How to make money from free software

Would-be IT industry barons were given some sobering news last week: building an IT company is hard work.

“You go into a business very bright-eyed and optimistic,” says Chris Hegan, “but one rule you can count on: it’s going to get rougher than you could possibly imagine.

“You have got to be prepared for it.”

Hegan and Igor Portugal, co-founders of Linux vendor Asterisk, gave a “warts and all” description of building a business with open source software to an audience in Auckland last week.

Portugal says the company doesn’t treat the Linux business as a special case: “Make margin and add value — just like any other third-party product or service.”

Asterisk was formed in 1999. Hegan stumbled across Linux when looking for a cost-effective way to connect the workstations in his business. “Appalled” at the cost of NetWare and Windows NT, he found Linux.

“Within two weeks I was absolutely blown away. This whole open source environment seemed to me the most amazing thing.”

Portugal had been introduced to Linux in 1993, and rediscovered it in 1998 after reading Eric Raymond’s treatise on open source, The Cathedral and the Bazaar.

“I could just see that Linux was going to be everywhere,” he told the meeting.

Their belief in Linux and other open source software is key to Asterisk’s success, Hegan says. “We really knew that we were on to a good thing.

“If you don’t get a huge rush of energy when you’re starting [a new business], have another look: you may not be on to the right thing.”

Portugal and Hegan believed their business would have a market as long as they could set up a Linux server for less than the cost of a Windows licence plus the possibly cheaper setup. “And it always was,” Hegan says.

An early focus on Linux desktop software was abandoned when Microsoft released an improved desktop OS.

“Windows 2000 was and is a very good operating system,” Hegan says, which meant the company could concentrate on other areas. Early cashflow was generated through software development work, largely from an internet company, and Hegan says there is a lesson there for new businesses.

“Put a lot of energy into something that pays the bills every week.”

Asterisk entered the firewall market when Walker Wireless started connecting many businesses to the internet. Those businesses needed their networks protected, and soon Asterisk realised “we had a product”.

“We called it Asterisk Firefly, even though it was a Linux firewall,” Hegan says. “From a sales point of view, it was exactly what they wanted.”

Most new businesses experience growing pains and Asterisk was no exception. The company was forced to think about its operations in late 2000 after a negative customer satisfaction survey. Too often the company had promised too much and failed to deliver.

The partners took the survey results to heart.

“We actually sucked,” says Hegan. “We had a lousy business. We had a lot of complaints. We just had to face the facts that we were giving our loyal customers an awful time.

“Oddly enough, once we identified the problem, it wasn’t that hard to fix it.”

Portugal says The E-Myth, a book by Michael Gerber, helped refocus the company’s efforts, including increasing company value.

“If you build a business, it has to be a proposition to buy,” he says. “Have a look at what you’re doing right and do more of it.”

The reseller channel was given more emphasis, and Asterisk produced a brochure and a list of products: web server, firewall, mail server and the like.

This year Asterisk was sold to solutions integrator and developer Gen-i.

“That was a very hard call for us to make,” Hegan says. “It became apparent to us that that was the time to sell.”

There are benefits in being owned by a larger company with the right attitude.

“They’re giving us a very free hand; we’re not about to become a department of Gen-i. But now we sleep at nights.”

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