University backs venture to commercialize academic software

The University has helped spawn a new venture that sets out to do for academic software developers what Red Hat Inc. did for the Linux operating system. The venture, called Open Channel Software, opened for business in Chicago March 1 with half a million dollars in seed capital from investors that include the Illinois Coalition and the University’s ARCH Development Corporation.

Red Hat began marketing Linux, an open-source operating system––one that can be downloaded for free from the Internet––in 1995, a year after its release. In June 1999, Red Hat went public with a wildly successful $96.6 million stock offering.

“With Linux and Red Hat as examples of what’s going on in this environment, I think the acceptance of software coming out of the open-source community is something businesses are starting to wake up to,” said John Kennedy, Open Channel president and chief executive officer.

“The software that academic and research people create is generally very innovative and advanced. It may need a little tweaking to make it commercially acceptable, but fundamentally, it is very strong.”

Kennedy projects that the venture will generate between $5 million and $7 million annually, primarily from fees charged for customer support and services and the “e-tailing” of complementary products.

Open Channel’s principal investor is the Illinois Coalition, a not-for-profit economic development organization that seeks to strengthen the state economy through science and technology. Matching funds were provided by ARCH, a not-for-profit University subsidiary that commercializes technology from the University and Argonne National Laboratory; Lyric Capital of California; and an individual who prefers to remain anonymous.

ARCH Project Manager Douglas Curry approached Kennedy about starting such a venture after discussing with Ridgway Scott, Professor in Computer Science, and Stuart Kurtz, Professor and Chairman of Computer Science, the need for a better way to commercialize software developed at universities.

In academia, software authors typically release their work as open-source programs as an integral part of their research. It enables authors to establish an intellectual claim to a new idea and to receive assistance from their peers in its further development.

“The typical objective of a software developer is not to get rich. It’s rather to see that the software somehow continues to live,” Scott said. Yet getting new software fleshed out often requires extra time or special funding that may be unavailable in the early stages, when the concept’s potential remains unclear.

What is really needed, Scott said, is “a commercial entity that would offer services to the author to take the software down that long and tortuous road toward commercialization.”

ARCH’s Curry brought Kennedy into the discussions because of his proven track record as an innovative software-marketing executive. “John has already built one successful software company from scratch and sold it,” Curry said.

Kennedy founded Marketing Information Systems Inc. in 1981 and became one of the first innovators to introduce technology into the sales and marketing process. His company sold more than 500 software systems to customers––including IBM and MCI––operating in 60 countries. IMA Inc. of Connecticut bought Kennedy’s company in 1998.

With Open Channel Software, Kennedy and Curry have created an entirely new business model for software commercialization. The venture consists of two entities. A not-for-profit foundation, based on a concept originally proposed by Scott, will publish open-source software from a wide range of university and research laboratory contributors from around the globe. A for-profit company that Kennedy calls “the incubator” will then commercialize foundation software with the most market potential.

The arrangement allows software authors to remain the chief architects and moderators of their open-source software sites but will relieve them of the burden of setting up and maintaining the sites. For software that has commercial value, authors will receive additional marketing and support services. Authors and the universities with which they are affiliated also will receive a percentage of any revenue as defined by the policies of their institutions.

Kennedy is now seeking additional venture capital, hiring key new staff members and searching for open-source software authors to join his venture. Within two years, he expects his foundation to publish approximately 150 open-source programs in at least a dozen disciplines.

“One strong promise of commercialization is to bundle some of these individual programs into a suite of products and then go out and sell that suite as a more powerful solution,” Kennedy said.

Editorial review boards consisting of leading professors and researchers from a variety of institutions will oversee each disciplinary area. Board members’ duties will include handing out Editors’ Choice Awards for the programs they deem the most significant. Faculty member Scott will lead the review board for finite element analysis software, which is used in computer-aided design and computer-aided manufacturing systems.

“Scott has been a very important adviser as we have tried to develop this concept,” Kennedy said.

For more information, see Open Channel’s Web site at www.openchannelsoftware.com.