Everybody told me JBoss would never succeed. By 2003 the company had achieved more than five million downloads, and was cash flow positive, bringing in $2 million a year in training and documentation revenue.
How JBoss helped pioneer a new business model based on a radical idea: paying the best developers and giving away the product for free.
Giving Away the Store
In late 1999 when e-tailers and consumer email programs were getting all the attention from venture capitalists and the media, Marc Fleury and a few of his friends were furiously coding an open source Java application server they intended to market to businesses.
At the time, professional open source was still an oxymoron. Thousands of developers had joined the movement to share and remix their code, but very few had figured out how to create profitable businesses based on open source software. Marc admired the early successes of open source projects such as Linux, MySQL and Apache, and wondered why no one was trying to build a business around open source middleware.
Marc pitched the idea to dozens of venture capital firms in 2000. Each VC he met rejected the idea. “Everybody told me JBoss would never succeed,” he says.
Undaunted, Marc and his friends built JBoss, an open source middleware suite. The viral nature of the open source community helped them gain awareness without spending money on marketing. By 2003 the company had achieved more than five million downloads, and was cash flow positive, bringing in $2 million a year in training and documentation revenue.
Bob Bickel, a cofounder of Bluestone Software, a provider of a proprietary J2EE application server bought by HP, joined the JBoss team in 2003. Bob brought with him a vision for how the company could introduce new revenue streams beyond training and documentation, such as offering support contracts to customers.
He also encouraged the founding team to consider bringing in a venture partner. Even though JBoss was profitable, Bob knew from experience that the best way to reach a new level of growth would be to add a partner who could help round out the senior management team, as well as contribute advice and assistance.
Matrix’s David Skok had both the entrepreneurial and domain experience the founding team was hoping to find. “I liked that David had been a software entrepreneur. He earned our trust by being collaborative and patient, and always acting for the benefit of the company,” says Bob.
In 2004, Matrix Partners led a $10 million investment round in JBoss. David’s first order of business was to work with the management team to plot the strategic direction of the company. Once they figured out what JBoss needed to accomplish, David worked with the founders to recruit A-players who had the necessary skills to execute on the plan.
Next on the agenda was increasing sales. In David’s previous roles as an entrepreneur, he was frustrated by the lack of efficiency of sales and marketing. Over time he constructed a methodology he referred to as “building a sales and marketing machine.” The process infused sales and marketing with science, automation and metrics.
JBoss had a key challenge: More than a million people were using its software, but the downloads were free and anonymous. The only way JBoss could sell more to its customers was to find out who was downloading the software. David thought if JBoss gave away its documentation for free, people who downloaded the software might be willing to share their contact information. He pitched his idea to the JBoss management team.
It was a big risk: Documentation revenue was paying a big part of the bills at JBoss. Hopeful that the benefits would outweigh the potential losses, the management team decided to take the leap.
It worked! Soon they were hauling in 16,000 raw leads every month. But now they had a new problem: how to manage all those leads. David’s research provided the solution: software that would automatically score leads based on certain criteria. With a more manageable flow of leads now in place, JBoss employed low-cost telemarketing to further qualify leads, and then created an inside sales team to close the deals.
With the new sales and marketing machine in place, the management team, including Bob Bickel, Sacha Labourey, Rob Bearden, Brad Murdoch, Tom Leonard, Joe McGonnell, Rich Friedman, Ben Sabrin, Nathalie Mason-Fleury and others, knew the exact metrics and conversion rates at each stage of the sales process, as well as the average deal size and the total cost of processing and closing sales.
Armed with this information, they continued to fine-tune the machine. If they could keep lead volumes and conversion rates the same, they could significantly increase revenue and profit growth by increasing the average deal size. In order to do so they needed to provide more value to the customer than a simple support contract.
Red Hat had shown the way with the Red Hat Network, but JBoss’ customer needs and product lines were substantially different. They decided to offer software as an online service to help JBoss customers monitor and manage their JBoss application servers.
Brad Murdoch, the vice president of services at JBoss, took charge of building the program, dubbed the JBoss Operations Network. He also constructed a multi-level pricing matrix based on the number of servers and users at a given customer location.
In two and a half years the team increased JBoss’ average deal size from $10,000 to $50,000, and took revenue from $3 million to a $60 million run rate.
Soon other open source companies were trying to copy the JBoss methodology. IBM, a key player in this market, went on the attack using similar “give it away for free” tactics for a lower-grade version of its enterprise software. But JBoss had a key advantage: an award-winning open source project and an incredibly efficient sales and marketing process.
JBoss became one of the most successful companies in the history of open source software, and in April, 2006, JBoss sold to RedHat for $350 million.
In most businesses, coming up with the strategy is the easy part. Execution is far more difficult,” says David. “The JBoss team not only developed a great strategy, but also executed flawlessly. Their success is clear testament to the power of a great management team.
JBoss created a market-leading open source application server and associated middleware software stack.
Acquired by Red Hat, Inc for $350 million.
Matrix Partners Board Members