Venture Pro: Open-Source Standouts Will Heed 90s Lessons

In today's uncertain climate, companies are looking to integrate the IT systems they spent so much on in that decade, says partner in venture capital firm.

SAN FRANCISCO—Open-source software developers are subject to the same macroeconomic forces as the rest of the IT industry, and they have to avoid repeating the monstrously costly mistakes of the 1990s, says Ray Lane, general partner in venture capital firm Kleiner, Perkins, Caufield & Byers.

In the present environment of unpredictable threats of international terrorism and slow economic growth, companies are going to be more careful than ever about their software technology investments, Lane said during a presentation at the Open Source Business Conference here.

But what most people who came of age in the overheated economy of the 1990s dont realize is that todays level of IT business growth was more the norm back in the mid-1980s and 1970s, Lane said. The businesses that survive in the current climate will be those that can deal with the potential for market volatility caused by the uncertain threats of terrorism coupled with moderate to slow business growth, he said.

Venture capitalists are also going to be increasingly conservative and diligent in evaluating the market potential of the companies they fund, he said. Plenty of developers still come seeking funding for some new software component that solves a narrow business or technological problem, Lane said.

But usually the developer hasnt figured out how the product would integrate with existing systems or whether its market potential would justify the capital investment.

"This industry is not going to tolerate ideas for just components that leave the plug-in and implementation integration to the user," Lane said. The days when companies spent as much as 50 percent of their capital budget on IT is over, he said, adding that today theyre looking for technology that will improve integration of the IT systems they spent so much money on in the 90s.

Opportunities exist for open-source software developers if they can produce software at a lower cost than what has been the norm in the industry, he suggested.

Perceptions abound that "the revenues generated by the software industry are too big relative to the value that is generated," he said. Customers are demanding more measurable return on their investments.

The software industrys dynamics have changed, Lane contended, saying software developers should no longer focus on the "what" of technology invention. "Inventions should be focused around how," he said. "How do you change the work process?" Effective management tools must be put into the hands of people who know how to use them, he said.

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John Pallatto

John Pallatto

John Pallatto has been editor in chief of QuinStreet Inc.'s since October 2012. He has more than 40 years of experience as a professional journalist working at a daily newspaper and...