JBoss, Inc. Venture Funding Strategy
[ Bob Bickel ] [Permalink]
JBoss announced that we closed $10M in VC funding on Feb. 19, 2004. I thought it might be useful to review the logic behind the move and answer some of the commonly asked questions.
The simple reason to move forward with VC funding is that it helps enhance the Professional Open Source business model. We think that there are a lot of developers, IT shops, software, systems and integration partners that want a "safe" open source project to use. There are a couple of key elements to making this open source project "safe":
- 24X7 Production Support. This is not only someone answering a phone or email, but having an escalation procedure in place, improving our ability to fix bugs, provide patches and roll them into future release cycles.
- Partners. JBoss is very, very widely used by software, systems and integration vendors. These partners add value to the core JBoss and take the combined product or service to market. By having a company like JBoss standing behind the open source project and continuing to move it forward, as well as provide that back end production support, these partners can feel more comfortable continuing their investments in JBoss.
- There are plenty of other areas like Training, J2EE Certification, Indemnification, etc. that benefit from having a real company stand behind them. JBoss' business had grown to the point where it needed to move to the next level. Think of it as V2.0 of the company.
What is the business plan?
JBoss laid down a new business plan in September, 2003 that was based around shifting from a consulting focus to helping customers that had moved or were moving JBoss into Production environments. As mentioned above, the two key components are the 24X7 Production Support and the JBoss Authorized Service Partner (JASP) program.
Over the past year, there has been a major shift in who is using JBoss and how they are using it. Customers are moving JBoss into real production applications - enterprise level, mission critical apps. This coincides very well with our recent offerings of Production Support. We have seen Production Support cause a steep increase in the company's bookings, and we find that customers are not only saving money on licenses, but our pricing based on the number of applications, and not the number of CPU's is a lower cost model that is easier to administer. Additionally, a number of partners are entering into third level support agreements with JBoss. This is good because it keeps our sales and marketing costs low.
We will continue to be an LGPL biased company. We think this gives our customers and partners the assurance that the software stays free, and partners are able to embed the software.
This is a good business model because our development costs are lower Due to the power of the community and the productivity and quality of open source development. Additionally, our sales and marketing costs are low.
Taking money from services customers - is that Open Source?
Yes. Open source refers to the license under which we release our software and the existence of an open community of developers. And of course, because of the LGPL, the software is and will remain free to use.
A better question is what happens to the money we make from selling services - well it is used to pay the employees who drive the company forward. Just like any business. This means that JBoss developers are all making a decent living and working on open source software that is very widely used. For some people, this beats coding for free. (JBoss is not forcing anyone to pay us to use our software, nor do we require anyone to use our services.)
Is this the next step to doing an "Enhydra"?
No way. Enhydra was an early open source app server that changed their business model to selling a commercial version - this ended up ruining the project and the company. Not only do we believe strongly in the idea of a free license to JBoss Application Server, but the LGPL license makes sure that it will always be free.
What does this mean for future contributors to the JBoss open source projects?
We want to continue to expand the projects, and this will help in a number of ways. First, it allows us to continue to hire the best JBoss contributors (take note developers wanting to join JBoss: the best way is to get recognized by committing). Second, a lot of our partners are starting to contribute. As our partner network builds out we will have contributors from Apple, HP, Unisys, WebMethods, Iona, Ascential and many, many others. Third, we strongly encourage the academic community (we sponsor several projects at different Universities). And we want the individual developer contributing. We try to give our contributors recognition via the web site, and the LGPL does not require you to forego your copyright to your code. So, we are completely open and encourage all to join us in continuing to build great open source middleware.
Does JBoss make a profit? Is it cash flow positive? Can it really grow?
In spite of tripling revenue in 2003 over 2002, tripling employee count and paying Sun a very large fee for J2EE Certification, JBoss was both profitable and cash flow positive. The company had a profit sharing plan for all employees. Sure, it is easier to grow an early-stage company, but this is a significant achievement.
And, yes we can really grow. BEA has over $250M per year of revenue just from Support of just the WebLogic Application Server. There is room to grow a large company.
If things are going so well, why do you need outside funding?
There are several reasons. Probably the most important is that the company needed to move to the next level of maturity and ability to execute. To enhance our truly outstanding 24X7 Production Support, and to keep the technology pushing forward, we need to further professionalize our development community (be more than a loose connection of developers).
A top quality VC brings much more than money, they bring the experience of helping companies go thru the growing pains. They help set up appropriate governance models, thru due diligence assure proper accounting, contracts, employee agreements, option agreements, etc. are put in place. They help build a management team that can continue to expand the company and provide opportunity for existing and future employees. They help assure that their investment companies are truly providing value to customers.
In addition, having cash in the bank assures customers and partners of the stability and viability of the company. It enables the company to make investments ahead of the revenue stream to ensure that we continue to satisfy customers and employees.
Why did JBoss end up with Matrix and Accel?
JBoss was a very attractive investment. Revenue IS growing fast, we are profitable and cash flow positive. We have a new business model and plan that make sense, a great set of products, and some very talented people. JBoss did not have to call one VC - we were deluged with inquiries and interest.
We were looking for several things in a VC partner:
- They had to agree to our services model. Many VC's wanted us to sell a higher functionality version for a price - and we immediately cut those off.
- They had to have experience in Middleware and Java and understand our space. We did not want pure finance types.
- They had to be able to work with us on a day-day basis to grow this company. That means that we had to like each other, respect each other and help each other grow.
- They had to have an excellent reputation and track record. Tier 1 VC firms like Matrix and Accel are quite simply very good to work with.
- We wanted to keep control of the company - meaning we did not want to give control over to the VC in terms of ownership % of the company.
We talked to at least a couple dozen VC firms. We attracted a number of "term sheets" (these are offers to invest in your company at a certain valuation and % ownership).
Matrix was the first firm to really step up and aggressively show their interest in investing in JBoss, and the type of value they could add. David Skok is the partner from Matrix who will join our Board. He had excellent experience, not only starting and running several companies himself, but was the Founder and CEO of Silverstream, a middleware and application server company. We had a number of meetings with him, and he introduced potential partners to us. Matrix was the first company to give us a term sheet. They also showed great patience as we did our due diligence and talked with other firms to make sure that Matrix was the firm that made the most sense.
While we were doing that due diligence, another partner started to stand out above others - Peter Fenton at Accel. He, like David, really understood this space, and was very interested in working with us. Accel demonstrated their commitment to JBoss by agreeing to let Matrix take the lead investment position, yet committing to be an integral part of our success moving forward.
What will JBoss do with the money?
We intend to spend very little of it. We do not want to get into a "bubble" type of situation. It will allow us to spend a little bit ahead of revenue, but we have set some internal guidelines on this. Our business model is strong enough to give us excellent "visibility" because we are mostly in the support business. This means we may sign a support contract, but we do not count that revenue initially - we distribute it evenly over the next 12 months.
In terms of what the company will be growing, the typical things of a growing company - Development (our lifeblood), Support infrastructure, Management, Sales, Marketing, Finance and HR.
You talk about JBoss "maturing" by having this VC funding - what does that mean?
JBoss had a corporate structure of an LLC, and we are now a "C Corporation". This means we have a cleaner, more open structure. For example, our employees all get stock options. Also we have a better governance model by having a Board of Directors.
Our business plan also calls for growing the company and assembling a management team with broader experience. For example, we have added a new CFO, Cary Smith who came to us from Earthlink. He was the VP of Finance and Corporate Controller there. He was responsible for all SEC reporting, opened up offices across the globe, did acquisitions, etc. We hired a Director of Operations, Tom Wix, who will have responsibility to make sure we are delivering our services with our customers. And there will be more to come.
We are also in the process of assembling a Customer Advisory Board as well as a Partner Advisory Board. These will both review our technology and business plans and offer insight and advice on our directions. In addition, a user Conference is being planned for this fall.
What does this mean to JBoss employees?
This is good news for JBoss employees. It means the company keeps growing and offering new opportunities for everyone. It also means that they can see the value of their options in the company, and can have a sense that we are heading it he direction of continued success.
-Bob Bickel
VP Strategy and Corporate Development
JBoss, Inc.
Other questions? Please send them to me at bob.bickel at jboss.com.
Posted on Fri, 27 Feb 2004 10:29 by ( day(s) old) Trackbacks [0]
