Friday, December 01, 2006

Using Open Source in a Startup: Bad Idea

If you want to sell your own proprietary software, make sure you have a strictly enforced policy against using open source. Here's why: even if you agree that open source has crossed the chasm in the lifecycle that is technology adoption, your investors have not. Even the inclusion of an inconsequential open source tool can cause headaches, or stop a deal altogether.

Here are the concerns often raised about open source at the due diligence stage:
- there is no meaningful warranty or indemnity for this portion of the product
- how do we know the open source license is enforceable?
- do the terms for this piece of open source contaminate the rest of your product?
- if this was inadvertently incorporated into the product, what else was?

[Holly Towle at Preston Gates has done a good review of some of these issues here.]

These concerns can be managed, but they can't be eliminated altogether. And while venture capital investing is about risk, these aren't the kinds of risks VCs assume. Managing them sometimes isn't enough.

What does this kind of open source use mean for your financing (or acquisition) prospects? That depends on (a) the philosophy of your investors/acquirors, (b) whether the open source is incorporated in to your proprietary software or simply part of the internal operating systems of your business, and (c) whether the business' prospects hinge on the integration of your software/internal systems with those of others. But why get to the point where you are defending your approach?

As strongly articulated policy for use of third party software in your business needs to be developed, posted and enforced with your development team at the outset. Subcontractors (who in my experience are the usual culprits) need to be rigorously policed. Your product group may have an opposing (and equally valid) perspective on the issues I have raised, but it's not their perspective I'm worried about: it's your ability to persuade those with the cash to grow your business. Many of them are still sitting on the other side of the chasm.