In Israel, it has become close to impossible to get an investment for an Enterprise Software startup, even worse than in the US. One of the main reasons is that enterprise software sales are hard, and expensive ( a lot of high cost man power, and long sale cycles) - which is true. Everyone is looking at models to get around those issues (e.g. open source, SaaS), but fundamentally it remains an issue.
Not that there aren’t problems or opportunities in enterprise software (see The Trouble With Enterprise Software for a nice overview of some of the issues), there are huge issues with enterprise software, and SOA (Services Oriented Architectures) are no panacea. So opportunities for technical innovation abound, it is just that most VCs don’t believe that it is a good investment of time or capital. Since VCs are awfully busy, and have more on their plate than they can handle, once this is a “rule-of-thumb” it is hard to get their ear.
I think this will have grave implications for Enterprise IT shops (and vendors). In last few years most large IT vendors have gotten into the habit of “outsourcing” their technical innovation - they buy companies rather than develop the technology in-house. If the VCs stop investing - then in a few years, innovation in the enterprise software market will dry up. Given the current state of enterprise software, that can’t be a good thing….
I think that things will change - since there is still a lot of money in enterprise software and large vendors need technology, someone will have to provide them with it. Enterprise software companies probably will have smaller chance at IPO - but given the relative lack of competition they should have a better shot at M&A. The trick is to have unique, innovative technology that solves a problem for enterprise IT departments – or even better, for the business. I also think the pendulum has swung too far, and will swing back in a couple of years - making any investment done now, much more valuable in the future

Kudos to Google (soon) and Facebook (already) for offering open APIs, empowering the development community to create interesting (and hopefully profitable) applications based on those APIs. Opening the APIs allow the developer community to develop interesting applications, and enrich everyone’s user experience. However, there is a basic limitation of the current notion of open API (unless it is an open source project) – the owner of the API gets to decide for the developers what is opened (i.e. what programmatic access is allowed), and what remains unavailable. Sometimes limitations are created on purpose – limiting what developers have access to for business, security or other reasons. It is clear the owner has the right to limit usage to protect their rights – but limiting access will just stifle creativity – especially if the APIs are too limiting. Also, in many cases the limitations are artificial – the owner just hasn’t had time to develop all the possible APIs, or haven’t through all the use cases (if that is even possible) leading to a limitation that stops somebody building some really useful new application.
The only way to get around this is to allow the developers to create APIs themselves, or make it possible for anyone to extend and change the APIs and submit it back to the community - not be reliant on the owners to develop it for them. This would lead to a rich evolving set of APIs maintained by the developer community. Until then – open APIs will never be truly open.
And about the owner’s rights - my guess is that this will need to be done contractually rather than programmatically.

Selling IT to corporations is hard (well, selling to anybody is hard) and requires a lot of resources (especially around presale - POCs, Bake-offs, etc.) So a lot of VCs are looking to the open source model for salvation - not Open Source in its purest (as published in The Cathedral and the Bazaar), but as a way to lower the cost and frcition in selling to the enterprise.

The logic behind it is that the techies (especially in larger organizations) will download the software, play with it, and start using it in a limited way. This can be either as part of a project to solve a specific problem  (e.g. we need a new documant management systems), or just something that interests them as part of their job (why pay for a FTP client and server if you can just use FileZilla, or pay for a databsae if you can use MySQL). So the thinking is that this solves the issue of both penetration (the user find the stuff themselves), expensive POCs (the users will create the POC themselves) and the length of the sale cycle.

The second part of the open source equation is that users will become an active and viable community - both recommending and improving the product directly. Linux is usually given as the prototypical example - with a vibrant user community and a large number of developer\contributors. The allure behind this idea, and the feeling that you have more control (you can modify the code yourself, no vendor tie in, a community of developers\contributers) is what differentiates Open Source from just Freeware.

So how does a company make money off an open source product:

1. Sell services - any large organization that uses a product wants support, and will pay for it.

2. Sell add-ons, upgrades, premium versions - once they get used to the product, they will be willing to pay for added functionality

What doesn’t seem to work is proving a dumbed down, or partial functionality product to get people “hooked” and them sell them the full version, or leaving out important features.

So should you turn your enterprise software product open source. Before you you do here are a few things to consider:

1. How will the techies find your product? Is it a well know category (so that when  they need to find a CRM system, and the search for vendors, your product will show up - e.g. SugarCRM,).

2. Do you really have a technological breakthrough - or are you trying to sell an enhnaced version of a well established product category? If you do have a real, viable techical breakthrough - your code is open and you can be sure that the first people to download your product will be competitors looking for the “secret sauce”.

3. There are a LOT of Open Source projects out there -  take a look at Sourceforge, there are at least 100K projects out there. You’ll need to put effort (probably at least 1 or 2 people) to make sure that you stand out from the crowd and start growing a user community.

4. The open source download to sale conversion rate is low somewhere between 1 in 1,000 to 1 in 10,000, so you have to make sure that you get enough users to be viable.

5. It is a one way street, you can make your code open source, but it is really impossible to take back that decision once it is out in the wild.

6. Choosing a license - GPL gives you the most control, but many organizations don’t like it’s restrictions. Apache license seems to be universally acceptable - but gives you almost no control.

7. You need to decide what you will do with user submissions - and make sure you get the copyright for everything that is submitted.