OpenStack: Show Me the Money

A panel of investors at the OpenStack Summit in Paris explain what they're looking for and why security is ripe for investment.

OpenStack summit

PARIS—Over the course of the past year, there have been hundreds of millions of dollars in OpenStack-related funding and acquisition activities. In a panel at the OpenStack Summit here, some of the top venture capitalists detailed what they're investing in and what they want to see.

While OpenStack itself is open-source software, there are a lot of opportunities from which companies and their investors can profit. Among the big deals recently completed, Red Hat acquired OpenStack vendor eNovance in June for $95 million, Cisco acquired Metacloud and Mirantis raised $100 million in funding.

David Lam, managing director at West Summit Capital, helped lead Mirantis' $100 million funding round and told the OpenStack audience that he's very optimistic about the firm's prospects. In particular, Lam said the new funding is helping Mirantis grow in China.

"We invest in China and try to connect our companies with the Chinese market, where we see huge demand for alternatives to incumbent vendors," Lam said.

In terms of how the venture capitalists identify potential companies to invest in, Jai Das, managing director at Sapphire Ventures, said that when it comes to open source, he's looking at the size of the project's community. He also looks at how widely used a technology is and how many code committers there are for a project.

Being able to deliver the right technology is also a key part of a successful company that the venture capitalists will invest in. Ryan Floyd, managing director at Storm Ventures, said that, for example, if he's investing in a storage vendor, it better understand what proprietary storage giant EMC offers. Floyd noted that enterprise consumers are not worried about open source, but they are worried about losing data.

Whether a company is open-source or not doesn't necessarily matter. Das said he first looks at the business model and how much money it will take to get the company to market and win customers. He added that with open source, the benefit is that a company can use its community to get customers to easily try out a technology and potentially bring in revenue.

Floyd added that some buyers don't want vendor lock-in and that's why they love open source. That said, he emphasized that enterprises don't want "a bag of bolts." In other words, they aren't looking for a collection of code bits and disconnected features; rather they are looking for complete solutions that solve business problems. Floyd suggested that for an operations person, all they care about is getting the job done and having applications deployed.

Simon Anderson, CEO of Dreamhost, sees a real need to have technology that reduces complexity. Anderson on Nov. 3 completed a funding round for network function virtualization (NFV) startup Akanada.

In terms of OpenStack specifically, Das said Amazon is the big juggernaut in the cloud that OpenStack vendors need to compare themselves against. In Das' view, Amazon provides its users with everything they need to deploy an application. In contrast, he said OpenStack is not an entirely comprehensive platform, but it is catching up.

Floyd argued that Amazon is also the greatest opportunity for OpenStack vendors, as enterprises realize they want to run their own private clouds.

"At a certain point, it makes sense to pull the spend in-house, if you can do it efficiently," Floyd said. "Amazon won't go away, it's easy for test and development, but once organizations start spending a few hundred thousand dollars a month on Amazon, they'll look at OpenStack."

Looking at specific opportunities for entrepreneurs that are considering building OpenStack companies, Floyd said security is a good place to start. In his view, the OpenStack Keystone identity service is solid but is not a comprehensive solution. Floyd doesn't expect the open-source community to build a free comprehensive security technology for OpenStack either.

"Security is not free; it's a tax," Floyd said.

Sean Michael Kerner is a senior editor at eWEEK and Follow him on Twitter @TechJournalist.

Sean Michael Kerner

Sean Michael Kerner

Sean Michael Kerner is an Internet consultant, strategist, and contributor to several leading IT business web sites.