Open Source Startups: Marketcetera, making Business sense of Free Software

Marketcetera, an open source startup based in San Francisco developing a platform for automated trading, has just secured $4 million in Series A funding to help others make millions.

Marketcetera is already making its platform available for download, an official 1.0 release is tentatively scheduled for the last quarter of 2008, but the current version is already certified with Reuters RTEX and available also available as a VMWare and Parallels appliance.

Making senseMaking sense by Eccleston George Public Artists

I met Graham Miller and Toli Kuznets few weeks ago in San Francisco, and I spent a couple of hours with them talking of their business experience. I am reporting a detailed essay of our conversation, it could be inspirational for tomorrow’s entrepreneurs.

How all this started.

Toli and I were both computer science students at Stanford when we met. I participated in a program called the Mayfield Fellows Program, run by entrepreneurship Professor Tom Byers. That together with a couple of classes that Toli took, make up the sum total of our formal business training. The rest was by osmosis and trial and error in working in Silicon Valley. It was through this early work at Reactivity (me) and CenterRun (Toli), that we met our two advisors, John Lilly (currently CEO of Mozilla), and Aaref Hilaly (currently CEO of Clearwell Systems). These two guys have be extremely helpful. Everything from business advice to introductions to investors that they had worked with in the past. The introduction–while helpful–really only gets you the first meeting tho. The rest is up to you, which is why we are grateful that our advisors were able to help us with our pitch as well.

It is interesting to know how things go over the pond. IT firms, and open source ones are not an exception, start small to become big, or very big. The whole entrepreneurial ecosystem enables start-ups to achieve sustainable growth, it is not just matter of the availability of financial support instruments for SMEs. Advisors are of capital importance, as are important business training courses, and last but not least the role that customers play.

What role did customers play in the development of the company?

I think that there were three key customers in the development of the company. First, we were the target customers. When we were building these trading systems on Wall Street, we were looking for something exactly like the Marketcetera platform, and would happily have paid for market data and other services on top of an open-source platform. Secondly, we found some initial seed investors, (friendly Wall Street types) who also wanted to use the software, and specifically were interested in a platform that would let them build out applications quickly. They invested a modest amount of money with the goal of seeing this dream realized. As part of their participation in the company, they got access to the platform, and the ability to guide product development.

Finally once we got the product into a usable shape, we managed to get some early customers up and running on the platform. These customers required more flexibility in integration and licensing terms than proprietary products could offer them. We structured our early development projects as consulting engagements, that is only charging for our development and configuration time. That way we were able to give our customers a tailored custom solution at the same time maximizing the feedback we get for future product development.

The first customers have been playing an important role to let it happen. Graham and Toli progressively moved from the approach of consulting engagements into the process to define and sell a product. Customers expectations in terms of licensing and flexibility were definitely of great importance in their path down the open source road.

Why did you decide to go open source with your platform?

The initial motivation for the open source model was the recognition that these systems, traditionally built from scratch in house, required flexibility not possible in proprietary systems. We looked at the strengths of the open source development model, and realized that it often steers development efforts toward a platform, rather than a specific application. This is our end goal, to enable the construction of the next generation of trading tools on top of an open-source infrastructure. One unintended side-effect has been that our customers have complete control over information management. In the intensely competitive world of finance, a hedge fund can more closely guard its secrets through the use of open-source software, because it need not engage third party vendors at all. Should they need help, we are here to provide it, but they’re welcome to “Download. Run. Trade.” all on their own.
Ultimately we think the open-source software plus services model is a much better fit for an industry that sees much custom software development, and has a voracious appetite for data and connectivity.

Interestingly enough Marketcetera platform is welcomed by customers because of the “unintended side-effect” Graham talks about. As a matter of fact the freedom to make modifications and use them privately without even mentioning that they exist is a key success factor here. It is probably not by casualty that Marketcetera is distributed under the GPLv2 and I believe they definitely shouldn’t consider to adopt the AGPL.

Last but not least, who is your customer?

Organizations of all sizes have deployed the Marketcetera Platform, from multibillion-dollar asset managers to small currency traders. A billion-dollar hedge fund has deployed the platform as a replacement for home-grown trading tools, because of increasing maintenance costs of the custom code. A large asset manager has deployed the platform to manage a suite of connections to 200 broker dealers globally. Because it is available under an open source license, frequently the platform is used as an integration point for several trading systems. For example a small currency trading firm integrates a third party analytics package to a FIX connection with Currenex. We see growing interest from small hedge funds in India up to 10 of the largest financial institutions in the world.

While Marketcetera have not yet labored enough as open source operations to provide substantiative evidence of the viability of their model, I firmly believe that they are really exploring new potentialities of the free software business. Companies using platforms resulting from commons-based peer production are used to reveal just a fraction of the new code, but hedge funds and currency traders are definitely not industry participants in the field of embedded Linux. Marketcetera’s customers are willing to co-fund the platform’s development, just as Collaborative Software Initiative‘s customers probably do.

To gain the greatest benefit from open source disruptive challenges to proprietary platforms like FlexTrade, savvy IT departments will pay for open source solutions allowing proprietary and secret trading algorithms.

Congratulations to the Marketcetera team, and happy hacking!

Read also Matt Asays post and Dana Blankenhorn‘s post.

Technorati Tags: marketcetera, trading platform, commercial open source, free software business, flextrade, startup, open business

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