But to get started I wanted to ask JingJing few questions:

Q1. Tell briefly about your background and interest in software business

I have been working in the software industry in Finland since 2002. I first started as a research assistant on mobile services in Nokia Research Center while studying for my bachelor degree on software engineering. After finishing my bachelor, I became a software engineer working in the industry while continuing a further master degree study at Helsinki University of Technology on software business and engineering. I have been a software designer, software tester, test manager, and now a quality assurance consultant throughout these years.

Software business has always been of interest to me. In 2004, I started looking into open source software business through a course assignment in the university. The more I read and talk with people about it, the more attractive it appears to me. I was lucky to get the opportunity to work with you Mikko (I believe I was the lucky one) since the beginning of 2007 in research studies on open source software business in China. The result of my research will be presented in my master thesis work.

I like the idea of “openness” - open mindset, open development, open source and open competition. I have a strong believe in the future of open source. The software market in China is still very young yet growing intensively on yearly basis. The combination of open source and Chinese software market could provide true social and economy values to the development in China.

Q2. Please give a brief overview of the Chinese Software industry e.g. size, growth-rate, special areas of interest

I see the Chinese software market to be very attractive. In 2004, the market size was about 53.9 billion Yuan (5.2 billion euro). From Jan-May 2007, the software market reached 178.3 billion euros sales revenue. Though the current market size is still rather small, comprising 6% of the global market, one has to take into consideration that software industry was almost non-existing 15 years ago in China. Within the last decade, the Chinese software market has been growing through fast development and restructuring with around 30% growth rate annually. With the ever increasing internal interests and international focus on China, the Chinese government estimates a staggering growth reaching 4800 billion Yuan sales (463 billion euros), with 4.4 billion euro export and outsourcing, and 1.29 million professionals till 2010.

Some special areas of interests: Enterprise software market has been showing steady growth in the recent years, as more and more companies have come to realize the values that enterprise software could provide. Additionally, it has been predicted that the rapid growth in Internet use will further drive the demand for software that accommodates broadband services, such as multimedia compatible software that will enable users to enjoy broadband contents. Blog hosting and multimedia content sharing, similar to MySpace and Youtube, have been the hot investment spots in the recent years.

Q3. Are there any special characteristics as to how the Chinese software market works that you want to highlight?

The Chinese market does have some interesting characteristics:
- huge amount of IT graduates yearly: It is estimated that Chinese universities will provide about 150,000 – 200,000 IT workers annually.
- The low labor costs: According to the opinion of a local IT professional, an engineer costing $4000 in the US only costs $500 in Shanghai. And it could be much less other than in Beijing and Shanghai.
- 30% annual growth of the Chinese software market
- the government’s determination in supporting the software industry development. Special benefits are offered on taxation deduction (VAT and EIT), exempt on import and export tax.

The Chinese software industry is still very young and small comparing to the global market. The development of the software industry is far behind, and not in proportion compared to the hardware industry. The difference between enterprise market and consumer market is huge (96.62% vs. 3.38% in 2004). The Chinese government, telecommunication, education, banking and production have been the key places of investments into IT in 2004. Software piracy remains a big problem in the Chinese market. The situation in the consumer market will gradually improve as the campaign on fighting software piracy continues in China.

As the Chinese market in general is still immature, the Chinese government has been taking actions to protect and support the local Chinese companies against competitions from global players. This can appear in many forms - Chinese own standards, favoring domestic software products, regulations, etc. Foreign companies coming to the Chinese market must be aware of these issues before their entry.

Some additional comments on software piracy in China: Microsoft has been complaining about it since its entry to the Chinese market. Actually comparing to Microsoft, I think it is the whole Chinese domestic software industry that has suffered the most. And that is one of the reasons which causes the Chinese market to be still very immature and hinders a healthy growth through time.

Q4. How have the Chinese traditionally worked with foreign software vendors, do you see any emerging trends?

The most common means for foreign software vendors working in the Chinese market is to:

- buy Chinese companies,
- set up joint ventures with Chinese companies,
- outsourcing,
- set up subsidiaries
- or through partnership

The Chinese market has been very attractive and many foreign companies are looking into the Chinese market for opportunities. They have advanced technology and wonderful business models, but lack of real experience with the local environment of the industry and the market information. To get an initial understanding, many companies have started their piloting operation in China through partnership with local Chinese companies in localization, further development and marketing operations.

Q5. Do you see any big challenges in Chinese software industry that the companies and organizations from abroad could help to solve together with Chinese?

I see two issues here:

1) The Chinese software industry has lots of good programmers produced by the Chinese academy annually. But at the moment, the market is really in need of experienced IT professionals with various management skills in areas such as project, quality, process, IPR and business. The resource defines the capability of the market. In order to build up a better environment for further development, education, training and knowledge transfer could be a direction where foreign companies can bring extensive knowledge and experiences to the Chinese market.

2) Though China has good programmers, comparing to the foreign companies there is a lack of real technical and domain knowledge and experience. At the moment, in those international companies most of the complex R&D work is done abroad. Chinese subsidiaries are normally working on localization and marketing issues. One key reason I see is that the foreign companies are afraid of losing their IPRs. However, to build up the Chinese software industry, China needs to strengthen its R&D capability. I have been wondering - is there a possibility that foreign companies can gradually provide technology transfer to the Chinese market?

Part II will be looking at the Emergence of Open Source within Chinese software industry.

Some key advice Eero pointed out in the article was the importance of partners and channels:

‘’Another surprise is partner networking, or actually the lack of it. Maybe this is result of open source companies’ natural tendency to focus on services and, for the most part, on a direct sales model. Open source companies have created tight-knit partner communities, which are excellent vehicles for the self-promoting (every self-respecting open source company seems to be partner with at least 10 other open source companies), while at the same time there has been very limited success in creating truly significant partner networks (system integrators, VARs) to push open source solutions to the end users….’’

‘’ Focus on partners, partners that sell for you. Strategic partners are great to increase credibility, but won’t pay your bills. Peer partners are great to increase overall visibility, but won’t pay your bills. Partners who will deliver your solution to the paying customer are a godsend - they pay your bills. Understand what motivates partners, and keep them happy and productive!’’

I am 100% behind that piece of advice, but while agreeing that is the way to go, the big question for me (and I suppose for many entrepreneurs) is how? How to execute the sound strategy and identify and actually get those key partners critical for your business success or even survival?

Continuent has gone through couple of phases 1) under the name Emic Networks with more traditional proprietary approach and 2) under the current name Continuent changing the approach to Open Source.

Q1. How has your company’s partnering strategy changed while moving from a proprietary to open source model? Have you had to dismiss some earlier partners’ as they did not fit the new approach?

A1. Over the course of the years there have been natural ‘churn rate’ among channel partners for number of reasons, but we did not have to make major overhaul of the partner network. As a part of the change from completely proprietary solution to the commercial open source we have kept the licensing, pricing and partner discounts very attractive.

There was more significant change in our channel-strategy when we expanded database support from MySQL-only solution (which was the case with our proprietary solution) to also cover PostgreSQL and EnterpriseDB. MySQL’s adoption rate is clearly larger than any other open source databases, but interestingly enough due MySQL’s own quite aggressive direct sales approach and primary focus in embedded market, MySQL has not developed extensive network of resellers or systems integrators.

There is no one single company behind PostgreSQL. That has created more opportunities for local system integrators and there seems to be more partner opportunities for value-add providers such Continuent.

Q2. Any special challenges in building the business out of Finland?

A2. When Continuent was established in Finland, our mindset was from the day one to be ‘born-global’. It naturally did help us that my primary residence has been US for the past 14 years and I have been involved with cross-Atlantic software business this whole time. Finland has definitely significant good-will value and healthy respect within open source community with number of visible open source visionaries and leaders, for example Linus and Mårten, coming out of Finland. This creates a good ground to build successful open source companies.

The key challenge with Finland, and almost any European based companies, is the lack of the understanding in customers actual needs (largest open source customers are in USA, and their needs are not always same as smaller European based customers) and effectively getting solutions to the market.

There always is very good and solid technical foundation, but there seems to be disconnection what actual customer needs are and how to take those into account in the process creating solutions out of these core technologies.

As valuable the open source community is giving feedback, unfortunately you can’t solely trust the judgment of the masses. The key decisions need to be done internally, and those need to be based on solid market intelligence and true understanding of the customer needs.

Q3.Please outline a short description as to how to do it e.g. 3 do’s and 3 don’ts

A3. The three DO’s for the aspiring open source entrepreneurs from Finland, or from Europe in general:

ii) Follow Steve Job’s lead and build ‘insanely great’ solutions. ‘Me too’ just doesn’t cut it. ‘Good enough’ won’t create excitement.

iii) Think hard who can be the best partners to take your solution to the market. The larger partner the better, but early on you need to settle smaller partners until you have increase your credibility.

And Don’ts:

i) Don’t forget to define your ideal customers (note: first customers may not be ideal on the long run, thus you really need to define the ideal customer). You need to address a real need of this ideal customer. You also need to offer a complete solution. Don’t assume that all customers are alike. USA customers tend to build larger systems catering larger markets, thus they typically require more (quality, functionality, supportability), but this will also help your smaller customers.

ii) Don’t forget your community: as you give to your community, it is fair to expect real value (contribution, testing, support) back. Community will be your best marketing vehicle and also excellent source to recruit new talent.

iii) Don’t forget that your solution and market takes time to mature. Make sure you have adequate funding to ride the tough times, which there will be plenty. You can safely assume that you are in the business for a long haul, minimum 5-7 years, before you can see any significant success. For example MySQL has been around almost 15 years (taking account Monty’s early years) and it took first 7 years (10 if you count the early years) to reach 5 Million euro revenue.

I have already learned a lot, thanks to everyone who has contributed so far!

Ps. If I have missed some links, please let me know at mikko.puhakka at gmail.com

1) Team

A superb team is a must in all start-ups. The special thing with open source startups is that they may have a history as an open source *project* before becoming a commercial business. The team must understand how to master this evolutionary transition.

2) Innovation

It’s not enough to be less expensive, or faster, or the same as others but open source. There has to be a genuine, value-adding innovation that users and customers get a new benefit from.

3) Participation

The strength of open source lies in massive participation by users worldwide. It takes special dedication and skill to build an
architecture of participation.

-1) Open source as the silver bullet

Well, it isn’t. It’s dangerous to think that opensourcing something will solve all problems. It probably won’t. Open source accelerates what would happen anyway. If you have a crappy product, it will die sooner if you opensource it. If you have a great product, it will succeed sooner if you opensource it. Open source also is not a business model in itself. You have to figure out the business model as a separate exercise
(there is a handful of good alternatives).

-2) Too much money

If you have too much (VC) money, you may not notice soon enough that you need to change something in your model or your product.

-3) Impatience

Great businesses take time to build. Sure, you should have a very ambitious plan with success waiting around the corner. But you should also have the patience to keep going even when things don’t look good. The night is coldest just before the sun rises.

But first my own observations:

3 Success factors / best practices:

1) Solid value proposition

Pretty obvious, but it is surprising how difficult at it is to explain your product or service offering concisely and compellingly.

2) Business model that supports healthy margins

There are challenges in the open source business where you are competing against incumbents with an offering that typically seems to be priced lower, or at least in my experience I have seen most open source start-ups battling with lower margins than their proprietary counterparts, this needs to be figured out for open source businesses to really scale out.

3) Entrepreneurial management

Markets change and evolve rapidly, especially in an emerging industry that does not have all the business ‘’rules’’ set in stone yet, so it is often necessary to change the business model quite rapidly over the development of the company, and that in my mind requires management team that is constantly looking to find better ways of growing the business, and not just looking after the numbers.

3 Things to avoid (=risk / failure)

1) Open it and they will come (customers, partners etc), ‘’field of dreams model’’ (in ref to the Kevin Costner movie)

Open source is not magic. At times as open source has been surrounded by hype, some companies have thought that they could cure a bad business and a bad offering by just opening up the source code. Unfortunately it does not work that way, and it is not that easy.

2) Under/over resourced

People and money wise you can go wrong in two ways, either you don’t have enough of them or you have too much of them. Either way you will struggle at some point and possibly even go out of business. Knowledge about how to find the right balance is something that comes with experience; there is no science behind that.

3) The 30 minute elevator pitch

This reflects back to the first ‘’do’’ but I wish I had a buck for each time an entrepreneur has continued his pitch to me with words ‘’you just don’t quite get it yet, let me explain…’’ Well, if I don’t get it quickly, how does the message get to your potential partners, investors, customers etc.?

To get this chain started I want to ask some colleagues to come up with their own 3 & 3 observations as well as to forward the challenge to their select colleagues, so I am challenging the following gentlemen:

1. How did you get started?

The idea of founding a consultancy company specialized on open source technologies came from six guys which were probable the best Linux experts and most active open source advocates in the region. A year before, I had left a good job in Finland to try to start the same kind of company in Zaragoza, so when they asked me to join in as the non-geek member of the team I could not resist.

Before founding Warp we applied to become a part of CEEI, which is a incubator for innovative companies funded by the regional government and which gives some grants and support for its members. On the other hand, we started the development of our own product eBox together with another company in the region, DBS (this company has recently closed down). The deal was simple: we did the work, they funded the direct costs.

With these two sources of funding and a main competitive advantage (we were and still are the only open source based company in the region) we could start looking for customers and projects. A lot of work and really tiny
salaries for several months and Warp was launched.

2. What is your product?

eBox Platform is a user-friendly Linux server. It is focused on managing corporate networks with the simplicity of an appliance server and the flexibility of a Debian Linux. It is the server that Canonical would build
for the SMEs segment (actually, they have plans to build a server for SMEs and I have heard they are watching eBox very carefully).

So far, eBox is still under development, with our 1.0 first stable version expected for September 2007, when we will start offering professional services on top of it. Our community is also growing pretty fast, with more
than 22,000 downloads, an average 10% monthly growth and almost 180 active members in the community.

3. Key milestones?

Milestone 0 would be the foundation of Warp in September 2004 and the start of our business. The first real milestone was the release of eBox 0.7 under GPL in December 2005. After that moment our agreement with DBS ended and we needed to look for other sources of funding if we wanted to continue with eBox, so we approached CDTI, an organization dependant on the Spanish Ministry of Industry which funds innovative start-ups.

The second milestone was May 2006, when we participated at Innovate!Europe Conference presenting eBox. The marketing and promotion we got locally was so huge that the perception the market had about us shifted from “just a bunch of geeks taking about communist stuff” to “a young innovative company that gets international recognition”. A few months later we were flooded with projects, and we have been like that since, even we have been growing quite fast.

The third milestone was in July 2006, when the CDTI accepted our proposal and granted us the funds we needed to complete eBox 1.0. Moreover, after that we are officially considered one of the most innovative companies in Spain, which has opened many unexpected doors and has put our name in some of the circles of power in the country.

And hopefully the fourth milestone will be in September 2007, when we release eBox 1.0

4. Why did you decide on the open source model?

It was the natural model for us, considering our background and that we sell ourselves as open source experts. On the other hand, I don’t know how we could have had eBox as popular as it is now (getting feedback from people at the One Laptop Per Child project, for example), got it translated into a dozen languages by volunteers, had it thoroughfully market-tested before launching the business, got several partnership proposals before having the first stable version, …with virtually no budget for marketing and communication.

5. How do you see Warp / Ebox in 5 years?

Difficult question. Five years is a really long time in our industry and it is particularly long for a company that did not celebrate yet its third anniversary.

I like to think about Warp in a few years as a well established player in the open source sector in Spain, attracting good talent and launching innovative projects that could become promising products in their niches, just like we
are doing with eBox.

And about eBox, I think we have a good chance to make it a very popular professional product. We still have to see whether we succeed in giving great value both to the community and the market at the same time, and if we manage to make it grow both in users and in business.

6. Some comments on Open Source and Spain

The community movement in Spain has always been very strong, and some regions have been global pioneers in implementing policies in favor of open source, but the private sector has been quite conservative so far. Even among the start-ups it is hard to find a real open source mentality and, oddly enough, the few ones that exist are not usually in the traditional hubs of innovation (Madrid and Barcelona), but in peripherical regions such as Aragon, Galicia, Andalucia, …

Tämän lisäksi tulemme vierailemaan mm. Linux Foundationissa sekä Googlen pääkonttorilla.

Otan mielelläni ehdotuksia vastaan kysymyksistä mitä kannattaisi esittää ja tulen kirjoittamaan ainakin osaan nistä vastauksia tässä blogissa.