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An Open (Source) and Shut Case

The business model of open-source software companies puts a premium on finding a CFO with experience in the field.
David McCann, CFO.com | US
August 6, 2010

The more specialized a company is, the more likely it is to prefer a CFO with experience in that specialty. The catch, of course, is that there may be few people available who fit the bill.

In that sense, Talend, a five-year-old maker of database-management software, was fortunate in its recent hiring of its first full-time CFO, Nick White. Like most software companies, it had a strong preference for a finance chief with a software background. But Talend sought a more specific type of experience, related not to the function of its product but rather to its business model.

Talend is an open-source software firm, which means users can download the software along with its source code, allowing them to customize it to their particular needs. A basic version is free, while the company makes money by selling an advanced version and providing support for it. The largest and most well-known open-source provider is Red Hat, a public company that offers the Linux operating system and a wide range of applications and middleware.

Before joining Talend, White was the CFO at SpringSource, an open-source provider of Java infrastructure and management services that, at age 27 months, was acquired last year by VMware for $445 million. That positioned him as a strong candidate for the Talend job. "There aren't that many people who are experienced as CFOs of open-source companies," says White.

A big difference for open-source firms compared with those selling proprietary software is that instead of having salespeople trying to persuade prospects to try out and buy the product, they call on those who are already using it. An open-source company can be very successful if it can get from 1% to 3% of its users to pay for the advanced version, notes White. "We've had 10 million downloads, but our number of customers is a very small percentage of that," he says.

White

The model keeps development costs low, because users are acting as developers. Both paying and nonpaying ones can submit their modifications to the software and request that Talend include the changes in future releases. "Instead of having 50 or 100 developers, you've got all your customers making modifications and doing testing and debugging for you, so the software becomes robust very quickly," says White.

But there are some challenges stemming from the business model. One is common to most software-as-a-service (SaaS) companies, whether the software is open source or proprietary: the need to expand the company quickly. The selling proposition partly involves offering a much lower price point than is typical of larger, enterprise software vendors, which may have a rock-bottom implementation charge of around $50,000 and charge hefty annual maintenance fees. With SaaS there is usually little or no start-up cost, and the annual usage expense is often lower.

"We're doing deals that are a lot smaller, so we have to grow faster," says White. "We cannot do multiple meetings to persuade a company to buy. We refer to it as popcorn sales: you have a larger volume of deals, so you make them quickly, with low touch and a low price. It's got to be a very efficient sales model."

But because their software is freely available from the Internet, open-source providers tend to achieve a worldwide reach much faster than their proprietary-software counterparts. At Talend, for example, which rolled out its product, Talent Open Studio, in October 2006, its 240 employees are spread among six countries on three continents.

That creates a set of complications that most successful companies will have at some point, though by then they are usually substantially larger than open-source firms. The headaches include transfer pricing, value-added taxes, invoicing in multiple languages, and management activities that are spread all over the world in different time zones. "An open-source company has these issues, if not literally from Day 1, then pretty close to it," says White.

Another issue involves indemnifying customers against claims of intellectual-property infringement arising from their use of the software. Many companies require such assurance from software vendors, and those selling proprietary software routinely provide it. But since open-source companies don't write all the code themselves, their control over the code is limited. "We provide a reasonable level of IP indemnification without making it an unlimited level," says White, "and there are some complications around getting customers comfortable with that."




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