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Feature: Business

Progeny's closure highlights problems of small FOSS companies

By Bruce Byfield on May 11, 2007 (8:00:00 AM)

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Founded by Ian Murdock and John H. Hartman in 2000, Progeny Linux Systems seemed for years like a modestly successful free and open source software (FOSS) company. Although it abandoned its original plans for revolutionizing networks, it survived the dot-com crash while many other companies had gone under, and its efforts to commercialize Debian were profitable after its first year and a half. By early 2005, Progeny had reinvented itself by offering update services and modular components for building specialized GNU/Linux distributions. Yet on April 30, Progeny ceased operations. What happened?

The reasons for the closure provide a case study of the problems that small FOSS companies face. They include difficulties in scaling, an inability to compete with large companies, and a lack of the funding needed to develop.

Branden Robinson, former Debian Project Leader and a Progeny employee from the company's start, makes clear that Progeny's failure was not due to lack of business. According to Robinson, when the company closed, it had half a dozen clients, and was in negotiations with at least one other company. In addition, Progeny was still providing update services for three or four clients. "In some ways, I feel like we had no competitors," Robinson says. One company, he adds, "was really disappointed to hear that Progeny was going out of business, because they weren't really sure who to turn to."

Too big and too small

One problem, Robinson says, may have been that the company was an awkward size for the marketplace. To survive, let alone grow, the company could not afford to take on the small contracts that might have sustained a sole proprietorship. Nor was taking on numerous small contracts a solution, since, as Robinson observes, "You can only distribute an engineer over so many projects before you start losing his efficiency."

Yet, at the same time, with the five engineers who remained until the end, the company had trouble fulfilling larger contracts. In the company's final weeks, Robinson says, "We pretty much had enough people that if we worked really, really hard, we could fulfill the contractual obligations that we had, but if we were to lose just one engineer, we'd be facing deadline slippage and other problems like that. It would have just sent us down the spiral in two or three months." As things were, in the last month, Progeny's director of engineering was doing some work for free, and the company was operating without a CEO.

Competing in the big pond

Varying in size from five to 30 employees, Progeny was also in the awkward position of trying to compete with companies with hundred of employees. Bern Galvin, a member of the board of directors, suggests that competing was especially difficult because "there ain't no IP" [intellectual property] -- meaning that, as a FOSS company, Progeny had no trade secrets to level the playing field. Murdock believes that the company's expertise gave it a similar advantage, but he concedes that the traditional proprietary business models can be easier for a small company looking for an advantage over larger ones.

Another problem, Galvin suggests, is that larger companies operating in the FOSS market are no longer interested in acquiring smaller rivals, the way that Novell, for instance, purchased Ximian. Now, he suggests, they prefer "picking off key employees." He cites Murdock's own departure for the Free Standards Group in 2006 as an example of this tendency, especially since he was soon followed by Jeff Licquia, another of Progeny's original programmers.

According to Murdock, his departure was due to the fact that "I just realized that we had missed the window and it's time to move on." That may be so, but it is hard to imagine that the founder and chair's departure would not make the company's demise a self-fulfilling prophecy, or that the loss of a lead developer could do anything but stretch the already overstretched employees even further.

More directly, with the rise of Canonical and Ubuntu, a large and well-funded rival also working to commercialize Debian, Progeny "has been losing its relevance over the last couple of years," Murdock says. "We tried competing head to head for a little while," but "they executed better than we did. Some of that was that they had more resources than we did, but you can't explain it all that way. And, at some point, we had lost whatever momentum we had."

Lack of capital

However, all those connected with Progeny agree that the largest problem for Progeny was a lack of capital. After exhausting its initial funding in mid-2001, the company was unable to secure additional funding despite repeated efforts. Instead, the company focused its energies on finding the contracts it needed to meet its payroll.

In the short term, this tactic guaranteed the company's survival and even encouraged modest growth. However, as Murdock says, "The problem was, when you are bootstrapping, your first priority is to do the work that pays the bills. You tend to have precious little left over to invest in R & D." The company attempted to incorporate its own development work into its custom contracts, but that tactic was not always possible.

"Progeny was in a business that required a lot of capital to make it work," Murdock says. "We wanted to sell Debian as the preeminent platform for building Linux-based appliances, and that's a big chunk to bite off. If you don't have the capital you need, no matter how good your ideas are, you're simply not going to get there."

The final descent

Progeny seems to have reached its zenith in mid-2005. However, a round of layoffs occurred at the end of 2005, and Murdock became disillusioned and moved on soon afterward. "The company kept going," Murdock says, "but it's just been slowly shrinking since that time. At some point, the remaining people realized it's never going to be any different, and that it was time to move on."

At the end of March 2007, CEO Garth Dickey and other management staff reached the same realization as Murdock and moved on. When contacted, Dickey preferred not to comment, saying that to do so would be inappropriate, but both Murdock and Robinson confirm this sequence of events. For the last month, "the engineering team was having to carry on without management," Robinson says.

The company's board of directors approached one potential CEO with an offer, but it was turned down. At any rate, Robinson says, "Had we hired a CEO, we might have been in the position of laying off another engineer." Faced with such an unsolvable situation, the company had little choice except to close shop.

Despite what must have been an often frustrating experience, those contacted regard their time at Progeny as well-spent. "I was there seven years," Robinson says, "and for practically all that time, it was a fun and really rewarding place to work."

Similarly, when asked if he would consider starting another company, Murdock immediately replied, "Absolutely."

However, in thinking about what he learned from Progeny, Murdock offers two pices of advice for others starting their own FOSS business. First, thinking about the company's sometimes unfocused approached in its first year, he suggests, "Before you take money, make sure you know why you are taking it" -- in other words, have a clear set of goals.

The widespread acceptance of FOSS and the rise of online technologies mean that many companies today do not need venture capital, Murdock says. However, his second piece of advice is, "Once you've decided to take outside capital, make sure that you take it from the right people. One of the problems we had in raising the second round is that the people who initially funded us didn't understand what we were doing. They were basically just throwing money out at a time when that seemed to be a strategy that worked. Having the right backers means that you get more than just money from them. They would have been motivated to help us over the hump and get us to where we needed to be successful. I think that's something that's been lost on a lot of people."

Bruce Byfield is a computer journalist who writes regularly for NewsForge, Linux.com, and IT Manager's Journal. He was a Progeny employee in 2000-2001.

Bruce Byfield is a computer journalist who writes regularly for Linux.com.

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on Progeny's closure highlights problems of small FOSS companies

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Dead end

Posted by: Anonymous Coward on May 13, 2007 04:58 AM
Well I guess that proves that you can't make a living with OSS.

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Re:Dead end

Posted by: Anonymous Coward on May 13, 2007 08:37 AM
It also proves that the earth is 9,123 years old.

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I saw a red crayon once

Posted by: Anonymous Coward on May 14, 2007 07:21 PM
That proves beyond a doubt that all crayons are red.

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Re:I saw a red crayon once

Posted by: Anonymous Coward on May 14, 2007 11:57 PM
Thank you for proving my theory that all crayons are red.

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Typical Director Mindset

Posted by: Anonymous Coward on May 11, 2007 07:44 PM
"Bern Galvin, a member of the board of directors, suggests that competing was especially difficult because "there ain't no IP" [intellectual property] -- meaning that, as a FOSS company, Progeny had no trade secrets to level the playing field."

Or rather, without "special secrets" there was no way to screw over or lock in those hapless customers. Earth to Galvin: in services, your "IP" is what your employees know, not the secrets of your widgets.

Having worked in a services organisation where most employees wanted to quit because they were treated so poorly by the idiot management, I've seen the way that many managers and directors overlook the actual value in the business as they focus on the only things they know: reducing costs and selling widgets. Only they aren't in the business of selling widgets, and laying people off just reduces the value of the business.

Then the widget sellers have a harder time convincing customers to buy more stuff, erm, services. Then the revenues drop, and more value is sacrificed on the high altar of a salesforce unwilling to adapt to the optimal business model. But does the salesforce and upper management get mandatory retraining or pruning to meet the reality of the business? "No, let's just fire some more engineers and have more brainstorming meetings, perhaps coming up with a company slogan to communicate to the customers what we supposedly stand for." Only the customers aren't so easily fooled...

I'm not saying this is where Progeny was headed, but the "no IP" excuse is a denial of business reality, in my opinion.

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Re:Typical Director Mindset

Posted by: Anonymous Coward on May 12, 2007 07:58 PM
"I'm not saying this is where Progeny was headed, but the "no IP" excuse is a denial of business reality, in my opinion. "

No you just made a grand assumption that anything having to do with IP is to "screw over and lock in". In other words an abusive relationship. I think his point with a "level playing field" is that FOSS doesn't allow one. Whatever distinguished Progeny from it's competition (and in this case free competition) could easily be taken away.

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Re:Typical Director Mindset

Posted by: Anonymous Coward on May 14, 2007 12:34 PM
>> Whatever distinguished Progeny from it's competition (and in this case free competition) could easily be taken away.

Your comment makes little sense. Super proprietary companies get beat out all the time. Since when does brand (a form of IP) and money to scale not matter (to provide for the needed marketing and R&D expenses but have these costs be a modest percentage of revenues)?

Do law firms service proprietary laws? No, yet law firms exist.

There are certain things that even if others could see they could not replicate. Sorry to burst your bubble but progeny proved for whatever reasons they weren't a company to last 5 more years. They proved nothing about FLOSS and business. Red Hat has lasted longer. They are larger for one. They have a different management and engineering team for another. I don't believe that the teams that succeed longest must necessarily be loaded with secrets or rely on proprietary software.

Proprietary IP in non-human items are easier to manage. They won't run off to the competitor or demand more money or fail to function well on some days. It is more of a challenge to manage these, but they are managed all the time. And then, even companies that work with open things (like law firms and Google and Red Hat) keep some secrets -- not that these are required but they make it easier to last more years against tough up and coming hungry young dogs. Essentially almost no companies open up their strategy meetings to the competitors. I am not saying this must be the way, but regardless, it has nothing to do with FLOSS vs closed source software products.

R&D and some other costs many small businesses avoid are born by larger partners (two examples: product based franchises and service providers that service Microsoft products). There is no magic here. Yesterday, partnering with Red Hat gave you more opportunities than partnering with no one and trying to grow Debian. Tomorrow, partnering with Canonical or someone else might be the best way to go and a great way to grow Debian.

FLOSS based businesses are growing while closed source businesses are dropping. FLOSS provides some but not all of the R&D to compete against the closed source competitors.

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Re:Typical Director Mindset

Posted by: Anonymous Coward on May 14, 2007 09:07 PM

"I'm not saying this is where Progeny was headed, but the "no IP" excuse is a denial of business reality, in my opinion. "

No you just made a grand assumption that anything having to do with IP is to "screw over and lock in".


If you read the comment again in full you'll find that I made the observation that services companies in general tend to screw up when they fail to realise that their value lies in their employees' expertise. This can just as easily happen with Microsoft, SAP or Oracle consultancies as it can be with people providing open source services. And yes, I've seen this happen with companies providing proprietary solutions on top of proprietary solutions.

All you've done is to restate the "secret sauce is everything" mantra by someone who not only makes a grand assumption, but has also probably only ever seen services organisations from the top via organisational charts and spreadsheets.

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Nothing to do with FOSS

Posted by: Anonymous Coward on May 12, 2007 12:48 AM
How is this a problem with FOSS. This is what every small business has to deal with, its called a free market economy and all small business face these challenges. 80-90% of small business fail, why should it be any different for FOSS businesses?

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Re:Nothing to do with FOSS

Posted by: nanday on May 13, 2007 10:53 AM
A few of the lessons for FOSS companies from the article:

1. raising capital remains hard. Investors who know FOSS and can provide help for FOSS companies are hard to find.

2. the buyout, one of the traditional ways for small companies to become successful may now be much rarer for FOSS companies.

- Bruce Byfield (nanday)

3. commercialized FOSS is dominated by large companies these days. That wasn't the case eight years ago.

The struggles of small companies, of course, aren't unique to FOSS ones. But it's still worth seeing what the conditions in the FOSS market are these days.

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Agreed - what is the relevance to FOSS in general?

Posted by: Anonymous Coward on May 12, 2007 09:01 AM
What exactly did this company do? I can't even tell from the descriptions here:

"its efforts to commercialize Debian..."

How?

"reinvented itself by offering update services and modular components for building specialized GNU/Linux distributions"

Uhm, with everybody moaning about the excessive number of Linux distros, this seems like a recipe for failure on the face of it, if I even understand what that description means.

Then they were trying to compete with Canonical with a couple dozen employees? Good luck with that! Canonical has 50 or more employees, revenue of $10 million/year, and the backing of someone with deep pockets.

It's unfortunate when a FOSS company goes under, and I'm sure the lessons learned here are valuable for any small company, but I don't see anything that is particularly applicable to FOSS per se as a business model.

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Boo-Frickin-Hoo

Posted by: Anonymous Coward on May 13, 2007 07:42 AM
This just proves you can't survive doing widget frosting or selling books and t-shirts in a GPL world.

You either need to be an IBM or Sun selling hardware or you need to be a Oracle or Novell selling closed source goods. Yeah yeah you'll come back with Redhat - but the honest truth - they are alive because IBM hasn't decided to come out with their own brand of Linux (I guess after the SCO dust settles, IBM will do that). Oracle's already eating into their business and so has Ubuntu.

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sure thing skippy

Posted by: Anonymous Coward on May 14, 2007 07:39 PM
A small business offering FOSS solutions closes down. Obviously a clear indication that any other company offering FOSS and still in business is an anomoly.

Hey, I saw a red crayon once. Obviously, all crayons must be red.

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Re:Boo-Frickin-Hoo

Posted by: Anonymous Coward on May 14, 2007 09:26 PM
"This just proves you can't survive doing widget frosting or selling books and t-shirts in a GPL world."

Perhaps not - you have to add value in a way that's more competitive than anyone else in the same game. Do people want a special distro for their embedded stuff? Can you offer that service to them in a way that's competitive with (a) those people rolling their own and (b) other companies in the same space? Can you get those people to realise that rolling their own may be a bigger exercise done right than they anticipate?

"You either need to be an IBM or Sun selling hardware or you need to be a Oracle or Novell selling closed source goods."

Nonsense. Both IBM and Sun know that the money is increasingly in services. And there are other companies doing fine providing open source software and services.

"Yeah yeah you'll come back with Redhat - but the honest truth - they are alive because IBM hasn't decided to come out with their own brand of Linux (I guess after the SCO dust settles, IBM will do that)."

Fantasy! IBM could have made their own distro at any time but haven't. Why is that? Perhaps it's because they realise that it's not worth owning the distro space because then they'd look like the IBM of old selling a full stack of solutions which, even if it's somewhat more open (DB2 and WebSphere notwithstanding) than the old stuff, looks exclusionary and makes more enemies than friends.

"Oracle's already eating into their business and so has Ubuntu."

Oh yes, Oracle Linux (iteration n), where Oracle - with an abysmal track record in dealing with security issues in their own core products (exposed during the whole "unbreakable" charade) - start off with Red Hat's sources and claim that they can provide better support than the Red Hat people. Not much credibility there, I'm afraid.

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FOSS = GPL =means that company could be picked up!

Posted by: Anonymous Coward on May 13, 2007 08:56 AM
The software being the GPL... means that the company could be picked up and the code still lives?

No?

Some other in the debian space were switching to using the UBUNTU repositories... Did this company think of doing this too?

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