Mulesource Raises Series B

Mulesource, the leading open source integration framework, announced today the successful close of a $12.5m Series B. Lightspeed led the deal, with return participation from the Series A leads, Hummer Winblad and Morgenthaler.



The raise reflects five important characteristics of the company:

1. large target market - the integration market is roughly $8bn
2. large pricing umbrella - incumbents' products sell for ~$90k/cpu
3. very active developer community - hundreds of contributors
4. mission critical use cases - high conversion rates from free to paid
5. ramping customer acquisition and bookings

As I wrote in a prior post, the closer to a transaction the higher the open source conversion rates. Enterprise risk controls demand that software that touches critical to revenue/transaction systems be supported.

The attached graphic, forgive my graphics design skills, helps me think through the opportunity

• how large is area A, ie the degree of overlap between a project with an active developer community and a enterprise use case that is mission critical?


• how much headroom is there in area B, ie the pricing umbrella created by the incumbents' price points, TCO, and cost of sale and implementation

I would argue that Mulesource offers a very large overlap, represented by area A, with 10x price umbrella support, represented by area B in the above graphic. The financing, but more importantly the amazing developer, customer, and employee acquisition traction validates the premise.

Congratulations to the team.

Mulecon 2007

Today, Mulesource, the leading open source integration software provider, held its inaugural Mule developer conference. The event proved to be a smashing success.

See my prior post on Mule here.

Over 100 developers flew in from around the world to share their expereinces, use cases and passion for the Mule project. For a company less than a year old, the size, diversity, and evangelical nature of the audience was simply remarkable to observe.

The best companies create ecosystems of customers, partners, and developers who realize their own economic interests and dreams via the given company's platform and technology. For example, both eBay and Microsoft benefited from the energy, investment, and activity of the thousands of companies in their ecosystems. The leverage possible when you are the fulcrum by which third parties leverage their businesses is powerful indeed.

Typically, creating vibrant ecosystems takes years to accomplish and material investments in developer, partner, and customer acquisition and development programs. Mulesource, riding the momentum of an authentically grassroots open source project, hit the ecosystem milestone within 9 months of incorporation.

Today, Walmart.com, H&R Block, Fimat, MLB.com, etc...presented use cases, reference architectures, lessons learned, competitors considered, and endorsements of Mule. For those interested in Mule, Eugene Ciurana's very detailed Mulesource case study from The Serverside is definitely worth reading.

For the prospects in the audience, hearing first hand why the largest mission critical applications in e-commerce, trade processing, tax form processing, etc chose Mule over competitive open and closed source vendors, many of which already had enterprise license agreements with competitors in place, proved invaluable.

Watching the developers share best practices and their genuine appreciation for Mule's flexibility, ease of use, and value helped me realize that the company is in the enviable position of having a fully functioning ecosystem where the interests of the ecosystem and the company are becoming fundamentally intertwined. Historically, that proved to be a very good thing!

Congratulations to the Mulesource team and to the many third party customers and developers who are driving the project and company forward.

The Three Most Important Letters in Open Source: CYA

Anyone who follows politics knows that one man’s given is another man’s question. In the software VC world, the merits of open source are regarded as givens- a business model innovation that brilliantly aligns customer and vendor interests.

However, outside of the software VC market, open source remains an enigma wrapped in a mystery. How does free pay? Is open source a backdoor towards communism? Is it anti-capitalist? Despite RHT’s market cap and the success of JBoss, I continue to meet many who question the wisdom and financial merits of open source.

Open source is rife with acronyms – GPL, MPL, OSS, etc. In my experience, however, the three letters in open source that matter most are CYA ("cover your ass"), not GPL…in fact, CYA best explains the economic incentives of open source customers. Simply put, customers will not deploy software into production, independent of whether developers think that they need support, that is not supported.

No IT manager worth his salt will put mission critical software infrastructure into production without a throat to choke. Telling the head of equities that trades are failing due to a software crash and that you have an email into a community forum asking for a fix will result in termination faster than you can say “dumb ass.”

In analyzing open source, I have talked to many developers who tell me they do not need support for many open source projects and that forums, list serves, and documentation provide the material they need to solve their problems. However, IT managers are focused more than ever on service levels and subscribing to open source vendor’s support subscriptions allows them to cover their asses if and when infrastructure fails and transactions are at risk.

If CYA is the key to monetization – what does that mean about the categories of software that are likely to succeed via an open source model? Fundamentally, the closer a product is to a transaction the more important CYA becomes. Applications that are not mission critical –content management, for example - run a material risk of developers using the GPL license and sourcing support from the community rather than via subscription arrangements with the vendor in question.

What other variables characterize successful open source companies:

• Established market- successful open source projects target established software markets where the incumbent vendors are over charging their customers for bloated, proprietary solutions. Famously, once RHT Linux met their enterprise expectations, Morgan Stanley’s purchases of Solaris servers fell off a cliff and the investment bank realized close to 10x cost reductions per CPU. Can you target a large market and deliver a standards-based product that allows IT organizations to grow their IT capacity at a greatly reduced cost basis?
• Evidence of organic pull most appropriately characterized by downloads, forum usage, etc.
• IP rights retained by C-corp established to commercialize project. Indemnities become challenging when it is difficult to provide documented attribution of source code ownership. Also, potential buyers will discount a company’s value if IP remains unclear.
• Active community – an active community of developers led by a project leader who is employed by the company
  

Next time someone asks you how free leads to fee…remember that IT managers and risk taking are oxymorons and that having a throat to choke while saving large amounts of money feels good!