Bob Waldie

Brisbane tech veteran Bob Waldie is the chief executive and founder of Opengear, an Australian technology exporter that specialises in IT infrastructure management solutions based on an open-source platform.

The company makes 80% of its sales to overseas customers, which means the rising Australian dollar has been a huge hurdle this year. Nevertheless, revenue grew by 50% in 2010, although Waldie won’t reveal any figures (industry sources suggest somewhere between $3-5 million).

Today Bob talks about combating the rising Australian dollar, why it’s crucial to start up with scale in mind, and the advantages of open source.

For non-tech people like myself, can you give us an explanation of exactly what Opengear does?

What we do is we develop smart infrastructure management solutions. So we manage ICT infrastructure, that’s computers and all their related pieces and our customers. Our typical customers are people who provide data or information services, or people who control devices and infrastructure. So a customer target area for us is data centres and ISPs like TPG and Telstra in Australia. And within that organisation our customers are the system administrators or the network managers and their job is to make sure of uptime of all the computers and networks and that everything is working. And we give them tools to enable them to do that. We give them appliances, little black box appliances that they put in their racks, and it monitors the power supply, the temperature, if someone’s opened the front door. It gives them access to go along and remotely connect to all those devices.

So a pretty crucial bit of technology?

It is, even more critical and more exciting to think is people that have got distributed infrastructure, like people who are providing a managed service where they’ve got customers that have got hundreds of branches and they’re controlling everything in a big network with 1,000 sites. Our biggest customer in Australia is the Department of Foreign Affairs and Trade. And we’ve got one of our appliances in every trade centre, every embassy around the world, so the guy from Canberra can essentially manage the communications network, all the Cisco routers and the firewalls and the satellite links in those sites. They can go in there over a separate secure link and they can change passwords and they can monitor what’s going and we can provide that secure access entry point. Plus we’ve got a lot of monitoring facilities and other smarts we build, but that’s the essence of what we do.

So in terms of where the geography of the business, how important is Australia? I know you’re Brisbane-based, but where is your main playing field?

First of all I was born here, I live here, I went to college here and more than 80% of our shareholders are here. We do all of our R&D here, so let’s say from a supply side and a balance sheet perspective Australia is imperative. But to date Australia has not been as key to us in terms of our customers. It’s not the market in where we have focused, although that’s changing a little again with the Australian dollar increasing.

When you have a lot of your operational expenditure written in $AUD but very little of your revenue’s written in $AUD, then if you can build up your local business that’s sort of a natural hedge. So we’re putting in a bit of an effort which we hadn’t done before. Because again, Australia’s a beautiful place to live but it’s a terribly small market – which is why it’s a beautiful place to live.

How much focus are you putting on the dollar right now?

I’ve done a couple of start-up cycles before in the last 20 or 30 years and the dollar has always been a big issue. In the previous business from 2000 we had US50c for a while and went up to about US80c and this time in the last couple of years we’ve gone from US70c to $US1.05. That’s a huge impact on your operations when you’re trading across currencies and we’re small at this stage in our life cycle.

We’re too small to do the simple things like take out foreign exchange protection. Now, I’ve had a previous business where you get to the point you take out a contract and you know you can’t win or lose so you’re never happy because it’s costing you, but you’re sleeping better because you’ve taken that completely uncontrollable factor out of the equation.

What we do is that even though we’re an Australian-owned operation, everything here we transact in here is in US dollars. We’ve got our budgets written in US dollars, we manufacture all of our electronic hardware in China and all our supply-side contracts for hardware are written in US dollars. All of our export sales contracts and all of our overseas business, whether it’s in China or whether it’s in Japan, in Europe or in America is all written in US dollars. In fact our biggest contract we’ve had in Australia is a deal we got last year with Maxgaming, which was a $1 million deal for us domestically, that was written in US dollars even though it was an Australian business deal. That just puts a big hedge that you can build into your business model.

I think the only thing we can’t mitigate against is our people costs and our software and R&D costs and our management costs. They’re Australian dollars and I’m just really miserable in pay rises when that dollar goes up.

With the dollar looking like it’s going to sit high for awhile we’re revisiting our local price book again – you’ve got to keep your price book here really current because the dollar keeps moving around.

The other thing we’ve been looking at is resources. In the past I’ve been able to get really good quality design people in Brisbane a lot cheaper than I could get them in America. For the first time now since we started to get up into the high US90c-range it actually costs you more to buy and R&D engineer in Brisbane than it cost me to buy one in Middle America. That changes the equation of how you build out your global resources again because people aren’t working from central offices any more. You can scatter them around the world as much as around the country.

So is that a strategy to change the location of your resources?

We won’t change the core location of our R&D because I think that’s important that your founders and your driving forces are near your key implementers. But the support infrastructure is a piece where we’ve said we currently do a bit here and a bit in the US, we’re now looking to expand that now we’ve got a UK operation so we can offer 24/7 sort of coverage. Now, we do that normally by expanding people here but now we’re looking to put more people in Utah or putting support infrastructure in the UK. Now that’s something you wouldn’t have contemplated in an US80c world.

But again this is a technology business so it’s different to manufacturing or another business because we can network things. There’s not a lot of infrastructure costs with key people. I mean, most of our people in the States work from home, we’ve got an office in Utah in that facility there but all our sales and other technical staff there they all work in different states because that’s their normal model there.

You’re a bit of a start-up veteran. What are the key lessons you took into the launch of this business?

I think as a serial entrepreneur I am a failure, not as a success, because I tried retiring and failed. I bought a farm, did all those things, I’ve got cattle and grapes and that stuff and they really aren’t as exciting as starting a business. I could never actually learn to enjoy myself.

But I think that there are a couple of key lessons.

One of the things we do and I do is to make sure right from the very get go, when you’re still at the concept stage, that you’ve actually mapped out your business evolution and how’s it going to scale. Now, not just how it’s going to develop the solution and go to market, that’s the easy part. It really is the question of: How’s it scale? And what’s the return for founder, stakeholder, angel, VC?

Have that pretty clear in your head again before you spend a penny on actually really validating your value proposition. Have this map of where you’re going and how you’re going to grow it because in doing that, that’s when you identify really important things, like what’s the unfair advantage you’re going to use to make you successful.

Most businesses that start, stop prematurely because they haven’t found the secret to success. I think it’s worth putting in a lot of thought into what’s your unfair advantage, something that not just gets you to market but is a scalable unfair advantage which you can build the business on.

It may be that you’ve got a really rich uncle who happens to own the big piece of the demand side of the market or something. It doesn’t have to involve huge amounts of intellect and wisdom and intellectual property, but I think it’s important that you identify something. It could just be that you’re going to be first to market but it’s only of value if you’re first to global market. There’s not point being first to market in Brisbane or Australia, because someone will be second to market in America and China and then they’ll come and thwart you.

How did you take Opengear overseas?

We started the business with the intention of developing into the US so that was our plan right from the start. In fact, we set the company up with a US parent entity even though all of the intellectual property is owned down here. But I just know from history if you’re selling to major customers in the States, that gets rid of another uncertainty factor if they can be doing contracts with a US parent.

It looks like resellers have been the key to getting your product out there very quickly to as many people as possible.

That’s a key piece of the scaling factor, in terms of how we can multiply without having to have a huge sales force and the like. I think though the other underpinning piece of the solution that we developed is we’re very much an open-source based business. So everything we’ve developed is very heavily built on this open-source technology where the software is free to use and people can change it. [Companies pay to use Opengear’s hardware and services]. And that gives us a huge asset pool to leverage, that even a small company can derive strength from and create unfair advantage.

I think therefore big customers feel less risk in taking solutions from us. One of the big challenges as a growing business in any environment is getting the attention of your big customer. Because normally they deal with big suppliers, there is a whole heap of risk factors that they don’t have to consider when what we’re supplying is an open source solution. They know that the technology is really robust.

But a lot of businesses would hear “open source” and think does that mean you’re giving away your IP.

I look at most things in life as you’re actually providing services. There are very few people that have made a lot of money out of product, and I think intellectual property is just another product. If you can’t wrap that product in a best-of-breed service then you’re doomed to failure. That’s why I think it’s a real challenge for building smart nations by feeding lots of money into creating lots of intellect. That’s not what you need to do, you need to have lots of people that have lots of wisdom in applying intellect to make a great service and I don’t think we’ve quite got to that maturity in Australia.

But does not controlling your IP mean that margins are lower?

I think if you look in the IT industry and that’s the segment that my experience is based on, the big leading companies have moved away from being box vendors and hardware vendors to being service providers. That’s what they are, they give you expert advice and expert tools. They do have some IP pieces, but their value is not built on protecting intellectual property, it’s built on protecting branding.

You know Red Hat is the biggest open-source software provider. It’s now doing $1 billion in business and I imagine it’s got very high margins. It’s primarily open-source software and what they sell is related service. They package it up and they sweeten it and they say, you can get the free lot if you download it like this or we’ve actually added pieces to this and we’ll give you ongoing support and updates if you buy that. And people see if they’ve got the best of both worlds, they know they’re not locked in by a vendor with a proprietary solution. They know that they’re not going to be getting done over in year three when the vendor makes the maintenance greater than the original capital cost. But at the same time they’re happy to pay for it because they want to get quality support. So I think the business model has proved itself and it’s being mandated in lots of developing nations as the way because it’s just the way you avoid the legacy of vendor lock in which in the computer industry we’ve got a terrible history of.

What have been some of the hard parts of growing this business?

One of the challenges is that we’ve now got an office in three countries which means our CEO never sleeps! I think one of the hard bits for us has been we haven’t found an easy footprint in Australia. I think our value prop is the countries that have high operating costs but have got compelling economic reasons why big businesses have to step out of their comfort zones and try new things. Whereas in Australia, we’re still a very fat and happy nation, which is great.

I don’t think it’s necessarily a problem, I think it’s a sign that things are healthy here. I think Australia is largely a rocks and crops and tourism economy and that’s the essence of our business. But they are all either low tech or very conservative technology businesses. For example, in mining you’re doing a 20 year investment so you’re not going to play at the edge, you’re going to carefully explore a process, put a process in.

You don’t have fast turn pioneering technology cycles. I think that’s just an attribute of our nature here.

You spoke about knowing your exit strategy – what is yours? An IPO?

Our shareholders are mainly individual moderate and high-net worth patient capital sources. That was one of the criteria in setting up this business, unlike previous ones we’ve done we’ve brought in venture capital and other angel feed funding. I think we need to be building businesses that have generally more patient cycles – you wait to get your VC, funding a bit later in the cycle. We do have some funding from some VC-related sources from the States and part of that is to make sure that we’re plugged into the capital cycle, so as we need it we can go to market and raise further rounds.

Is that far away?

We’re tracking profitably and it’s nice to own a big chunk of the company. I’m a Scotsman and hate diluting and every time you bring in funding, I’ve got to put more funding back in, so I try to avoid that. I guess this is like any business – it’s a question of minimising the cost and maximising the value and so we don’t want to be taking lots of funds and turning on a hard race for the clock when we don’t need to.

I started back in life when businesses used their IPO as their exit, but now the reality is that 80% of businesses in Australia that exit successfully exit from some sort of buyout, not from a listing.

So is that your sense of where you’re probably heading?

We do have that on our strategic plan every year, with prospective acquisition partners and we work towards that as part of our product development plans, our marketing plans, that’s a factor. So I think that’s the most likely outcome. But equally unlike previous businesses I’ve put a time expectancy on that, I’ve taken that off because I just think things have just slowed down a lot. You should be planning now for exit, you shouldn’t be planning for a quick exit. So, if you’re employing someone it’s for a good chunk of time, if you’re talking partnerships that could last five or 10 years. And in the computer industry that’s more than a lifetime.