Open Source Software and ‘Indie Biz’

[Also available on Medium.]

Thesis

  1. The Open Source movement freed large scale software development projects from a set of narrow constraints imposed by the capital infrastructure needed to finance big projects.
  2. Current developments including B-Corps, crowdfunding projects (e.g. Kickstarter) and, in particular, crowdfunding equity under the JOBS Act III (e.g. Wefunder) are allowing a parallel development in the capital infrastructure needed to finance Independent Businesses.

Definitions

Biz — an enterprise that needs to return concrete value to key stakeholders, i.e. customers, investors, and employees.

Indie Biz — an enterprise funded bottom-up from customers, fans, supporters and small investors rather than top-down by VCs or large lenders.

Let’s start with a Manifesto. I like Manifestos; this will degrade into an essay all too soon.

Indie Biz Manifesto

  • An Indie Biz should grow out of community: businesses should be the outgrowth of communities of interest; capitalization should scale with community growth.
  • An Indie Biz should retain its connection to its community in as many ways as possible. Constant communication is the key.
  • An Indie Biz should provide a clear vision but allow a variety of interests. At the founding of Mountain Hardwear, our fearless leader, Jack Gilbert’s, provided this initial vision statement: “Where others have gone off in other directions, we are going to build the really good stuff.” Simple. Clear. Works for all shareholders…with the possible exception of financers.
  • An Indie Biz’s financial structure should keep interests aligned. For example, if offering stock to small investors, that stock should provide the same rewards and value as any founder’s stock. Proceeds should be parceled out relative to contributions. (My favorite model for that: Slicing Pie)
    It’s not exactly anarcho-syndicalism but it’s a start.

Restating That By Example

The food biz can provide a great example. First, communication with one’s community is not generally a problem. You’re feeding people. You can tell if they’re liking it. There’s an engagement path (dinners for friends->catering->food cart->pop up->restaurant) where reputation can grow an expanding clientele. A clear vision (great food) can be pursued from a variety of motivations (making it, being creative with it, enjoying it alone and with friends, being proud to produce and serve it, etc.) Finally, with new regulations, a food biz could scale up based on financing from its community at various points along that path and returning value to its investors in a mix of cash payouts and discounts on dining.

Note: this provides a path for people with vision and talent but limited financial resources!

Discussion

On rare occasion, I get a distinct whiff of the future arriving. Here was one:

20+ years ago at the height of Microsoft’s empire, Ruth (a little old lady)*1 and Jay Cheroske (a Ruckus Society activist and coder) separately explained Open Source Software to me.

Ruth gave me a description of the emerging ecosystem and breadth of projects. Jay gave me the emotional hook:

“There are two approaches,” he said.

“You can build proprietary software and make money by squatting on it like a big ugly spider.
“Or you can join in and build open source tools. You don’t make money by charging tolls and rents. You make money building and using tools to practice the craft you love.”

The core: you’re not in it to score and get out. You’re in it because it’s where you want to be…and you need to put together the revenue stream to stay at it.

Here’s a great recent statementwith a shout out to Medium author, Nadia Eghbal

I’m here because I want to make it easier for other people to build, do, and express themselves however they want. To me, that’s the heart and soul of tech. Technology is about making tools for us to express our humanity. To make our creative expression frictionless.

The Problem

Expressing yourself creatively “frictionlessly” is a bit more difficult if your expression is a physical product…say gear we make for mountaineers, climbers, backpacking and wilderness explorers out in all sorts of weather and locations.

I’m a backpacking biz lifer. I don’t design gear, but I’ve been using it and loving it as long as I can remember. My job for most of my working life has been the application of information to the design and sourcing chain that brings that gear to you over the web or through REI or your local specialty shop.

For example, I was one of the founders of Mountain Hardwear in charge of IT, Forecasting, and Operations. My great love has always been systems and what we call hardware: tents, packs, bags. I’ve been lucky enough to combine them. I built my first forecasting systems in Dbase and Quatro Pro on a Kaypro II a couple of thousand years ago.

This biz is a capital intensive one. We often use boutique fabrics with long lead times using fabrication techniques being hacked together along with materials. As an example, Mountain Hardwear used a special Italian fleece laminated by Gore in Germany and sewn in Oakland,CA, into one of the original softshell jackets. We would have to commit 8 months in advance before a shop saw the product. We’d need to buy a second season before we could see most of the results of first season. Forecasting was a bit tricky.

In capital terms that means: spend season #1, spend season #2, start seeing money for #1, spend #3. That’s worst case. Some short lead products leaven it out but the capital demands are bruising. It’s basically a motherfucker.

Once gear visionaries emerge from the (often literal) garage, they hit against this hard. So, they generally have to make a deal with the money people. I could get into details of how it goes south from there but the net result is most typically a classic example of what Tim O’Reilly terms the ‘clothes line paradox.’ Value is created; value is harvested. But not by the same people. The brand, with diluted vision, totters on to a slow death or crashes and burns.

Occasionally the brand is strong enough to survive pirates, thieves and MBAs (witness The North Face), but it is not an accident that Patagonia and Osprey are privately held and essentially bootstrapped companies.

Indie Biz

On rare occasion, I get a distinct whiff of the future arriving. That is happening now.

It is my belief that we’re on the cutting edge of a change comparable to the emergence of Open Source Software that is grounded in the way outdoor brands and other “passion driven businesses”can be funded.*2

(The parallels are probably best communicated in nested bullet points shown in the supplement post.)

When the capital required to fund an enterprise is significant…and the forced path to obtaining the capital is top down from professional investors or big banks…then it is easy for two sets of interests to collide in a way that is detrimental to the sustained creation of genuine value.

This is particularly acute for businesses that are, at essence, “affairs of the heart”…food, beer, outdoor gear, bikes, small label music, that sort of thing. These enterprises don’t often start with a business plan; they start with someone making something great and the community responding.

As they grow, they need funds. This typically sets up a collision course between the need for steady and unending growth, quarterly progress, and an exit strategy on the one hand versus looking for sustainable (and perhaps steady-state) business, a reasonable return for key stakeholders, and a consistent delivery of value and innovation in a more natural “punctuated equilibrium” pattern on the other.

This malign dynamic is being upset!

How ?

  • Kickstarter and such where initial products can be tested and developed in dialog with the community. This might be all that’s needed. Peak Designhas leveraged a series of Kickstarters into a vital business. Typically more is needed to provide enough capital for the business.
  • Wefunder and such where the JOBS Act TIII allows a business with a track record and a little seasoning to then appeal to their community for working capital. (I’m involved in that now with a gear company, SlingFin.)
  • The maturing of the B-Corp is worth mentioning: a wider mission can now be baked in to an enterprise making it substantially more durable.

This will have (is having!) a number of positive effects.

  1. Founders will in be a stronger position when they have to deal with the money people if they end up needing them at all.
  2. Surviving businesses will exhibit a greater diversity of motivations (more Patagonias.)Like Open Source, the gatekeeper is now gone and a significant choke point for surviving enterprises has been removed.
  3. More value will be harvested by the core value creators: designers, visionaries, and enthusiasts who support and sustain them.
  4. This will result in a more vital ecosystem. There will be more great gear and experiences. This will help us better share our love affair with the amazing world we all inhabit!

Point 2) is, I think, the key. Rather than all value eroding over time to a monetary bottom line, more of the heart and vision of startup businesses will survive. Granted, “money is a necessary evil” and stakeholders need be rewarded, but those stakeholders will define their interests in less narrow terms. This will I think be to everyone’s benefit including the money folks. I’ve seen great long-term value trashed at a whole series of outdoor companies afflicted by a monetary focus that is too short-sited.

Do what you love reprise

One point that shouldn’t be overlooked is that the process outlined above will lower the barrier to entry and soften the barrier to success. Great outdoor gear has generally constellated out of the community. The return of the 10th Mountain Division from WWII, the 60’s backpacking craze, and the thru-hiker surge (AT, PCT, John Muir Trail, etc) all pushed innovation created precisely by the folks actually doing it. There has always been a permeable barrier between enthusiast and pro and a strong DIY ethic in our ‘industry.’

Most of us are in the biz to stay connected to our passion. We seek to make a living doing that. We feel that our work should be a vehicle for our contribution to wider society…while running an honest business. Now we have a whole new tool set to accomplish that.

PS, If you read this before 11 pm on 12/19/2016, come check us out at the SlingFin page on Wefunder…particularly if you love outdoor activities from the extreme to simple backpacking or bike camping. If not (pity you<g>) check out Wefunder anyway. You’ll find lots of essentials from coffee to beer to environmentally friendly tampons to glow in the dark shrubbery and smart guitars.

DISCLOSURE: Obviously, I have an interest in Slingfin. I’ve, also, invested small amounts via the Wefunder platform in a number of companies including Wefunder itself. You can see all that on my Wefunder profile. (Hmmm, just checked the link and it only shows things that have fully closed. I’ve committed to a half dozen others in amounts from $100 to $1500.)

*1 Ruth is now 93. From the perspective of my current age, I’d say she was barely passed middle age when she described Open Source to me in the mid-1990s.

*2 Outdoor businesses are generally what Kristin Carpenter-Ogden calls ‘passion driven businesses.’ She’s exploring this space in her great podcast, The Intrepid Entrepreneur.