I had worked in Russia in the early 1990’s as the Business Development Manager for Oracle’s Eastern European operations. We went into the country just before the Berlin Wall came down. It was still the USSR, and our main concern was trying to get the then worthless Roubles converted into dollars that Larry Ellison would appreciate. It was rumored that Larry once swore that the only way Russians would get Oracle was if it came in on a B-52. We were trying to change all that. We worried about piracy, we worried about theft of intellectual property, we worried about exorbitant taxation and (ahem) dynamic legal system.
Twenty years have gone by. The wall is down, the USSR is no more, but many of the issues past still haunt anyone trying to do business “over there” — the legal system is still hard to understand, repatriating profits is a challenge, and there are stories about corruption, crime, and rigidity of the Russian establishment.
Since Russia has always been on my mind, I often thought about finding ways to build software companies that could, on the one hand, leverage the tremendous potential for technical innovation in my former country, but, at the same time could avoid the traditional financial pitfalls that challenge anyone trying to do normal Western-style business. I did not like outsourcing businesses. I did not like the “clones” of U.S. consumer internet products.
Open source software and companies that encourage its development seemed to me as a clever way for Russia to alter its image as a land of software piracy, clever algorithms used exclusively by its military, half-crazy scientists, and borderline psychotic oligarchs. Here was an approach to building free software by communities of developers that are compensated for the software’s utility to the community and the world as a whole. There are no IP issues — the software is free and the code is available and, if the code is free, it can not be pirated or stolen. There are no crazy payment schemes. There are plenty of “hard currency” companies willing to pay dollars for solving the problems open source software can solve. Open source software development does not need “campuses” and “data centers” — it takes people with small computers connected to the internet — something the country now had. Open source rewards technically talented people whose talents are judged by a community of their peers, not state committees. And Russia always had plenty of technical talent respected by even the hard-core Western scientists.
In 2010, my becoming a full-time investor coincided with a flurry of activity after the establishment of Skolkovo and a visit to Silicon Valley by Russia’s president Dmitry Medvedev. I started recalling arguments I made during the last couple of years about Russia’s potential as an open source software power. After a meeting with some Russian government officials associated with Skolkovo, I decided to write down some of the points about why it would be interesting for an American investor to consider allocating funds to Russian open source technology startups (and funds that invest in them). Always trying to find an unfair competitive advantage, my thinking led me to look at the proposition that not just software but, open source software, could be a key to Russian software business’ coming of age.
So, here are some of my arguments on “Why Open Source in Russia?” Ironically, I wrote the paper in Russian first, and this is an English translation. For those of you who read Russian, here is the Russian version, or PDF.
Why Russia Should Invest in Open Source?
- Proven commercial success attractive to investors
For a long time, RedHat was seen as the only commercially successful open source company. Its market cap reached $8B. During the last five years, in America, other commercially successful open source software companies have appeared: MySQL (acquisition, Sun: $1.2B), Springsource (acquisition, VMare, $425M), Xensource (acquisition, Citrix: $500M). Major venture capital funds in the U.S. and Europe have invested and continue to invest in open source companies: Benchmark Capital (RedHat, Terracotta, Springsource, MySQL, Pentaho, Eucalyptus), Sequoia (Sencha, 10gen), NEA (NetSuite), Kleiner (Jive), Index (Pentaho, Gluster). Smart investors have long realized that open source companies have a great potential for successful exits and continue to direct their financial resources to that space of the software market.
Open source = good ROI
- Unique characteristics of Russian technical talent
Large companies do not create open source software. It is built by groups of cooperating individuals that only form companies *when and if *the software has commercial applications. When it comes to programming, Russia is a land of self-taught craftsmen and “hackers” (in the good sense of the word). For a long time, Russian institutions of higher education have lagged their western counterparts in teaching pragmatic knowledge required for software company creation. There are theorists, but there is little experience in building software companies. However, when it comes to open source, one needs craftsmen much more than businessmen because the commercial part of the company’s lifecycle happens much later than it happens with traditional software companies. Open source companies need management and marketing after the company’s products have been widely accepted by the market. With open source, rare, talented, and expensive sales, marketing, and product management resources are not wasted on projects that don’t have a chance of profitability but come to the table only when the company is ready to use what they have to offer.
Open source = Many programmers + few salesmen, right demographics
- Infrastructure not a barrier
Unlike companies in other software areas, nanotechnology, or energy, open source development does not require the construction of factories or technical centers. The development techniques for this type of software mostly rely on programmers connected to the modestly fast Internet, using modestly configured personal computers. This infrastructure already exists in Russia.
Open source = simpler, existing infrastructure.
- Modest first investment
Unlike nanotechnology, energy, and medicine — software, and, especially, open source software, does not need large financial commitments from investors. Since venture capital activity in Russia is still in its early phases, investments in open source is a thesis that gives funds the best chance to show that investment can take place without exposure to potentially large financial losses.
Open source = less short-term capital and less long-term risk.
- Support from government as customer
Most do not seem to grasp that the pledged support of these project by the Russian government does not merely consist of funding and purchasing products by state institutions, but also by organizations over which the government wields influence (schools, universities, hospitals, municipalities, etc.).
Russian president’s directive about transitioning the country to open source (preferably, Russian open source) technologies can force the creation of the needed large user base for new companies and development of their products.
Open source = faster and wider adoption, thanks to government support**
- Improved reputation for Russian technologists and businessmen
Unfortunately, most Western companies see Russia as a cheap source of labor. The rest see it as a strange combination between local “mad scientists” and “wheeler-dealers” – dangerous groups with which to do serious business. But Open source software, by its’ very communal nature, filters the real technologists and innovators from the fake ones. First, since code is assessed by groups of colleagues, including colleagues overseas (this system of evaluation is built into the core of how open source software is created), truly talented programmers tend to achieve both fame and financial success. Second, since financial success of open source software projects is the secondary, not first stage of company development, these companies do not attract the numbers of “dealers” like others because the commercial value of these projects is not immediately apparent. Not as much money is needed to start, and companies can start development worrying less about corruption and financial manipulation which, in itself, is attractive to Western investors.
Open source = valuing the innovation and minimization of corruption
- Huge potential for business and innovation
Open source projects try to address many of today’s most pressing business problems as well as the world’s economic development. “Old technologies” like, for example, databases have shown their open source manifestations in projects like MySQL and Postgres. Customer resource managements systems like SugarCRM, analytical platforms like Pentaho – all have been a hit with both Russian and Western users.
But, open source software is also prominent in areas of greatest modern innovation – for example, mobile operating systems (Android) and NFC communication platforms. The best know provider of cloud computing, Amazon, built its cloud almost exclusively on open source software. Companies like CloudEra, starting with a base set of open Hadoop products is innovating in the fields of parallel analytics and informatics.
*Open source = many products and ideas attractive to investors *
- No need to simply copy Western companies
Today, Russian software companies have a reputation for simply copying Western software and business models to suit the Russian market. Thus facebook.com becomes odnoklassniki.ru, Google = Yandex, Gilt = kupivip, etc. In the eyes of Western investors, Russia produces little new technology and, mostly, focuses on moving accumulated oil money out of the country. But it could be the other way around. Russian companies like Parallels, for example, successfully import dollars, not just export them.
Open source = source of new ideas and new companies
- No need to start from scratch
Not all commercially viable open source companies start with a completely new codebase. For example, CloudEra is successfully leveraging the foundation of long-existing Hadoop. TCat Server from MuleSoft and tcServer from VMWare are based on Apache’s Tomcat. Infobright in Boston based its software on MySQL and as far back as 1995, Illustra, based on Postgres was acquired by Informix for more than a billion dollars.
Open source = more quickly reaching commercial goals leveraging existing work.
- National interest
As Russian President Medvedev stated, lessening the dependence in the field of software on foreign companies has a strategic interest for the Russian Federation. Development of successful software businesses in the country not only has the potential to lower expenditures but to also, potentially, raise tax revenues. The Russians’ call for a “national operating system” is a great long-term goal, but the path toward that goal needs to start via smaller, pragmatic open source development.
Open source = Russian national interest
So, there you have it. One man’s opinion about a great opportunity that is staring me in the face.