I’m calling a ‘time of opportunity’ for London/UK internet startup industry

I’m getting very bored of being told we’re no good at Tech startup’s in the UK. I’ve calmed down since reading Paul Carr’s “I’m calling a ‘time of death’ for London’s internet startup industry” Guardian article, so this post won’t be a rant.  Admittedly Paul’s post is amusing , however he paints a very negative and bleak picture. If Paul is to be believed there’s no future for London/UK Internet startups. However, I believe there is hope and the UK Tech startup industry has great strengths.

Paul’s a journalist who once lived in London and is now housed in Silicon Valley. He believes “The London internet industry is increasingly, and terminally, screwed”. If Paul is to be believed shouldn’t we just give up! Why bother if  there’s no hope. While we are here lets cancel the 2012 London Olympics because the Beijing games were exceptional. There’s no way London could be the same. Just as we’re not Beijing, we are not Silicon Valley.

The Awesome Beijing Olympic opening ceremony drummers!! (Image source)

The investment funds sloshing around The Valley are huge compared to UK/European funds. The VC’s and Angel’s in the UK/Europe also tend to be much more risk adverse. Although these factors are changing  in the US with the credit bubble bursting. The UK’s limitations doesn’t mean we can’t produce a wonderful Olympics or make world class profitable web apps, we can. Huddle is a great example. Their ranked as one of the globe’s top 50 startups. Bebo is an excellent example of a very healthy trade sale. Sage a global leader was once a UK startup. The list of great UK startup goes on. Mike Butcher of Techcrunch Europe did a splendid job of correcting Paul on London’s startup profitability.

I and  many others agree that the Web 2.0 bubble is coming to an end. But the end is not death, it’s change. The Internet continues to deconstruct entire industries: advertising, music, newspapers etc. This change brings new potential innovation opportunities for existing and aspiring entrepreneurs alike. The Tech community has always been about and embraced radical change.  We are more adept at change than many other industries including Paul Carr’s Newspaper sector which Mike Butcher also pointed out.

The underlying Internet market continues to grow strongly. Ecommerce sales growth remains healthy even in the recession and the use of web applications are forecast to increase massively. The future of software is going to come from Internet based SaaS services and Open source. Again we have world leaders in the opensource sector with UK companies like Canonical and Alfresco. As entrepreneurs shouldn’t we take advantage of change to bring new opportunities. Or as Paul suggests should we give up hope and all the strengths that we have in the UK.

The future of software: Open source, but where’s the profit?

I’m fascinated by Open source. It’s changing how software is developed, marketed and customised but can commercial Open source firms make healthy profits? They have been grappling with this challenge since the 90’s.  “Keith Curtis, an 11-year veteran of Microsoft, believes deeply that open source is the future of software” as discussed by Paige Finkelman. It seems the old proprietary and open source models are dead and commercial Open source vendors are now evolving into a mixed hybrid model.

Is this the key to a profitable open source model?

This year I met two evangelical CEO’s of commercial Open source firms, Ismael Ghalimi of Intalio and Aaron Fulkerson of Mindtouch. Ismael attempted to commercialise with GPL licencing but had to restart his business twice, racking-up $43m $34m in debt investments. A recent report form The 451 Group entitled “Open source is not a business model” concludes,“There is very little money being made out of open source software that doesn’t involve proprietary software and services.” Stuart Cohen thinks that the Opensource model is broken and “open-source companies that rely on support and service alone are not long for this world.”

Open source firms such as Intalio and Mindtouch are increasing becoming a mixed model supplying both open source community versions and chargeable enterprise editions which are reliant on proprietary code. Whether they will make healthy profits is yet to been seen. We know it can be done. Red Hat is the leading Open source commercial provider with revenues of $400m (2007). Profiteering from an aquision as good as the Sun $1b purchase of MySQL is unlikely to come around again soon because the revenue challenge remains. MySQL makes a mere $60m from support and services. This compares against Oracle’s $22b in licence and service revenues.

Some concider MySQL a growing threat to Oracle. Conspiracy theorists see the Sun deal as trying to stop Open source growing so that the perpetual software vendors such as Oracle can continue to make huge profits. It turns out Sun’s aquision of MySQL is not going well with latest version having major bugs. Ismael believes that “traditional Software is a dead market with propriety software companies no long existing in the future”.

I believe this new hybrid Open source/propriety mix is the future of software. Open source brings firms like Intalio and Mindtouch a huge developer community and a powerful marketing channel.  Customers get cheaper, better software which is much easier to customise and integrate. This market change will spell the end of enormous profits for future software vendors.

However today’s big software vendors ain’t going down without a fight. Microsoft have taken a strong stance against Open source with accusations of patent violations. Some believe this attitude will change at Microsoft in the post Bill era as discussed by Dana Blankenhorn & Paula Rooney of ZDnet. I don’t think so. Does a leopard change his spots? The recession we are now entering is likely to be a long and deep depression. This pressure on budgets could be the catalyst which ushers in a new dominate software model into the market.

Does your CEO really believe “our employees are our greatest asset”?

Susan Scrupski had some strong words in her post about GenY and the self-serving behaviour of management 1.0:

“we excelled at the selfish art of Machiavellian achievement, in the end it took my generation down a path that led to, well, the S&L scandal, Enron, one-dot-oh greed, and now, the subprime meltdown. Our narcissism is our legacy.”

The caricature Gordon ‘Greed is good’ Gekko has become a real living nightmare reeking havoc on the economy. Is our current management of business now changing with the arrival of the next generation and their affinity with social media?

The social spark of Web2.0 is igniting Enterprise 2.0 and fanning the fire of management change. In addition Gary Hamel is banging the drum of a much needed management change with his trade marked term Management 2.0 and latest book. Many others must be in agreement with Hamel as he’s been propelling to the status of the most influential management guru.

Google has been put on a pedestal by academics such as Hamel because of its innovation model, flat management structure and people centric approach. Hamel recently interviewed Google CEO Eric Schmidt at the future of management conference, it’s long but if you ‘listen’ below there are some insightful pearls of wisdom from a seemingly un-egoistical 2.0 Manager.

Jeffrey Hollender and Keith Sawyer who were both at the event have produced good reports.

The similarities between Google and Opensource are strong. Both are increasingly challenging some of the world’s most profitable software business models and our current approach to organisational management. Neither Google or Opensource has a management hierarchy, they both carefully select the best employees/contributors and then engage and empower them. Interestingly this moves much of the managerial power from the self serving individual to the shared decision making of the collective.

However the Google and Opensource models are not without weaknesses. Most Opensource developers or contributors to projects such as Wikipedia have day jobs which pay them enough so they CAN contribute to a community as a hobby. Interestingly one of the motivations of Opensource developers is based on the ego. As for the Ad model, it breaks down when Ad revenues top out or if Ad’s are strongly rejected by visitors.

As examples the Internet poster child Facebook has been unable to fully capitalise on Ad revenues because of user kick back. In the case of Wikipedia, they are too worried introducing Ad’s in case of alienating their unwaged contributors.

Like the Google and Opensource models the next generation are challenging the norm, however they maybe warn down by management hierarchy and copitulate to make money and progress careers. Like many of us GenYers want to be happy and satisfied at work. They are increasing looking for firms like Google which give them the chance to have a real say in decisions so they can make a difference.

Scott Gavin’s GenY ‘Meet Charlie’ deck is a must see

If firms that embrace fundamental management change gain greater economic performance then most firms, through survival, will evolve this way. It is important to attract talented GenYers but they alone unaided are not going to be able to change a 100 year old engrained management hierarchy. However GenY and the catalyst of Social Media are critical parts of the jigsaw of change.

Enterprise 2.0, Boston Judgement Day (4) – Who should the customer believe?

With so many choices when selecting a Web2.0 Enterprise 2.0 strategy, who should the customer believe: the vendors; the analysts or themselves? Seeing the numerous vendors categorised at Tony Byrne‘s CMS session, selecting the right solution must be a difficult decision for any customer. I heard many customers during the conference say that the event was too much of a ‘Vendor fest’, which was echoed at the final ‘Town Hall’ feedback back session.

Despite all the vendors shouting from the rooftops the majority of the case studies presented were using Opensource applications (Three out of the five: CIA; Sony and Pfizer). Even the wonderful case from Lockheed Martin was customised on the ‘included’ version of Sharepoint with a massive 14,000 man day effort. Interestingly there was talk from Lockheed of Opensourcing their code and expressions of interest from the audience .

Was the stark difference between what we saw from the vendors and what we heard from customer cases because these users were early adopters (visionaries) prepared to work with unpolished Opensource? Or is Opensource providing the working products, with the help of in-house technical expertise, being demanded by customers. It is well know in the industry that some Opensource is better than commercial code.

Unfortunately I missed the opinions from Opensource Panel session at the Conference with Bob Bickel of Ringside Networks, Jeff Whatcott of Acquia and John Newton of Alfresco but caught up with them on John Eckman  MP3 recording.

Perhaps Enterprise businesses are now looking to free applications as in the Web2.0 world. It is a compelling argument, free/low cost and working products. There is no doubt Opensource is on the rise, as supported by Jeffery Walker of Atlassian. Yet only 5% of vendors at the conference were representing this large and growing community, a view shared by Kathleen Reidy and John Eckman. Interestingly some of the commercial products at the conference are reliant and partially build upon Opensource, some even up to 80% I was reliably informed! Customers maybe starting to question why pay for an application which is built on Opensource. The problem with Opensource is it can sometimes be poorly packaged and can need a lot of attention to set-up and maintain.

The cases presented at the ‘leading Enterprise 2.0 conference’ shows that customers are ‘baking’ or testing solutions before fully implementing them as recommended by Tony of CMS. Opensource offers a very attractive approach to testing and trying before buying. I believe customers are increasingly listening to each others experiences, believe less in the vendor’s promises and are more willing to use Opensource. However, as Milton Friedman said ‘There’s no such thing as free lunch’. Customers say they want more case studies and less vendor pitches. However, someone has to subsidise conferences and pay for the commercial development work to round Opensource products off for the mainstream.

I believe the balance between Opensource and the proprietary commercial software is going to change with many vendors having to move more towards a business model like MySQL(pre-Sun) or MindTouch who were at the conference. Because many of today’s vendors are so proprietary and lack flexibility they may not be able to make this transition. However the challenge Opensource vendors have is making healthy revenues from a very diverse, demanding and large customer base. Currently the most effective and successful software vendor model for the future still remains unclear.