For 10 years, Danny Rimer was in the thick of the startup action in Silicon Valley as an investment banker and venture investor. In 2002 he gave it all up to move to London to open the European office for VC firm Index Ventures. At the time it may have seemed an odd career move. Silicon Valley-style venture investing was on the downswing in Europe, in favor of more old-fashioned and safer buyout deals.
But Rimer maintains that being removed from the often-incestuous Silicon Valley rat race has helped him get into hot European deals earlier. That may be true: An early investment in Internet phone company Skype netted an undisclosed -- but undoubtedly enviable -- return when Skype was purchased by eBay (EBAY) for $2.6 billion last month (see BW Online, 9/12/05, "eBay Opens a Whole New Channel").
The move also put Rimer at ground zero of the open-source revolution. Open-source companies are just now emerging out of Silicon Valley, but for years the revolution has been rooted in Europe.
Rimer has made investments in companies across the open-source landscape, including MySQL, so far one of the more successful open-source startups; Zend, which created the popular "PHP" open-source programming language; TrollTech, which is using open source to go after the mobile device market; and his newest investment, Seattle's SourceLabs, which aims to become the middleman between open-source projects and big companies.
Few other venture capitalists have been in so many open-source deals, but Rimer is still cautious about how many big companies will emerge from the current funding frenzy. BusinessWeek Online reporter Sarah Lacy caught up with Rimer to chat about his European advantage and why he won't make certain open-source investments. Following are edited excerpts of the conversation.
MySQL was your first open-source investment. How did you get into the deal?
We knew MySQL as a technology, and I was chatting with another VC about different open-source projects, and he mentioned I should check out MySQL. At the time, I didn't realize it was a company.
It ended up being a fairly tough deal to get into primarily because certain U.S. VCs were very interested in it. But no other European VC was interested, and the company wanted one U.S. VC and one European VC. So they picked Benchmark for the U.S. one and picked us for the European.
At the time they were generating some revenue, but it wasn't apparent they were going to be a successful business. It was apparent it was a successful phenomenon, as most Web sites either looked at MySQL or were using it as their database.
How does your MySQL investment reflect what you look for in an open-source deal?
Early on we had to come up with key criteria. It's not difficult to create a successful small business if you're an open-source vendor. But we're a VC firm looking to make returns [of 10 times our initial investment] for [our investors]. We're looking for $100 million in revenue potential.
A small business that's highly profitable, making $15 million a year, is not going to move the dial for us. We're looking to invest in major software vendors.
So what are those criteria?
I call them the three Cs. These are necessary from the onset to make it an attractive story. The first is community. There has to be a huge amount of interest in it. [MySQL, Zend, and TrollTech] were already incredibly popular [when we invested]. The community is your marketing and evangelism arm. They're going to contribute and make sure this piece of software truly becomes mainstream.
The second C is commodity. Open-source companies absolutely can't have a new, innovative technology. They have to be smarter approaches to existing technology. They have to be [technologies] that developers and buyers already understand.
In the case of MySQL, because of Oracle [ORCL
], everyone already knew the relational database. Open source is about coming up with an alternative that's cheaper, not going after a new area.
The third C is price cushion. There has to be a big enough difference between what proprietary vendors are charging and open source is charging, so that over time open-source companies can charge more and still have enough of a price cushion to make it interesting for customers.
Those three qualities are what help us evaluate companies. We've made four investments and looked at three dozen.
Would you ever invest in a company starting an open-source project from scratch, like SugarCRM did?
I think we would likely not to do that. The community aspect is hard to predict, and it's very important. It shouldn't be difficult for companies to get [their product] out there and see if it's popular very quickly.
The second point is there are a lot of software vendors that haven't gotten traction, so they're retroactively open-sourcing it. They couldn't sell it, so they said: "Let's make it open-source." There's going to be a lot of quicksand there.
Do you think the investing frenzy around open source is warranted?
Frenzies usually happen for a reason. There's no question there's a lot of herd-like mentality that goes into investing. Search was a frenzy for a while, and I guess it was worth it. But we have been looking at [open source] for a long time, and we've only done four investments over 3 1/2 years.
What do you think about all the investing in open-source application companies?
I think the jury is out. I think you will have open-source components making up applications, but I don't know if you're going to have open-source applications. With business applications [that run things like call centers, accounting, and human resources], you're going to want some proprietary-ness to it. They can't be commodity, and in my logic, commodity is critical, or you don't have an interesting open-source company.
I have a tough time believing financial applications like enterprise resource planning will ever be open-source. ERP is really complex, and you have companies like SAP (SAP) and Oracle that are being very, very intelligent about adapting their smarts and making them co-exist with open source.
What about selling to smaller businesses that can't afford Oracle or SAP? That's what open-source application companies like Compiere, SugarCRM, and MedSphere are doing.
Small to medium-sized businesses are a potential market, sure. You can build a small business that's incredibly profitable there, but whether you can build a $100 million business, that's hard in that sector.
The open-source companies you have invested in, including Skype, are giving software away for free, building momentum, and finding a way to make money later. As a venture investor who lived through the Internet bubble, doesn't that scare you?
We firmly believe if you provide a better value proposition for customers, you will be able to monetize it -- period. We're not going to invest in anything free forever, but we believe it's a shame to sacrifice the opportunity of a company by trying to lock in the business model from day one.
We obviously will work hard at figuring out what the right business model is. We think about the business models while we invest, and we have a pretty good sense of what they will be. Certainly with the companies that defined the Internet space the most over the past 10 years, [they've tweaked their models as they went along].
Take Google (GOOG). They didn't know their business model until they had launched, gotten traffic, and saw what Overture had done [with paid-search advertising], then tweaked that model. It takes a while for a business model to mature when you're building that kind of momentum.