August 2007

"CanIt-PRO and Roaring Penguin Software are stellar examples of what first-rate value-added programming and support around an open source core can do!"

Alan Belanger, Soundview Technology Group

Roaring Penguin Software Inc. started as a one-person consulting company in 1999. A year later, David F. Skoll, the company's President and CTO, was asked to develop an e-mail filtering tool. David developed MIMEDefang, an e-mail filter that used Sendmail's Milter facilities. David donated the code to the open source community, and kept developing MIMEDefang as a free tool for system administrators. Today, the MIMEDefang code is available at at the website.

By 2002, it was obvious that there was a need for a packaged mail-filtering solution suitable for end-users. David decided to go ahead and write what became CanIt-PRO. Whereas MIMEDefang is suited to system administrators who are familiar with Perl and comfortable with writing their filtering policies in Perl, the CanIt product line allows end-users to control their filtering through a simple web-based interface.

The company transformed itself from a consulting company to a product development company. This transformation required significant changes.

Business Model

There are a number of open source business models touted by open source supporters. Roaring Penguin chose the "free core, value-add on top" model. The core scanning software, MIMEDefang, is free and released under the terms of the GNU General Public License.

All the MIMEDefang code is contributed by Roaring Penguin, which has made minor patches and regular releases based on community feedback; MIMEDefang is estimated to have between 6,500 and 10,000 users.

The commercial products are built on top of MIMEDefang and have a more traditional proprietary software license. However, even the commercial products ship with source code and permission for end-users to modify it. They just can't redistribute the commercial products.

The commercial software extends MIMEDefang by hooking into strategic points in its filter file. MIMEDefang was designed to be extended in this way by system administrators and it proved a natural way to develop CanIt.

Although some businesses offer only free software and generate revenue strictly from support or contract customizations, we did not feel this would generate sufficient revenue to make the company viable. We based this feeling on a number of observations:

  1. Having released several applications under the GPL license in the past, we found that people were very reluctant to pay for support. For example, we have over 500 paying customers for CanIt. There are probably more than 20 times that many using MIMEDefang, but we have only sold two MIMEDefang support contracts.
  2. An application released under the GPL licence can be supported by anyone. Thus, you run the risk of someone else offering paid support for your application. This is perfectly legal under the GPL.
  3. Very few companies have made a viable business out of free software with paid support whereas there are tens of thousands of successful proprietary software companies.
  4. Contract work and consulting is labour-intensive. Selling the actual software lets you obtain revenues again and again for the same original work.

Venture Capital or Not?

A major decision for a small company is whether or not to seek venture capital. We investigated venture capital investment and decided not to pursue it for a number of reasons:

  1. Venture capitalists demand a significant share of the company and considerable control over its direction.
  2. Venture capitalists have a short-to-medium time-frame. Their goal is to sell their investment for a profit after a few years. They tend not to plan for the long term.
  3. Obtaining venture capital demands a significant investment in time and energy. We felt this time and energy was better spent developing our products and growing our business.

In retrospect, it was a very easy decision not to seek venture capital. After spending a few weeks examining the issue, we concluded that the amount of capital we could realistically raise would be far too low to compensate for the time, energy and equity we'd have to spend to secure it.

Bootstrapping

Once the decision was made not to seek venture capital, the key to a viable company was getting the product to market as quickly and cheaply as possible and securing a few well-regarded reference customers. We began developing CanIt in April 2002 and the first copy was sold by July 2002. By December 2002, we had our CanIt-PRO product in production. By the end of 2002, we had about 12 customers, including a few well-known organizations. This set the foundation for future growth.

During the bootstrapping phase, it is critical to keep expenses down. We ran completely on free and open source software and worked mostly out of home offices. In early 2003, we expanded into a small three person office and by late 2003 had moved to our current location.

Business Tools

Roaring Penguin started out as an open source company and we are still heavily involved in the Free Software community. As part of that philosophy, we run completely on Free Software. For example, we use SugarCRM for contact management. We use RT for ticket-tracking, Asterisk for our phone system, Ledger-SMB for accounting, and Linux, Firefox, Thunderbird and OpenOffice on the desktop. Our Web site is powered by Drupal, an advanced content-management system.

Remarkably, our annual software licensing budget is zero. A rough calculation shows that based on 10 servers and 12 desktops, we have saved over $27,000 in software licensing fees by using Free Software instead of the analogous Microsoft software. In addition, SugarCRM saves us something like $12,000 per year compared to a solution like Salesforce. The additional savings due to increased reliability of open source software and immunity to Windows viruses are considerable.

Saving many thousands of dollars in software licensing fees has allowed us to spend the money on more important things like marketing and development.

Marketing

Roaring Penguin's long history of participation in the open source community has paid off tremendously. Because of our established history and the fact that our open source products are widely used, many web sites link to our site. This has kept us ranking relatively high on Google searches. This was important because many of our early reference customers found us through Google.

Paid online advertising is important, but expensive. Maintaining a good position in organic search results is critical to success. Unfortunately, there's no quick and easy way to do this. You need to actively participate in the open source community and provide valuable products that people like. Only then can you build up your mesh of interconnectivity that boosts your Google ranking.

The Story So Far

In 2002, Roaring Penguin consisted of one person with a few open source applications. Five years later, we have grown to 10 employees and have hundreds of customers and hundreds of thousands of end-users for our commercial products. Feedback from users of our free products has improved their quality and also that of our commercial products.

We compete in a world where our competitors are an order of magnitude larger than we are with the commensurate marketing budgets, and we're winning our fair share of the anti-spam business. Open source software is a critical part of that success.

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