Assignment 01 - Winston Damarillo Case

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WINSTON DAMARILLO:
MAKING MONEY OFF OPEN SOURCE
A Meeting in Cebu
In August, 2007, Winston Damarillo, a Filipino-American, brought a

group of Japanese venture capitalists to Cebu to invite them to invest in open
source software opportunities in the Philippines. Winston thought of himself
as a technology entrepreneur as well as a venture capitalist.
The Japanese VCs were eager to meet Damarillo. Indeed, here was a
man selected in 2006 by Red Herring, a U.S. tech magazine, as one of the
top 20 personalities in open source as well as by ZDNet (another U.S. tech
news service) as one of Asia’s tech visionaries for that same year. Known in
the industry as a man who had mastered the art of incubating and selling off
open source companies. Damarillo had disposed of Gluecode (see Exhibit 1),
his first open source startup in 2005 (to IBM), and followed this up with the
sale of his second startup, LogicBlaze (see Exhibit 2), to Iona Technologies
(see Exhibit 3), based in Ireland, in 2007.
Although Damarillo was prevented from revealing how much he had

made from his deals by non-disclosure agreements he did admit that “the top
six engineers made over $1M each.” At the time Damarillo owned 25% of
Gluecode.
Open Source Software
Open Source software, as opposed to the proprietary kind exemplified

by Microsoft and Oracle software, is developed through the collaboration of
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This case was written by Prof. Meliton V. Salazar based on an original case written by Mr. Dennis Posadas,
Asian Institute of Management. All case materials are prepared solely for the purposes of class discussion.
They are neither designed nor intended to illustrate the correct or incorrect management of problems or
issues contained in the case.
Copyright 2007, Asian Institute of Management, Makati City, Philippines, http://www.aim.edu. No part of
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Winston Damarillo: Making Money Off Open Source_________________ _2
many volunteers around the world. These volunteers work on the software
for free, driven by their belief that software should be available to everyone,
an attitude recalling the communal values of the 60’s “flower power” era.
Because of its lower cost, open source is a popular alternative to

branded proprietary software products. However, critics argue that although
the software itself may be cheap or free, there are costs arising from
mistakes and delays due to lack of documentation, control and support.
Nevertheless, the Forester Research graph shown in Figure 1 reveals that
many U.S. Fortune 500 companies have some open source software running
on their systems.
Damarillo’s secret was the way he regarded open source software. He
saw it as “the best 80% complete software that’s out there”. It was “the
best” because its basic functionality had been tested and improved by a
worldwide community of volunteers. Best of all, it was free. The value he
added – the missing 20% - was the touch required to make the software fit
the specialized needs of some customers. Volunteers who had worked to
perfect the basic 80% of the software usually did not want to bother
themselves with the rework required by specialized users. But that,
Damarillo had found, was precisely where opportunity lay.
There was a problem, however. Even “free” open source software is

often bound by intellectual property licenses. Although the goal of the
General Purpose License or GPI is to make all software free there are other
licenses that limit the ways the software can be used. The BSD or Apache
licenses, for example, allow usage of the software but require identification of
the source. So the license of the open source software often determines the
uses that can be made of it. Most, if not all open source software licenses
require that developers redistribute the source code along with the changes
made.
“It is no wonder,” Damarillo commented, “that the conventional

wisdom is that you cannot make money out of something available for free.
But I have other ideas.”
Opportunities and Key Concerns in Asia
In Cebu, Damarillo spoke to his potential investors about the

opportunities in Asia and the Philippines. “Open source,” he said, “is going to
have a powerful impact in Asia. Managed carefully, investments in this
industry could be extremely profitable.”
In the same breath, however, Damarillo admitted that there were

serious concerns that had to be addressed.
One area of concern was that although Asia was the dominant
consumer of open source software, “only 5% of open source software
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projects are contributed by Asian developers.” In an attempt to increase the
number of Asian open source software developers, he had visited developer
communities in a number of Asian cities and organized an open source
conference in Hong Kong, bringing together groups such as the Canada-
based Eclipse Foundation and other influential bodies in open source.
Another concern that was particularly serious in the Philippines was

the growing trend for young people to turn away from computer science as a
career in favor of such alternatives as nursing. This had prompted Damarillo
to organize a movement called Go for Software (GO4SW) that he hoped
would encourage a return to computer science. To reinforce this movement
he funded professorial chairs in the University of the Philippines and De La
Salle University and sponsored parties and networking events to introduce
young people to successful software professionals.
A third area that needed to be addressed was the apparent lack in Asia
of experienced CEOs with both a rounded and a global perspective.
Damarillo noted that many technology startups were being led by CEOs with
strong technical backgrounds who were good at making sophisticated
products but weak at other critical functions such as marketing and
management. “Our young, tech-savvy startup founders need to be paired
with experienced CEOs who understand the business,” Damarillo said, adding
as an example that he had succeeded in attracting Steve Nathan, GM of Sun
Microsystems based in Santa Clara, California, to be CEO for Exist, his
Philippine-based company.
Developing a Career: the Early Years
Damarillo was born in Bohol, an island in the Philippines and grew up

in the city of Cagayan de Oro. He helped out in various aspects of the family
businesses, which included lumber, trucking, hauling, construction and at one
point extruding high octane fuel from castor beans. After completing his
studies in Industrial Engineering from De La Salle University in 1990 he
followed his wife, a nurse, to the U.S. He had already decided to seek
employment in a technology company and was soon hired by Intel in
Hillsboro, Oregon, in 1992. His first job at Intel was to design some of the
company’s advanced Voice over IP (VoIP) technologies. Eventually, Winston
moved into business side of technology. He said of his stint in Sales and
Marketing: “I enjoyed the experience very much. I was named one of the
top 10% among Intel’s salespersons.”
Winston’s next move was into Intel’s venture capital arm, Intel Capital.
This was during the early days of investing in open source pioneers such as
Red Hat (an open source company that commercialized the Linux operating
system). Here Winston began to see where money could be made. He said:
“This gave me a really, really good bird’s eye view of the software industry
and early glimpse of what could happen in open source. I saw that the
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software business architecture would change over time. It would no longer

by played by the rules of Microsoft, Oracle and IBM.”
Damarillo was struck by the irony of it. How could something that
people thought was free be a potential money-making business? He was
fascinated by the notion that there could be worldwide collaboration in R&D.
“If you think about it,” he said, “the first thing you do in a technology-based
business is to protect and hide intellectual property. But in open source, the
first thing you do is share it and give it away!” He was dumbfounded by the
fact that open source developers made no attempt to protect their creative
and intellectual work. In fact, they gave it away. But he had already begun
to think of a business model that would work with open source.
A Business Model for Open Source
Winston’s “model” was to be on the lookout for software developers

and startups with open source projects or ideas that represented solutions to
simple needs. These fledging enterprises he would then “incubate”, helping
them develop and refine their products while at the same time searching for
companies that needed such products to fill gaps in their software portfolios.
(He recalled that this was, after all, how IBM and Gluecode had come
together.)
“Incubation” was the current term for identifying inexperienced

startups with promising technologies and helping them push their plans and
ambitions to fruition. Sometimes incubators pooled together startups with
similar programs to realize scale economies in the services and resources
provided them. One example of a Philippine based incubator was the
University of the Philippines-Ayala Technology Business Incubator (Up-Ayala
TBI). Winston himself had set up a local incubator called Mor.ph to incubate
his startups.
The accepted practice was for incubators to limit support to their

selected startups for a maximum of three years, the idea being that a new
enterprise that had not yet taken off or been acquired in that period of time
would probably never make it. The kind and intensity of support provided to
startups varied widely. Some incubators offered only office space, others a
fairly wide range of services. Some incubators provided funding by taking
equity while others provided no financial support at all.
Funding Sources
Technology startups were usually funded by equity rather than loans.

Intellectual property (specially the kind you give away) is not usually
regarded as desirable collateral by the traditional banking community. The
growth of the technology ecosystem in places such as Silicon Valley was
driven by a different type of funding source altogether, the “angel incubator”
or venture capital (VC).
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“Angel Incubators” were often described in the trade as “families,

friends or fools”, people willing to take a chance on a startup. The capital
available from this source usually arrived in small tranches, around $500k in
the U.S. and much smaller amounts in Asia. An “angel investor” who is also
familiar with the technology is more useful to the entrepreneur because he or
she may also serve as an interested mentor or consultant.
Less fortunate entrepreneurs who were unable to find angel investors

were forced to fund their enterprises with personal cash. This practice was
called “bootstrapping” and was the method used by Microsoft, Dell, Atari and
a host of other startups to grow their enterprises without external capital.
The typical growth or “exit” strategy employed by these companies was to
look for a buyer or co-investor, usually a venture capital firm, to help out
during the growth phase.
Another variant of these funding mechanisms were grants from a

government agency such as the Department of Science and Technology.
Some of these grants were loans up to P1M at little zero interest. Still
another variant was an outright purchase order from a company with a
downpayment which served to fund the startup.
Role of Venture Capital
Venture capital companies came into the life of a startup when it had
already begun to operate and felt it could grow. The venture capital industry
prospered in the U.S. because of the ERISA Act, which allowed portions of
pension funds to be invested in startups. Funding was usually given in
tranches: “Series A”, for example, referred to funding during the setup
phase, “Series B” was given after the business had been operating for some
time and had met certain milestones (see Exhibit 4). Damarillo himself was
lucky to receive venture capital for his first startup, Gluecode.
“Gluecode was large enough to get venture capital funding in 2003,”

he said. We got about $5M Series A from Palomar Ventures and Rustic
Canyon Partners in LA at a time when it was very difficult to attract VC
funding.”
The typical exit strategy is either an IPO or and M&A. In the U.S., the
venture capital industry was jumpstarted by the emergence of the NASDAQ,
started by the National Association of Securities Dealers who were resisting
the bias of the NYSE against small companies. Countries in Asia such as
Taiwan, Malaysia, Korea, etc., have followed suit, setting up bourses like the
TAIEX, MESDAQ, KOSDAQ, patterned after the NASDAQ.
As a venture capitalist, Damarillo was excited about the resurgent

liquidity of Asian bourses. “This will provide the next capital infrastructure
for startups,” he observed, “since NASDAQ in the U.S. has become difficult
because of Sarbanes-Oxley. NASDAQ has become big, it’s supposed to be
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the dynamic company market. So the HK Stock Exchange, the Philippines

Stock Exchange, SGX and the smaller boards of the Tokyo Stock Exchange
are interesting areas where you can create this liquidity mechanism.”
“It’s said that it takes 99 failed startups to make a Microsoft or an

Intel.” Winston continued, turning to the high cost of funding. “Fund sources
often set their expected ROI at 33% or higher per annum. This is because
these funds have to absorb several failed investments no matter how
carefully the partners have performed due diligence.”
Dan Pagulayan, Managing Director of RP-based ICCP Venture Partners,

echoed Damarillo’s sentiments when he declared that out of 100 plans
submitted to his firm it funds only one or two.
“So in effect,” Winston concluded, “the majority of technopreneurs will
never see a venture capital term sheet. Most of them will end up
bootstrapping their startups or finding “angels” to fund them.
Damarillo, however, saw a slight change in this funding scenario. “I

think we will see a return to the early days of venture capital,” he said.
“When VC started in Silicon Valley it was not the Wall Street broker types
who started it but rather the former engineer turned technopreneur who got
his big windfall. This type will only invest in technology startups he
understands.”
“And,” Winston concluded with a smile, “so will I. Since I only

understand software, I will stick to software.”
Incubating Software Companies
Damarillo’s plans for moving into Asia were essentially driven by the
potential cost savings of incubating software companies in the region.
“Comparable engineering and innovation capabilities can be found in Asian
companies for a fraction of their cost in the U.S.” He said, “You can actually
build equivalent technology companies for at least half the price compared to
the U.S. There are enough healthy engineering talents here to do that.”
For Damarillo to sustain his momentum of incubating and selling off

software companies from Asia (one or two of which, he hoped, would pay off
bigtime) the challenges he saw were formidable. In order to find his next
Gluecode or LogicBlaze he would have to separate the chaff from the wheat,
an awful lot of chaff for precious little wheat. He would have to sift through a
mountain of ideas from several different countries and cultures. He told his
Japanese audience that he wanted to adopt their keiretsu model by
incubating software enterprises with complementary strengths which could
fend off competition by supporting each other.
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The Future
In order to build what he called an equity capital infrastructure for

startups in the Asian region Damarillo had organized Global Gateway Capital
in 2007, a $15M venture capital fund he hoped would grow to$150M in a few
years. “I believe the next Silicon Valley will be in Asia,” he told his Japanese
visitors. “All the factors are present here: the rapid development of technical
expertise and the transition from a provider to a consumer economy for
technology. Furthermore, an explosion of entrepreneurial activities is taking
place as we speak. It is right place and time to start a venture fund.”
Damarillo also launched in Manila a Software as a Service (SaaS)

incubator called Mor.ph Labs. Springboard Research, an IT market research
firm, forecast that the Software as a Service market in Asia would reach
US$1.16 billion by 2010, with a cumulative growth rate of 66%, to eventually
comprise 35% of the enterprise software application market. SaaS, he
explained, is a paradigm shift in software revenue models. Instead of selling
software a user simply pays to be able to use the software online. He
pointed to Google Apps, which includes word processing, spreadsheet and
presentation software as an early example.
Another developing area for software, Winston added, is Web 2.0, “the
second iteration of the internet, as demonstrated by sites like YouTube,
Friendster, Wikipedia, and other social networking and self-generated
content sites.”
After his discussions with the Japanese investors, Damarillo confided

to some of his intimate friends that developments and challenges in Asia with
respect to software were “simply moving too fast” and that his interactions
with potential investors had made him realize that he needed some breathing
space to sit down and begin to develop a broad but cohesive strategy for the
next three or four years.
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FIGURE 1
Graph of open source usage in large U.S. companies, source: Forrester Research
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Exhibit 1
Gluecode security
Gluecode uses security realms that are built around the Java Authentication and
Authorization Service (JAAS). By default, there are default realms configured,
one for the console, and another for applications. The default realm is a property
file realm, as well as a realm for Derby, but you can configure the LDAP as a
security realm.
Gluecode ships with a login module for LDAP that can be configured against
LDAP servers for a more robust security implementation. Applications can then
programmatically authenticate using JAAS. In addition, security can be added to
Web components declaratively or programmatically. The declarative method
involves adding security constraints through the web.xml file and through the
application server-specific deployment files. Programmatic security requires Java
source code modification.
The key trade-off between the two methods is ease of use versus granularity of
control. The declarative method offers ease of use, while the programmatic
method provides finer levels of security control with respect to resource
authentication and authorization. Developers can also create their own custom
SecurityRealm/LoginModule pairs. There is a third method, which can be called
semi-custom, where a developer can use the supplied SimpleSecurityRealm
class and develop a custom JAAS login module. Multiple security realms can be
defined in Gluecode Standard Edition to authenticate and authorize users by
providing a set of principals for access control. Principals usually represent a
logged-in user and the groups to which that user is assigned. The list of roles
provided by an application module is then mapped to users and groups.
Typically, authentication implies validating a username and password, although,
as mentioned above, Gluecode supports Kerberos authentication with an
appropriate login module.
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Gluecode Standard Edition servers can be configured to use SSL/HTTPS. This

involves:
 Creating a keystore.
 Configuring a Jetty connector.
 Deploying and starting the connector.
Consult Gluecode documentation for details on how to do this.
Source:
http ://www.ibm.com/developerworks/webpshere/techjournal/0509_barcia/0509_ba
rcia.html
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Exhibit 2
Interview with LogicBlaze team

alex.fletcher (Technology Analyst) posted 6/7/2006 | Comments (2)
I was recently granted an interview with the LogicBlaze team (yes I said team, keep
reading...) for the purpose of integrating the answers into creating an analyst report about
the LogicBlaze FUSE platform. Some (3) of the quotes I included in the report itself but
as usual I felt it would be a horrible waste to simply sit on the rest of the valuable
information that was included in the interview.
For those who don't know LogicBlaze, is a company started by Winston Damarillo (the
founder of Gluecode Software) that provides a complete ESB based runtime solution for
the SOA. Despite the fact that FUSE is composed of different open source software
components, the product is integrated into a single point of access for support,
maintenance, and developer functionality. Because very few other vendors (open source
or otherwise) have SOA platforms on the market as yet, LogicBlaze has the opportunity
to really establish good market penetration before other open source and proprietary
offerings follow suite. Since the interview included input from more than one person, the
following is a key:
WD: Winston Damarillo, Chairman and CEO

RD: Rob Davies, VP Product Development
JS: James Strachan, Chief Architect, co-founder
HC: Hiram Chirino, Director of Architecture, co-founder
1. In specific terms, how does FUSE power business integration? (RD)
LogicBlaze FUSE provides a platform for the runtime execution of integrated business
processes, in a Service-Oriented Architecture. This includes the execution of composite
applications and event-driven processes, each comprising business services built on the
data and logic of existing business applications. In addition, LogicBlaze FUSE makes
these processes accessible to client applications and lightweight clients based in Ajax,
Ruby, Perl, Python, PHP, etc.
2. What is FUSE's target market? (WD)

LogicBlaze FUSE serves three general market requirements:
* High-Performance, pervasive business integration. By providing a reliable, high-

performance JMS-based messaging infrastructure as an open source offering, LogicBlaze
removes the financial barrier that had prevented pervasive implementation of "enterprise-
caliber" messaging across any number of endpoints.
* SOA and ESB. LogicBlaze FUSE is the first open source distribution that addresses the
comprehensive range of requirements for SOA runtime, in a pluggable architecture that
facilitates integration with current and future enterprise technologies.
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* Transactional Web 2.0. LogicBlaze FUSE enables scalable, reliable access to the
enterprise infrastructure from Web 2.0 applications such as Ajax, Ruby, etc., effectively
bridging SOA and Web 2.0.
3. Does the inclusion of technologies that are still in the Apache Incubator affect the
stability of FUSE? (JS)
All Apache projects work within the Apache Software Foundation's infrastructure, and
follow the Apache way of building and maintaining an open source community. The
incubator is a place for projects to demonstrate that they meet the criteria for Apache
projects, which may include moving repositories, mailing lists, issue-tracking systems,
and also defining who is participating in the project. Being in the incubator does not say
anything about the maturity or stability of the technology being developed -- it's really
about the project community and their operations.
While many of the projects in LogicBlaze FUSE have been active for years, they moved
to Apache just a few months ago, so the incubator is where they should be hosted
initially.
4. What relationship(s) does LogicBlaze have with the different development

communities responsible for releasing the components used in the FUSE stack? (HC)
The core technologies in LogicBlaze FUSE are the ServiceMix ESB and the ActiveMQ
messaging platform, and those of us who are leaders of those projects work at
LogicBlaze. But there's a lot more community involvement than that -- we are also
contributors to related projects, and people from those projects contribute to ActiveMQ
and ServiceMix. So basically there's constant communication among all these projects
anyway, and we're kind of in the middle of the parts that connect into FUSE.
5. Are there any plans to integrate FUSE with other open source IDE's such as Eclipse or
Netbeans as a plug-in or extension? (RD)
Yes, we plan to release a toolset for LogicBlaze FUSE based on Eclipse in our next
release, v1.2. You'll get a first look at it this summer.
6. What advantages does being a JBI-based architecture, provide for an SOA stack? (JS)
It's extremely advantageous, because you're not locked into just our one way to do each
thing. JBI gives us the ability to work with anybody else's engines or components, and it
lets others use our container or components in their framework. Open source is all about
using the best stuff that's available, and if you still want something better, go ahead an
build yourself a better one. But don't go re-inventing the wheel if somebody's got a
perfectly good solution. JBI is what lets you do that in an SOA platform.
7. Can you explain the XBean deployment framework and how it fits into the FUSE
architecture? (JS)
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Both ActiveMQ and ServiceMix have been using XBean as their primary configuration
mechanism for some time. Conceptually, it works in the same way that the Apache
Geronimo application server uses the GBean microkernel to deploy and manage
components like ActiveMQ for JMS messaging. But XBean is designed to be lighter, and
its key benefit for LogicBlaze FUSE is that it enables deployment of every component in
the platform without without requiring a full J2EE application server.
8. How does LogicBlaze ensure both compatibility and interoperability between FUSE
components? (WD)
I often say that open source development provides the best 80%-complete software in the
world. Because what is available in open source is really better than most of the
commercially-licensed alternatives. But the advantage the commercial solutions have is
that they deliver the whole package - all the parts, integrated, tested, documented,
supported and licensed as a single package. We do the same with LogicBlaze FUSE, but
of course it's an open source solution. We add value not only by identifying the best open
source products for each part of the SOA platform, but also by integrating and testing
them for our end users, and where necessary, developing parts that aren't yet available in
a mature open source product. And of course, we provide support and ongoing lifecycle
management for our enterprise customers.
9. Describe your support model for FUSE? Is each of the components within the stack
supported by LogicBlaze or is support delegated to the third party who released the
source code (i.e. Apache Software Foundation)? (WD)
LogicBlaze's mission is to provide a single point of information and support for

enterprise users of the FUSE distribution. We do this through a business and technical
infrastructure called the CoRE Network. CoRE stands for "Community-oriented Real-
time Engineering", and it enables end user IT professionals to work closely with our
developers in an environment that combines the best practices of open source
development -- transparency and collaboration -- with the requirements of enterprise IT --
service level agreements, customer confidentiality, etc.
People that aren't familiar with the dynamics of open source projects see the quality of
the code, and mistakenly assume that the open source community behind it is also an end-
user support operation. Some of the best enterprise Java development taking place today
is happening in open source projects at Apache, and Apache provides assurance that
those projects will remain developer-governed, community-driven and properly licensed.
But Apache doesn't make any promise of end-user support. So we have a complementary
role, in that we remove a number of the concerns that enterprise adopters have about open
source, namely support, interoperability, etc.
10. How does LogicBlaze handle the integration of updates to different components
within the stack? Are users responsible for upgrading to the latest version(s)? (WD)
This is one of the benefits of that LogicBlaze provides to all end users, and that we
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provide proactively to our customers through the CoRE network. We provide release
management just as any commercial software company would.
11. Give 5 reasons that you would recommend FUSE to technology professionals. (WD)
* It's the best way to get started with an SOA initiative without having to make a
commitment to one vendor's platform before you have fully scoped the long-term plan for
your SOA and defined the parameters of your SOA initiative.
* Open source isn't just about saving money. It's really about controlling the destiny of
your infrastructure.
* With an open source solution backed by commercial support operation, you only pay
for the value you derive. One hundred percent of LogicBlaze'srevenue is earned ensuring
the enterprise is realizing its SOA objectives.
* We do integration - that's where our roots are, and that's the center of our solution. For
many vendors - commercial and open source - integration lies outside their core
competency.
* Innovation. Through the contributions of scores of open source developers, hundreds of

end-user organizations, and thousands of individuals, LogicBlaze FUSE is moving
forward at a far faster pace, both in terms the development of its core technologies as
well as being extended to uses like Web 2.0 that we hadn't anticipated a year ago. So it's
just the most innovative, dynamically evolving integration solution available today.
12. Can you explain what "agile integration" is and how FUSE can help achieve it? (RD)
The goal of SOA is to provide systems integration to support business requirements, but
to avoid creating a solution that serves only current requirements, and cannot adapt when
the requirements change. We take the idea of agility a step further than many, because we
think the SOA infrastructure itself should be agile. That is, we believe that middleware
technologies should also be able to take advantage of unforeseen technologies or business
opportunities, and to adapt to changing requirements. Being based on open source is a big
part of that agility.
Source: http://it.toolbox.com/blogs/opensource-unleashed/interview-with-
logicblaze-team-9747
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Exhibit 3
LogicBlaze FAQ
The Deal
Q: Why is IONA acquiring LogicBlaze?
A: LogicBlaze brings IONA proven Open Source expertise. This acquisition
provides us with an even greater number of resources to help accelerate the
growth of our Open Source business and expand our capabilities to deliver the
Open Source technology and corresponding enterprise-quality support our
customers demand as they evaluate how best to incorporate Open Source into
their SOA deployment strategies.
LogicBlaze is well known and well respected in the Open Source community. The
company's founders are leaders in the Open Source community and its
employees are committers and contributors on several of the most popular and
widely deployed SOA-related Open Source projects such as Apache ActiveMQ,
Apache ServiceMix (in incubation) and several others. The LogicBlaze team
provides IONA with deeper expertise and committer access to these key
projects, which will result in more efficient, superior support for our customers.
In short, the key assets as a result of this acquisition are: respected Open Source
experts and leaders in the Open Source community (the people of LogicBlaze),
intellectual property, and existing customers that have adopted Open Source
technologies to support their SOA deployments.
Q: What are you paying for LogicBlaze?

A: Terms of the deal were not disclosed.
Q: What is covered under the terms of the acquisition?

A: We are acquiring substantially all of the assets of LogicBlaze, including
technology, intellectual property and active customers. Additionally, all
LogicBlaze employees are becoming IONA employees as a result of the
acquisition.
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Q: When will you complete the acquisition?

A: The transaction closed on April 6, 2007.
Q: What financial impact will the LogicBlaze acquisition have on

IONA?
A: LogicBlaze's revenue model is based on subscription support offerings and
consulting and training for the Apache ActiveMQ project and the Apache
ServiceMix project (in incubation). The company has approximately 25 active
customer agreements. Those customers become IONA customers as part of this
acquisition.
Further, with this acquisition we are adding nine people and the associated
overhead/office and other costs. When we report our first quarter earnings results
on April 24, 2007 our guidance for the second quarter will include this as part of
our total expense run rate.
Additionally, the initial effect on our revenue run rate is not significant at this
point. That being said, we are extremely excited about this company and the
accelerated growth opportunities it provides to our Open Source business
initiatives. As we've publicly stated, a goal for any acquisition is that it be
accretive in a year. Since LogicBlaze is an Open Source business with a
subscription-based revenue model, we plan for this acquisition to be cash
accretive within a year. We make that distinction since revenue recognition
follows billings in a subscription model and is ratably recognized over the full
contract period. For example, if a customer signs a one-year subscription, we
recognize 1/365 of the contract value per day of the contract.
The Company:
Q: Who is LogicBlaze?
A: LogicBlaze provides business integration solutions based on Open Source
technologies. The company was founded by integration architects with extensive
experience as leaders in Open Source projects for integration, messaging, and
enterprise service bus technologies.
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LogicBlaze's mission is to extend innovation in business integration through:
 Delivery and support of an Open Source SOA platform

 Ongoing development of Open Source solutions that meet enterprise requirements
for performance, reliability, and extensibility
 Professional services and subscription-based support offerings
 Commitment to the principles of Open Source development, including
cooperation and collaboration with related Open Source communities and projects
LogicBlaze combines the innovation, quality, and total cost of ownership

advantages of Open Source with the services offerings that customers need to
enable organizations to successfully adopt, easily manage, and widely leverage
Open Source solutions for business.
Q: Is there a current connection/relationship between LogicBlaze

and IONA?
A: IONA's Celtix Enterprise Open Source ESB contains code from both the
ActiveMQ and ServiceMix projects. IONA's Artix ESB also incorporates code
from the ActiveMQ project. Our two companies know each other very well and
are excited by the opportunities created by LogicBlaze becoming an integral part
of our Open Source business going forward.
Q: How will IONA bring LogicBlaze's products/services to market?

A: IONA will continue marketing and selling the service subscription offerings for
the ActiveMQ and ServiceMix projects for which the company is known and
respected.
Operations
Q: Who and where are LogicBlaze's customers?
A: LogicBlaze's customers include leaders in financial services, government, and
telecommunications industries. This is consistent and closely aligned with IONA's
existing customer base.
Q: how do the industry and its customers perceive LOGICBLAZE?

A: LogicBlaze has an excellent reputation in the Open Source community and
with its customers.
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Q: Will LogicBlaze continue for any length of time as an independent

company marketing their own offerings?
A: LogicBlaze will not operate as a separate company, but as indicated, will
become an integral part of IONA's Open Source business. We are excited to
welcome LogicBlaze to the IONA family and look forward to their contributions as
we continue to build out our capabilities to provide enterprise-quality Open
Source products, service and support to our customers as part of their
comprehensive SOA deployments.
Source: http://www.iona.com/pressroom/2007/logicblaze_faqs.htm
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Exhibit 4
The Venture Capital Industry–An Overview
Venture capital is money provided by professionals who invest alongside management in young,
rapidly growing companies that have the potential to develop into significant economic
contributors. Venture capital is an important source of equity for start-up companies.
Professionally managed venture capital firms generally are private partnerships or closely-held
corporations funded by private and public pension funds, endowment funds, foundations,
corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.
Venture capitalists generally:
 Finance new and rapidly growing companies;

 Purchase equity securities;
 Assist in the development of new products or services;
 Add value to the company through active participation;
 Take higher risks with the expectation of higher rewards;
 Have a long-term orientation
When considering an investment, venture capitalists carefully screen the technical and business
merits of the proposed company. Venture capitalists only invest in a small percentage of the
businesses they review and have a long-term perspective. Going forward, they actively work with
the company's management by contributing their experience and business savvy gained from
helping other companies with similar growth challenges.
Venture capitalists mitigate the risk of venture investing by developing a portfolio of young
companies in a single venture fund. Many times they will co-invest with other professional venture
capital firms. In addition, many venture partnership will manage multiple funds simultaneously.
For decades, venture capitalists have nurtured the growth of America's high technology and
entrepreneurial communities resulting in significant job creation, economic growth and
international competitiveness. Companies such as Digital Equipment Corporation, Apple, Federal
Express, Compaq, Sun Microsystems, Intel, Microsoft and Genentech are famous examples of
companies that received venture capital early in their development.
Private Equity Investing

Venture capital investing has grown from a small investment pool in the 1960s and early 1970s to
a mainstream asset class that is a viable and significant part of the institutional and corporate
investment portfolio. Recently, some investors have been referring to venture investing and
buyout investing as "private equity investing." This term can be confusing because some in the
investment industry use the term "private equity" to refer only to buyout fund investing. In any
case, an institutional investor will allocate 2% to 3% of their institutional portfolio for investment in
alternative assets such as private equity or venture capital as part of their overall asset allocation.
Currently, over 50% of investments in venture capital/private equity comes from institutional
public and private pension funds, with the balance coming from endowments, foundations,
insurance companies, banks, individuals and other entities who seek to diversify their portfolio
with this investment class.
What is a Venture Capitalist?

The typical person-on-the-street depiction of a venture capitalist is that of a wealthy financier who
wants to fund start-up companies. The perception is that a person who develops a brand new
change-the-world invention needs capital; thus, if they can’t get capital from a bank or from their
own pockets, they enlist the help of a venture capitalist.
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In truth, venture capital and private equity firms are pools of capital, typically organized as a
limited partnership, that invests in companies that represent the opportunity for a high rate of
return within five to seven years. The venture capitalist may look at several hundred investment
opportunities before investing in only a few selected companies with favorable investment
opportunities. Far from being simply passive financiers, venture capitalists foster growth in
companies through their involvement in the management, strategic marketing and planning of
their investee companies. They are entrepreneurs first and financiers second.
Even individuals may be venture capitalists. In the early days of venture capital investment, in the
1950s and 1960s, individual investors were the archetypal venture investor. While this type of
individual investment did not totally disappear, the modern venture firm emerged as the dominant
venture investment vehicle. However, in the last few years, individuals have again become a
potent and increasingly larger part of the early stage start-up venture life cycle. These "angel
investors" will mentor a company and provide needed capital and expertise to help develop
companies. Angel investors may either be wealthy people with management expertise or retired
business men and women who seek the opportunity for first-hand business development.
Investment Focus
Venture capitalists may be generalist or specialist investors depending on their investment
strategy. Venture capitalists can be generalists, investing in various industry sectors, or various
geographic locations, or various stages of a company’s life. Alternatively, they may be specialists
in one or two industry sectors, or may seek to invest in only a localized geographic area.
Not all venture capitalists invest in "start-ups." While venture firms will invest in companies that
are in their initial start-up modes, venture capitalists will also invest in companies at various
stages of the business life cycle. A venture capitalist may invest before there is a real product or
company organized (so called "seed investing"), or may provide capital to start up a company in
its first or second stages of development known as "early stage investing." Also, the venture
capitalist may provide needed financing to help a company grow beyond a critical mass to
become more successful ("expansion stage financing").
The venture capitalist may invest in a company throughout the company’s life cycle and therefore
some funds focus on later stage investing by providing financing to help the company grow to a
critical mass to attract public financing through a stock offering. Alternatively, the venture
capitalist may help the company attract a merger or acquisition with another company by
providing liquidity and exit for the company’s founders.
At the other end of the spectrum, some venture funds specialize in the acquisition, turnaround
or recapitalization of public and private companies that represent favorable investment
opportunities.
There are venture funds that will be broadly diversified and will invest in companies in various
industry sectors as diverse as semiconductors, software, retailing and restaurants and others that
may be specialists in only one technology.
While high technology investment makes up most of the venture investing in the U.S., and the
venture industry gets a lot of attention for its high technology investments, venture capitalists also
invest in companies such as construction, industrial products, business services, etc. There are
several firms that have specialized in retail company investment and others that have a focus in
investing only in "socially responsible" start-up endeavors.
Venture firms come in various sizes from small seed specialist firms of only a few million dollars
under management to firms with over a billion dollars in invested capital around the world. The
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AIM-X-XX-XXXX-XX
common denominator in all of these types of venture investing is that the venture capitalist is not
a passive investor, but has an active and vested interest in guiding, leading and growing the
companies they have invested in. They seek to add value through their experience in investing in
tens and hundreds of companies.
Some venture firms are successful by creating synergies between the various companies they
have invested in; for example one company that has a great software product, but does not have
adequate distribution technology may be paired with another company or its management in the
venture portfolio that has better distribution technology.
Length of Investment
Venture capitalists will help companies grow, but they eventually seek to exit the investment in
three to seven years. An early stage investment make take seven to ten years to mature, while a
later stage investment many only take a few years, so the appetite for the investment life cycle
must be congruent with the limited partnerships’ appetite for liquidity. The venture investment is
neither a short term nor a liquid investment, but an investment that must be made with careful
diligence and expertise.
Types of Firms
There are several types of venture capital firms, but most mainstream firms invest their capital
through funds organized as limited partnerships in which the venture capital firm serves as the
general partner. The most common type of venture firm is an independent venture firm that has
no affiliations with any other financial institution. These are called "private independent firms".
Venture firms may also be affiliates or subsidiaries of a commercial bank, investment bank or
insurance company and make investments on behalf of outside investors or the parent firm’s
clients. Still other firms may be subsidiaries of non-financial, industrial corporations making
investments on behalf of the parent itself. These latter firms are typically called "direct investors"
or "corporate venture investors."
Other organizations may include government affiliated investment programs that help start up
companies either through state, local or federal programs. One common vehicle is the Small
Business Investment Company or SBIC program administered by the Small Business
Administration, in which a venture capital firm may augment its own funds with federal funds and
leverage its investment in qualified investee companies.
While the predominant form of organization is the limited partnership, in recent years the tax code
has allowed the formation of either Limited Liability Partnerships, ("LLPs"), or Limited Liability
Companies ("LLCs"), as alternative forms of organization. However, the limited partnership is still
the predominant organizational form. The advantages and disadvantages of each has to do with
liability, taxation issues and management responsibility.
The venture capital firm will organize its partnership as a pooled fund; that is, a fund made up of
the general partner and the investors or limited partners. These funds are typically organized as
fixed life partnerships, usually having a life of ten years. Each fund is capitalized by commitments
of capital from the limited partners. Once the partnership has reached its target size, the
partnership is closed to further investment from new investors or even existing investors so the
fund has a fixed capital pool from which to make its investments.
Like a mutual fund company, a venture capital firm may have more than one fund in existence. A
venture firm may raise another fund a few years after closing the first fund in order to continue to
invest in companies and to provide more opportunities for existing and new investors. It is not
uncommon to see a successful firm raise six or seven funds consecutively over the span of ten to
fifteen years. Each fund is managed separately and has its own investors or limited partners and
its own general partner. These funds’ investment strategy may be similar to other funds in the
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AIM-X-XX-XXXX-XX
firm. However, the firm may have one fund with a specific focus and another with a different focus
and yet another with a broadly diversified portfolio. This depends on the strategy and focus of the
venture firm itself.
Corporate Venturing
One form of investing that was popular in the 1980s and is again very popular is corporate
venturing. This is usually called "direct investing" in portfolio companies by venture capital
programs or subsidiaries of nonfinancial corporations. These investment vehicles seek to find
qualified investment opportunities that are congruent with the parent company’s strategic
technology or that provide synergy or cost savings.
These corporate venturing programs may be loosely organized programs affiliated with existing
business development programs or may be self-contained entities with a strategic charter and
mission to make investments congruent with the parent’s strategic mission. There are some
venture firms that specialize in advising, consulting and managing a corporation’s venturing
program.
The typical distinction between corporate venturing and other types of venture investment
vehicles is that corporate venturing is usually performed with corporate strategic objectives in
mind while other venture investment vehicles typically have investment return or financial
objectives as their primary goal. This may be a generalization as corporate venture programs are
not immune to financial considerations, but the distinction can be made.
The other distinction of corporate v enture programs is that they usually invest their parent’s
capital while other venture investment vehicles invest outside investors’ capital.
Commitments and Fund Raising

The process that venture firms go through in seeking investment commitments from investors is
typically called "fund raising." This should not be confused with the actual investment in investee
or "portfolio" companies by the venture capital firms, which is also sometimes called "fund raising"
in some circles. The commitments of capital are raised from the investors during the formation of
the fund. A venture firm will set out prospecting for investors with a target fund size. It will
distribute a prospectus to potential investors and may take from several weeks to several months
to raise the requisite capital. The fund will seek commitments of capital from institutional
investors, endowments, foundations and individuals who seek to invest part of their portfolio in
opportunities with a higher risk factor and commensurate opportunity for higher returns.
Because of the risk, length of investment and illiquidity involved in venture investing, and because
the minimum commitment requirements are so high, venture capital fund investing is generally
out of reach for the average individual. The venture fund will have from a few to almost 100
limited partners depending on the target size of the fund. Once the firm has raised enough
commitments, it will start making investments in portfolio companies.
Capital Calls
Making investments in portfolio companies requires the venture firm to start "calling" its limited
partners commitments. The firm will collect or "call" the needed investment capital from the
limited partner in a series of tranches commonly known as "capital calls". These capital calls from
the limited partners to the venture fund are sometimes called "takedowns" or "paid-in capital."
Some years ago, the venture firm would "call" this capital down in three equal installments over a
three year period. More recently, venture firms have synchronized their funding cycles and call
their capital on an as-needed basis for investment.
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Illiquidity
Limited partners make these investments in venture funds knowing that the investment will be
long-term. It may take several years before the first investments starts to return proceeds; in
many cases the invested capital may be tied up in an investment for seven to ten years. Limited
partners understand that this illiquidity must be factored into their investment decision.
Other Types of Funds

Since venture firms are private firms, there is typically no way to exit before the partnership totally
matures or expires. In recent years, a new form of venture firm has evolved: so-called
"secondary" partnerships that specialize in purchasing the portfolios of investee company
investments of an existing venture firm. This type of partnership provides some liquidity for the
original investors. These secondary partnerships, expecting a large return, invest in what they
consider to be undervalued companies.
Advisors and Fund of Funds

Evaluating which funds to invest in is akin to choosing a good stock manager or mutual fund,
except the decision to invest is a long-term commitment. This investment decision takes
considerable investment knowledge and time on the part of the limited partner investor. The
larger institutions have investments in excess of 100 different venture capital and buyout funds
and continually invest in new funds as they are formed.
Some limited partner investors may have neither the resources nor the expertise to manage and
invest in many funds and thus, may seek to delegate this decision to an investment advisor or so-
called "gatekeeper". This advisor will pool the assets of its various clients and invest these
proceeds as a limited partner into a venture or buyout fund currently raising capital. Alternatively,
an investor may invest in a "fund of funds," which is a partnership organized to invest in other
partnerships, thus providing the limited partner investor with added diversification and the ability
to invest smaller amounts into a variety of funds.
Disbursements
The investment by venture funds into investee portfolio companies is called "disbursements". A
company will receive capital in one or more rounds of financing. A venture firm may make these
disbursements by itself or in many cases will co-invest in a company with other venture firms
("co-investment" or "syndication"). This syndication provides more capital resources for the
investee company. Firms co-invest because the company investment is congruent with the
investment strategies of various venture firms and each firm will bring some competitive
advantage to the investment.
The venture firm will provide capital and management expertise and will usually also take a seat
on the board of the company to ensure that the investment has the best chance of being
successful. A portfolio company may receive one round, or in many cases, several rounds of
venture financing in its life as needed. A venture firm may not invest all of its committed capital,
but will reserve some capital for later investment in some of its successful companies with
additional capital needs.
Exits
Depending on the investment focus and strategy of the venture firm, it will seek to exit the
investment in the portfolio company within three to five years of the initial investment. While the
initial public offering may be the most glamourous and heralded type of exit for the venture
capitalist and owners of the company, most successful exits of venture investments occur through
a merger or acquisition of the company by either the original founders or another company.
Again, the expertise of the venture firm in successfully exiting its investment will dictate the
success of the exit for themselves and the owner of the company.
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IPO
The initial public offering is the most glamourous and visible type of exit for a venture investment.
In recent years technology IPOs have been in the limelight during the IPO boom of the last six
years. At public offering, the venture firm is considered an insider and will receive stock in the
company, but the firm is regulated and restricted in how that stock can be sold or liquidated for
several years. Once this stock is freely tradable, usually after about two years, the venture fund
will distribute this stock or cash to its limited partner investor who may then manage the public
stock as a regular stock holding or may liquidate it upon receipt. Over the last twenty-five years,
almost 3000 companies financed by venture funds have gone public.
Mergers and Acquisitions

Mergers and acquisitions represent the most common type of successful exit for venture
investments. In the case of a merger or acquisition, the venture firm will receive stock or cash
from the acquiring company and the venture investor will distribute the proceeds from the sale to
its limited partners.
Valuations
Like a mutual fund, each v enture fund has a net asset value, or the value of an investor’s
holdings in that fund at any given time. However, unlike a mutual fund, this value is not
determined through a public market transaction, but through a valuation of the underlying
portfolio. Remember, the investment is illiquid and at any point, the partnership may have both
private companies and the stock of public companies in its portfolio. These public stocks are
usually subject to restrictions for a holding period and are thus subject to a liquidity discount in the
portfolio valuation.
Each company is valued at an agreed-upon value between the venture firms when invested in by
the venture fund or funds. In subsequent quarters, the venture investor will usually keep this
valuation intact until a material event occurs to change the value. Venture investors try to
conservatively value their investments using guidelines or standard industry practices and by
terms outlined in the prospectus of the fund. The venture investor is usually conservative in the
valuation of companies, but it is common to find that early stage funds may have an even more
conservative valuation of their companies due to the long lives of their investments when
compared to other funds with shorter investment cycles.
Management Fees
As an investment manager, the general partner will typically charge a management fee to cover
the costs of managing the committed capital. The management fee will usually be paid quarterly
for the life of the fund or it may be tapered or curtailed in the later stages of a fund’s life. This is
most often negotiated with investors upon formation of the fund in the terms and conditions of the
investment.
Carried Interest
"Carried interest" is the term used to denote the profit split of proceeds to the general partner.
This is the general partners’ fee for carrying the management responsibility plus all the liability
and for providing the needed expertise to successfully manage the investment. There are as
many variations of this profit split both in the size and how it is calculated and accrued as there
are firms.
Source: http://www.nvca.org/def.html
___________________________________________________________________________

Assignment 01 - Winston Damarillo Case

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In August, 2007, Winston Damarillo, a Filipino-American, brought a

Although Damarillo was prevented from revealing how much he had

Open Source Software

Open Source software, as opposed to the proprietary kind exemplified

Winston Damarillo: Making Money Off Open Source_________________ _2

Because of its lower cost, open source is a popular alternative to

There was a problem, however. Even “free” open source software is

“It is no wonder,” Damarillo commented, “that the conventional

Opportunities and Key Concerns in Asia

In Cebu, Damarillo spoke to his potential investors about the

In the same breath, however, Damarillo admitted that there were

Winston Damarillo: Making Money Off Open Source_________________ _3

Another concern that was particularly serious in the Philippines was

Developing a Career: the Early Years

Damarillo was born in Bohol, an island in the Philippines and grew up

Winston Damarillo: Making Money Off Open Source_________________ _4

software business architecture would change over time. It would no longer

A Business Model for Open Source

Winston’s “model” was to be on the lookout for software developers

“Incubation” was the current term for identifying inexperienced

The accepted practice was for incubators to limit support to their

Technology startups were usually funded by equity rather than loans.

Winston Damarillo: Making Money Off Open Source_________________ _5

“Angel Incubators” were often described in the trade as “families,

Less fortunate entrepreneurs who were unable to find angel investors

Another variant of these funding mechanisms were grants from a

Role of Venture Capital

“Gluecode was large enough to get venture capital funding in 2003,”

As a venture capitalist, Damarillo was excited about the resurgent

Winston Damarillo: Making Money Off Open Source_________________ _6

the dynamic company market. So the HK Stock Exchange, the Philippines

“It’s said that it takes 99 failed startups to make a Microsoft or an

Dan Pagulayan, Managing Director of RP-based ICCP Venture Partners,

Damarillo, however, saw a slight change in this funding scenario. “I

“And,” Winston concluded with a smile, “so will I. Since I only

Incubating Software Companies

For Damarillo to sustain his momentum of incubating and selling off

Winston Damarillo: Making Money Off Open Source_________________ _7

In order to build what he called an equity capital infrastructure for

Damarillo also launched in Manila a Software as a Service (SaaS)

After his discussions with the Japanese investors, Damarillo confided

Winston Damarillo: Making Money Off Open Source_________________ _8

Winston Damarillo: Making Money Off Open Source_________________ _9

Winston Damarillo: Making Money Off Open Source_________________ _10

Gluecode Standard Edition servers can be configured to use SSL/HTTPS. This

Consult Gluecode documentation for details on how to do this.

Winston Damarillo: Making Money Off Open Source_________________ _11

Interview with LogicBlaze team

WD: Winston Damarillo, Chairman and CEO

1. In specific terms, how does FUSE power business integration? (RD)

2. What is FUSE's target market? (WD)

* High-Performance, pervasive business integration. By providing a reliable, high-

Winston Damarillo: Making Money Off Open Source_________________ _12

4. What relationship(s) does LogicBlaze have with the different development

Winston Damarillo: Making Money Off Open Source_________________ _13

LogicBlaze's mission is to provide a single point of information and support for

Winston Damarillo: Making Money Off Open Source_________________ _14

* Innovation. Through the contributions of scores of open source developers, hundreds of

Winston Damarillo: Making Money Off Open Source_________________ _15

Q: What are you paying for LogicBlaze?

Q: What is covered under the terms of the acquisition?

Winston Damarillo: Making Money Off Open Source_________________ _16