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J2EE Journal: Article

"Professional Open Source" - VP Discusses JBoss's Venture Funding Strategy

"Think of it as V2.0 of the company," says Bob Bickel.

Bob Bickel has been busy since JBoss announced on February 19 that it had closed on $10M in VC funding.

A week on, he thought it might be useful to review the logic behind the move and answer some of the commonly asked questions. Innovatively, he addresses them in a blog.

"The simple reason to move forward with VC funding," writes Bickel, "is that it helps enhance the Professional Open Source business model."

What does JBoss mean exactly by that term, 'Professional Open Source'?

"We think that there are a lot of developers, IT shops, software, systems and integration partners," Bickel explains, "that want a 'safe' open source project to use."

By 'safe' what Bickel means, essentially, is two things: 24x7 production support and partners

"24x7 production support is not only someone answering a phone or e-mail," he stresses, "but having an escalation procedure in place, improving our ability to fix bugs, provide patches and roll them into future release cycles."

As for partners, "JBoss is very, very widely used by software, systems and integration vendors," Bickel says. "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," Bickel continues. "JBoss's business had grown to the point where it needed to move to the next level. Think of it as V2.0 of the company."

Bickel then lays down exactly what the new business plan entails.

"We 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," he says.

"Over the past year, there's been a major shift in who's using JBoss and how they're 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," he adds, "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."

Will JBoss continue to be an LGPL biased company? Yes, Bickel says. "We think this gives our customers and partners the assurance that the software stays free, and partners are able to embed the software," he adds.

This is a good business model, he says, because JBoss's 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."

But is it truly Open Source, to take any money at all from customers? Bicken says it is. "Open source refers to the license under which we release our software," he points out, "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," he continues. "Well, it's 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.)"

Does it mean the JBoss app server will go the same way as Enhydra? "No way," says Bickel. "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? Bickel is clear. "We want to continue to expand the projects, and this will help in a number of ways."

"First," he says, "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."

How about the whole question of whether JBoss makes a profit, whether it's cashflow positive, whether it 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," Bickel reports, "JBoss was both profitable and cash flow positive."

"And, yes we can really grow," he adds. "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."

Why then the need for outside funding?

There are several reasons, Bickel says. "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," he continues, "they bring the experience of helping companies go through the growing pains. They help set up appropriate governance models, through 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."

Having cash in the bank, Bickel adds, assures customers and partners of the stability and viability of the company. Plus "It enables the company to make investments ahead of the revenue stream to ensure that we continue to satisfy customers and employees."

JBoss had looked at several VC companies, Bickel says. But "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."

As the world now knows, David Skok is the partner from Matrix who will join the JBoss Inc board. "He had excellent experience," says Bickel, "not only starting and running several companies himself, but was the Founder and CEO of SilverStream, a middleware and application server company."

It was while JBoss was doing its due diligence that another partner started to stand out above others, tells, namely 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? The intention is to spend very little of it, Bickel says. "We don't 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."

The JBoss Group had the corporate structure of an LLC, Bickel explains, but it is 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," he says. "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."

JBoss is also in the process of assembling a Customer Advisory Board, says Bickel, 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 it all mean to JBoss employees? "This is good news for JBoss employees," Bickel declares, in conclusion. "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."

More Stories By Jeremy Geelan

Jeremy Geelan is Chairman & CEO of the 21st Century Internet Group, Inc. and an Executive Academy Member of the International Academy of Digital Arts & Sciences. Formerly he was President & COO at Cloud Expo, Inc. and Conference Chair of the worldwide Cloud Expo series. He appears regularly at conferences and trade shows, speaking to technology audiences across six continents. You can follow him on twitter: @jg21.

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