How to launch a successful startup based on free software

by Bill Xu & Mikko Puhakka

January 6, 2009 Beijing

What's Free Software? Free software is a matter of the users' freedom to run, copy, distribute, study, change and improve the software. More precisely, it refers to four kinds of freedom, for the users of the software:

0. The freedom to run the program, for any purpose (freedom 0).
1. The freedom to study how the program works, and adapt it to your needs (freedom 1). Access to the source code is a precondition for this.
2. The freedom to redistribute copies so you can help your neighbor (freedom 2).
3. The freedom to improve the program, and release your improvements to the public, so that the whole community benefits (freedom 3). Access to the source code is a precondition for this.

I have wrotten some articles about the philosopy and the history of free software, to show why the software should be free(as in freedom). At the same time, many people always ask me the same question: "OK, Bill, I agree with you, software should be free, but how could I earn the money by free software?". Anyway, this is a question I have to face and answer, even it's no matter with freedom.

In this serial of articles, I'll talk this with Mikko Puhakka who is the famous free and open source software investor from Finland and he invested MySQL AB in 2000. Yes, he is also the mentor of ZEUUX. And we'll talk even more, to discuss how to launch your own successful starup based on free software.

About Mikko Puhakka

Currently Mikko is working as a researcher at Helsinki University of Technology SoberIT Laboratory, is an advisor to COSS (Center for Open Source Solutions Finland), Further he consults and advices select clients on Open Source strategies.

Mikko can be reached at mikko.puhakka(at)gmail.com, and his blog is http://blogit.digitoday.fi/opensource/

About Bill Xu

bill@zeuux.org
Founder of ZEUUX Community

ZEUUX is the leading free software community, and focus on promoting the free software movement in China. ZEUUX develops ZEUUX system, ZEUUX Free Software books and ZEUUX Free Software fashions. At the same time, ZEUUX operates the online ZEUUX community to serve the free software fans in China.

Bill Xu:

Dear Mikko, for the free software movement, Finland is a special country, because Linux kernel (and many other free softwares) was born there. I have been curious about this for a long time, and I think many Chinese people would have the same feeling like mine. Since you are the famous free and open souce investor from Finland, could you please tell us why Finland is in the leading status in the free and open source movement? Just because Finland has the long dark night? I don't think so.

Mikko Puhakka:

I believe one reason is in our education system that gives the students a lot of freedom in studies as well as puts less pressure on students as the education is free giving them a chance to have many hobbies, and to do hackings.

Bill Xu:

Could you please introduce the status of education in Finland? For Finn, what's the first time to use or own a computer?

Mikko Puhakka:

School is free and available by law to everyone, of course some schools and universities have stricter tests to see who will be accepted.

Already back in 2000 it was researched that 96% of young people use computer regularly, in a later study in 2003 it was found out that majority of 15-year olds had more than 5 years experience from using a computer. Further kids start playing with computers at home around the time they are typically between 4 and 5 year old.

Bill Xu:

For a student in Finland who could not afford a copy of authorized MS Windows copy, what would he do? To use the free software, for example, GNU/Linux? Or just use the un-authorized MS Windows copy(so-called piracy).

Mikko Puhakka:

Yes, I believe most are opting for the free software, even though there is some piracy, I believe around 30%.

Bill Xu:

From the business point of view, what's the difference between free software and proprietary software do you think? And why?

Mikko Puhakka:

I believe control is the biggest issue as users of free software are not dependent on any single vendor, the cost savings are not necessarily the driving force for opting to use free software.

Maybe one of the reasons is also the innovative way of trying to put new things in practice. For example public sector organizations are actively searching and also trying new ways to decrease costs of investments they need to use for fast growing demands of online services for citizens. This doesn't mean only searching and studying alternative solutions comparing to the proprietary solutions, but also making investments in practice to open source alternative.

"Services are basically same, when comparing to proprietary application software implementations. However, there is something more: now when the idea of open source has been understood by public sector, there is a growing demand to share solutions, modules and code to other public organizations; when something is done once, then why to pay again when other organization needs the same solution? I would call this a trend that no doubt will be seen growing and spreading to private sector as well. By understanding the idea early phase and by providing services using eg. OS enterprise applications, the business feeds itself. We have seen this happening in practice, when building online services for use of all citizens by using OS enterprise applications in our projects", says Jouko Hyppönen, Senior Partner of Proactum Finland.

"It is really something new that we haven't yet seen happening in practice anywhere else – not only the support or subscription fees, but the service is the key&qute; continues Jouko. " We are happy to share our modules and code to any public organization for re-use; and of course we encourage them to try and re-share what we have done once. The best thing is, that today they are also keen to do the same", continues Jouko. "I believe this will be the trend in coming decade".

Bill Xu:

Many people are doubting the feasibility of earning the money by free software, since everyone has the freedom to get copy of free software without fees. At the same time, there do have the successful companies based on free software, such as RedHat, MySQL AB etc. So could you please introduce the common business model based on free software? And which one is the best do you think?

Mikko Puhakka:

I think one of the key issues that confuses people is use of words such free software business or open source business. Free and open source software is a very effective way to develop and distribute software. Business is something that you build on top of that like the companies that you mentioned have done or companies like Google, QQ etc, that are building services on top of the software.

Bill Xu:

For an investor, why do you focus on the free and open source software field? I am very interested in this.

Mikko Puhakka:

Well, my main job is a researcher of free and open source software business models at Helsinki University of Technology SoberIT Laboratory, http://www.soberit.hut.fi/english/index.html so that of course gives me an idea of where I believe software industry is headed, therefore I believe the future is in the free and open source software driven businesses.

Bill Xu:

As we know, you are the investor of MySQL AB that was acquired by SUN Microsystem. I think this is a successful investment for you, could you please tell us the background of this investment, and why did you invest MySQL AB at that time?

Mikko Puhakka:

I knew Mårten Mickos, the former CEO from before and he introduced Monty Widenius to me in a networking function back in 2000. He said that they were looking to find an investment and that Mårten would be joining as a CEO if that were to take place. Now at the time MySQL already had a lot of users, but the business was quite small, so funnily enough it looked like a lot of dotcoms that had started to fail. So in other words it was a very risky investment which was our strategy at the time.

Bill Xu:

Could you please introduce more about your VC company, such as how much money do you manage now? or what's your standard of investment? or what business model are you interested in now?

Mikko Puhakka:

I don't have my own investment company right now, but I am advising a VC called Inventure and I sit on their venture board looking at free and open source opportunities. Inventure currently manages 51 million Euros.

The model that I am most interested right now is software as a service or SaaS model.

I also am an advisor to number of companies where I typically have some option or ownership arrangement. Companies such as Coneadvisor (Finland), Continuent (USA), eBox platform (Spain), Proactum (Finland) and TargetSource (China).

Bill Xu:

More and more Chinese are knowing the free and open souce software. And many people are launching their own startup based on free and open source software. What's your advice for them? For the startupers, how do they communicate with the investors and get the investment from VC?

Mikko Puhakka:

It is still very difficult in Europe and Asia, in the US they have had so many successes and investors have made a lot of money that for a while there was a big boom in making Open Source investments over there. We need some good success cases and the communication will become much more easier. I believe the simplest way of communication is to look at some benchmark cases from e.g. USA and refer to them. At the end it does come down to having a sound businessplan.

Bill Xu:

Do you have any investment plan in China?

Mikko Puhakka:

I have been looking to find what would be the right approach to China, and the possibilities are becoming slowly clearer.

Bill Xu:

Now almost everyone is talking about the financial crisis, and many companies are laying off employees, they will reduce the IT budget definitely. You know, the solutions based on proprietary software are expensive and full of restriction for the customers usually. In the current economic climate, I believe more and more companies will use the free and open source software in their IT infrastructure. Do you think this is a good opportunity for the companies whose business model are based on free and open source software?

Mikko Puhakka:

Yes and no, while companies are certainly more cost sensitive, one outcome can be that no investments will take place on new technologies.

Bill Xu:

At the same time, during the financial crisis, it's hard to get the investment from VC for the startupers, and they have to face more difficulties than before, could you please give some advices to the startupers? How could they walk out of the valley of death? What's the secret to launch a successful startup?

Mikko Puhakka:

One should concentrate on getting the initial funding from customers rather than from investors. The investors will come once you have a sound business, this will also help the companies focus on pleasing the customers rather than investors which is a key for success.