeah, exactly.

I see that a lot too, where they're just, they're just building and building and building because there's all this excitement in the community and the actual customer hasn't been approached yet.

Yeah, right.

You know, and then, you know, and it's like Mike Tyson said, You know, everybody's got a plan until you get punched in the face.

Well, that's what business is like, definitely.

You know, um, so why is open source a really good business bet for investors and for entrepreneurs during inflation and recession? You had brought this up a couple of times in things I've read, and I was fascinated and wanted to share that with, uh, the listeners.

Well, so I started thinking about that idea based on, through my own anecdotal experience with open source. The, like, open source skyrocketed during the internet bust, okay, which is kind of near the beginning of my career. And I was just so blown away by the trajectory of adoption during that time. Because things were riding really high and all of a sudden everything goes to hell in a handbasket. And then everybody's looking to open source because it's, it's, it's not free if it's a product, but it's cheaper and better than the proprietary alternatives. So people started abandoning proprietary and going towards open source during the internet bust. And so then I thought, I should do a little bit of analysis of this. And I took a whole bunch of successful open-source businesses, and I looked at when they were started. And an amazing number of them were started during recessions. Open-source businesses do really well during recessions for a few reasons. One is a lot of developers are out of work during recessions, right?

Yeah, they get laid off.

Yeah, so they'll go and they'll start working on a pet project. And then once the recession starts to turn the corner, which hopefully is in like 1, 2, 3 years, right? They've got something they can really sell. And when I looked at the data, that really seemed to be borne out. People were doing development during recessionary times and then catching the wave when the economy came back.

The market turned. Yeah.

Plus, As I said, they're so capital efficient that, you know, during recession and inflationary periods, capital really dries up, and you need to be really lean and mean to get through those times. I'm just like, with our fund, I'm just so impressed at what the founders do with so little, right? They are really like really run a tight ship. They don't spend money on stuff that's unnecessary. They don't have to spend a lot on marketing. It's mostly kind of word of mouth. They don't have to spend money on market research. That stuff mostly comes to them. So, you know, as an investor, when it's difficult for you to be raising capital from your own investors, your LPs, right, you want to make sure to use the money as efficiently as possible, because during recessionary times it's hard to get stuff. During inflationary times, the money is going into other places and it's much harder to get it into something like venture. We've been seeing that in the past year. So it's a great thing to be doing during that time because you're, you're squeezing like all the utility out of the money that you have.

Yeah, I've noticed that they, they are extremely frugal. with how they go about it, sometimes too frugal. You know, they get into go-to-market and they're not spending. You're like, hey, we need to get this in front of customers, you know?

Yeah, it's a delicate balance. I mean, I don't mean to say that it's easy. It's never easy to run a business, but you can take advantage of so many efficiencies with open source. Also, like, I would say that almost every business we've invested in, has people all over the world working for it, right? So, so it's very geographically dispersed. So that means when one country goes through bad times, you can, you can employ people there. It helps even out the work for them. It makes the, the, the, the human resources less expensive for the company. So people can really take advantage of different markets. And different locations, because open source has always been geographically dispersed. That's one thing open source did before, like, the rest of the economy had to do it during the pandemic.

Yeah, it was interesting when the whole Russian thing started. I saw the number of engineers available drop significantly. Yeah, and the price for those that are available go way up.

Yeah.

As we lost a lot of the Eastern European engineers and the Russian engineers, which, I mean, it's a shame. That is just really awful.

Yeah. In Eastern Europe, it's kind of a pet topic of mine. Like a lot of the former socialist republics, when they kind of restarted their economies after the end of the Cold War, Software was a really attractive business because it didn't require a ton of infrastructure and had a lot, a lot of smart people to throw at it. And so there were a lot of, you know, really successful people coming out of the former USSR, and there still are today. So it's great to be able to enfranchise those people into the technology community and have them work with people all over the world. When the pandemic and then the war started, what a lot of people were asking me as a lawyer is, how do I pay my developers with Bitcoin, right?

Yeah, right? Yeah, I've heard that too. It's, we share a lot of, I have 14 companies in my portfolio, and, you know, so a lot of times I'm having these conversations and running into the same stuff. And I really favor open source too. I'm a huge fan of open source. Back in the day, in the '80s, I was coding when it first started, you know, and I haven't touched the command line for like 20 years, but for a long time I really got into it. I still keep up with it and understand it. Let me ask you, what business models do you think would perform best in open source if you were to break that? You know, like, so if you look at CRM, you had Sugar who came out with their open source. You know, and so on and so forth. So, what would you say is a good vertical to dive into for open source? I'm sure that the engineers listening have their pens out, or they're actually— who uses a pen anymore?

Well, their styluses. Yeah, this kind of goes beyond market verticals, but if you had to pick one business model that tends to work really well with open source, It's what we call an open core model backed up by SaaS. So what you do is you develop some core functionality and you release that as open source. And then around that, you build software as a service. That model seems to work really well. The interesting thing that's happened in the past, I don't know, 5 to 10 years, is that We knew that was a proven model in infrastructure software, right? But what's happening today is it's becoming a much more popular model in applications as well. Like, open source businesses used to be really centered around infrastructure, you know, from Red Hat to all the database companies and, you know, content management and so forth. But now when you look, there are a lot of top-level applications, and it's also working for them. So most of those businesses have some core of open-source software, and then they have some additional services or software that they sell that is complementary to the open-source software.

Do you think that, you know, sometimes you get investors or corporates, you know, corporates that are looking at making an acquisition into a space, concerned about the transparency that's in open source. You know, they'll say, well, I need to own this. I don't want it to be available to, you know, you know what I'm talking about. I could tell by that smile. How would you combat that sort of comment?

You know, I hear that all the time.

Right.

I actually think that it's usually an overblown concern. There are definitely situations where you might have a lot of sensitivity about looking people looking into how the software works. But I really think that people fear that a lot more than it really needs to be feared. Um, if it's, if it's an issue because of security, yeah, I would like pay a little more attention to it. But if it's just an issue because you don't want people to figure out what you're doing, I don't think that's actually a very effective business strategy. You need to be selling based on great products that solve problems for people. And you shouldn't have to worry about people copying you just because they can see what you're doing, because they should not be able to do the products as well as you do. It's, it's not enough to just see how you're doing things. It's how you execute that matters. And that's, you know, that's where people really add value and make money. Plus, you know, users really want transparency. That's something that, like, the whole open source movement has changed user expectations about what transparency you should have for your software build materials. And these days you can't just tell users, well, we won't tell you that because we're sensitive about it, or, or some kind of, you know, oh well, you know, it might expose us to our competitors or something. They want, they want the transparency, and it's something that they actually demand in the marketplace now.

So one of the things I hear is, you know, somebody will say, well, you know, if they can see everything you did, to your point, right, if they can see everything you did, can't they just create the same thing? And yeah, where's this, where's this, you know, they say the quote special sauce, right? Yeah. And You know, and I tell them, I say, well, how many deals have you invested in where there's a patent? And they tell you, and I'm like, well, same thing, right? They just gave you the instructions on how to build or reverse engineer or work around the patent that you have.

Yeah.

Right? So there is no escaping competitors' abilities to go figure out what you're doing and try to do it better. And that's just, you just have to be better.

You're exactly right. I would extrapolate that, I 100% agree with you. And I would extrapolate it to say people overvalue the pure intellectual property value of things, which would be patents or it'd be like algorithms and secret sauce and so forth, when actually most of what customers pay for is execution. What people are worried about with secret sauce is forestalling competition, but it's a lot better to blow your competition out of the water with great products Than it is to just rely on them, you know, not being able to copy you because of an intellectual property right. That is a short-term solution, believe me. But if you make great products, that's how you really blow your competition out of the water.

Yeah, I mean, look at what Google did competing with Microsoft, you know, with the Office suite. It's very interesting, and I agree with you 100%. Just make something better.

Yeah, exactly.

I'm not a big fan of the coin-operated approach that a lot of people take in building startups and more focusing on what problems does it solve and does it solve the problems better than anybody else? And then to your point, I think that the user experience is what it comes down to. The user doesn't care about what's behind there.

No, they don't care. They don't care at all, right? They, they don't— they don't care if you have a whiz-bang algorithm. What they want to know is, I have this problem. Can you solve this for me with the least amount of expense and pain? Right?

Yeah, exactly.

That's what they want to know.

Experience, right? Like, people always think about, you know, you look at user interface, UI/UX, right? And people oftentimes, I find, forget about the UX part. Like, how do they feel when they're using it? Are they feeling frustration? Or are they feeling like, oh, this is— and they're just kind of going through the process? And if you look at sort of like engineering product, big companies like Apple, you look at Apple's process. In the beginning, Apple's process was beautiful, right? So easy. And then they started to add all these different functions, and now you start to get people that are frustrated. Like, you know, and the, you know, the idea of changing the power cord. I know that the most recent one had to do with Europe changing the standards on the plug, but they still got blamed for it because they had a reputation of changing out the plug. You know, yeah, and it frustrated the users. And, and even to Apple, they forget where they came from. They forget that the whole concept was super easy user experience. Like, you shouldn't have to be thinking when you're using software. You should be floating through the software.

Yeah, exactly. And, you know, so, uh, one of the people I've been fortunate to meet during my, um, my adventures in venture capital is Bob Young, who was one of the founders of Red Hat, right? And he's a great guy, by the way, but he was a typewriter salesman, basically. And then he like started to find out about software, and his idea about it was, wait a minute, you can give people exactly the software they want and access to source code, you can still sell that? Why would we not do that, right? But part of that was because he had not come from a background of the technology industry where people are like, we gotta protect our IP, we gotta protect our IP. He was a salesman, right? And he was like, this is what people want, I'm gonna give it to them. And that's really kind of the whole mentality of the open-source business model. It's like, don't worry so much about protecting your IP, worry about winning in the marketplace and in an atmosphere of transparency. And that's incredibly powerful.

In closing here, I want to just sort of plug your book, your TED Talk, YouTube channel. Uh, I was, uh, going through all this stuff and I was like, this is incredible. And, uh, I would urge everybody to go watch the TED Talk on why we need open source because it is epic. Um, I also think her YouTube channel is incredible. Uh, and then why don't you talk a little bit about the book and what it's about, and so we can sort of get that out there?

Sure, thank you so much, and I'm glad you were like The videos, those are, they're fun to do. You know, I felt audacious even thinking I could do them, but it's been fun to do them. Yeah, so my most recent book is called From Project to Profit, and those who've been listening won't be surprised to hear that it's about how to build businesses around open source projects. And it's a short book, And it's really just kind of a guide for developers, also investors who are interested in how to build businesses in this area, what questions they should be asking themselves. And then it actually goes through a fair amount of detail about how to execute on different kinds of business models in open source. It's written in a way that I hope is accessible and easy to understand. For people. And, you know, I hope that people can use the book to start wonderful businesses. I just finished the audiobook, which was a lot of work. But so it's now available. Did you do it yourself? I did. I did it myself.

Oh man, I'm not doing mine. I can't even. I started one.

It's difficult.

This is embarrassing.

It's difficult to do. I managed my way through it. But so now it's, Paperback, Kindle, and audiobook.

Well, I want to thank you so much for joining the podcast. I mean, you're an epic person and you're very busy, and I think it's really nice that you're giving out— it's like open source podcasting, you know, open source knowledge, you know. And you're, you're out here doing this, and I'm sure everybody is grateful, and I certainly am. Thank you so much for your time and energy today.

Well, thank you. This has been great fun talking. I really appreciate the opportunity to talk to you today.

And that's it for another episode of Startup Science Podcast. If you can please leave a 5-star review on Apple or Spotify, I would really, really appreciate it. And founders, as a thank you for leading the changes in our world, I'm offering free access to the Startup Science platform called Visionaries, a one-stop shop for founders. It has everything from a startup academy, investor match, grant finders, pitch finders, and a whole lot more. Go to GregoryShepard.com, click on Visionaries, and use the code FOUNDERS in all capitals. You'll be able to check it out for yourself. Until next time, namaste, my friends.

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