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For those entrepreneurs looking to make a living from open-source software, Index Ventures general partner Bernard Dallé has some advice: get thee to a cloud strategy.

Bernard Dallé

(Credit: Index Ventures)

Why? At a time when enterprises may be less willing to spend on software, they’re increasingly interested in spending on the operation of that software through cloud computing, an interest that can be bought…and sold.

The cloud isn’t simply a clever way to provide social-networking services, either. As Dallé suggested in a phone interview on Wednesday, cloud computing may well be the best way to monetize enterprise-facing open-source software.

He should know. Index Ventures has been one of the most successful investors in the changing world of software, hitting home runs with MySQL, Skype, and more. So when Dallé says that as much as 70 percent of the investment opportunities they see now are cloud-related, and that this bodes well for open source, it’s worth paying attention.

Given that the cloud renders software less visible to end users, I asked Dallé if cloud computing spells the end for open-source businesses. Far from it, he said:

I think it’s good news. I don’t think open source is going away. It’s here to stay. The world is increasingly moving to a hybrid world: a combination of on-premises and cloud computing. We’re not going to see a 100 percent cloud world.

If I look at our portfolio, even our “open-source companies” like Pentaho, OpenX, and DimDim are turning to the cloud to monetize their open-source software assets.

Open source provides a convenient on-ramp and off-ramp for customers, helping them evaluate the software at low to no cost and also gives a free (as in cost and as in freedom) exit in case things go wrong. Between that entrance and exit is a ripe opportunity to make a lot of money by delivering value to customers.

Dallé further explained that open source helps vendors reach customers through low-cost distribution, but cloud computing, importantly, makes the open-source software palatable to a class of customer that finds open source too risky, yet has no problem using it when hosted.

If this sounds like a potent mix, it’s because it is. It’s also a highly efficient, low-cost way to start and build a company. Dallé elaborates:

The other big trend, not related to open source, is cloud-on-cloud: cloud services running on other clouds. It used to be that everyone ran their own data center, but now an increasing number of companies are happily running their services on Amazon EC2 or other public clouds. This dramatically lowers the cost of starting a service, and starting a company around it.

This might raise the concern that we’ll see too many open source/cloud companies, not too few. Dallé isn’t worried: “The quality of an investment always comes down to the quality of the people involved and their execution.”

If Dallé’s correct, the right place to look for open-source businesses to flourish is at the nexus of on-premises open-source software and cloud computing. It could prove to be a potent mix. And while the cloud might not be the right delivery platform for some software, it probably does have a high degree of salience for many.

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This week Microsoft gave evidence that it will continue to be a major force for at least the next decade. The company outlined its products and strategies that more fully embrace the “cloud,” such as the Azure set of cloud services; Web-based, lighter-weight versions of Microsoft Office applications; and the latest iteration of the Live Mesh middleware. Google may have won the search war, but Microsoft isn’t about to cede the global cloud to the search engine giant.

Ray Ozzie explains Azure to CNET News correspondent Ina Fried.

As in past epochs in its 33-year history, Microsoft ties its success to the developer community, having an army of loyal, or at least well or modestly compensated, software warriors. The Microsoft mantra is: “Build a platform and an ecosystem of developers, partners, fans, and people willing to spend their money will follow.” A compelling platform and the potential to reach a large audience of buyers, which Microsoft can deliver, attract the developers, who build the applications and services that attract consumers and business users.

Microsoft also now understands that its platform must span every kind of device–PC, notebook, smartphone, car, home, etc.–and offline scenarios. Microsoft missed the Web search revolution, but it’s not going to miss out on the much bigger revolution–the move to the cloud over the next two decades.

Google is building a competing ecosystem from the ground up with similar characteristics and a desire to attract millions of developers. Amazon is pushing its elastic computer cloud, and Rackspace, EMC, IBM, and many other companies are trying to get a piece of the action. Most the cloud companies are focused on hosting services, but the biggest piece will be platforms-as-a-service with developers creating and running their applications for on a cloud operating system.

An early example of this trend is Salesforce.com’s proprietary Force.com platform. Sun Microsystems, the company that coined the phrase “The network is the computer,” has all the pieces to construct a planetary cloud but seems to be missing from the discussion. As my friend Steve Gillmor notes, Sun is on the ropes.

Openness is a major issue as the global cloud materializes. Businesses don’t want to be locked into a particular cloud, and also want various clouds and services to interoperate via standards. Speaking at the Professional Developers Conference last week, Microsoft’s chief software architect Ray Ozzie said that the foundation level in the operating system cloud would run in Microsoft’s data center, but SQL services, .NET, and Live services can be mixed and matched by developers inside and outside of the company’s datacenters. The Azure cloud is also cross-platform, but the various clouds will extract a toll and by nature it won’t be dead simple to move applications using foundation services from one cloud to another.

Microsoft’s cloud computing efforts have gotten off to a slow start compared with competitors, and it’s on the scale of a Manhattan Project for Windows. Azure is in pre-beta and who knows how it will turn out or whether consumers and companies will adopt it with enough volume to keep Microsoft’s business model and market share intact. But there is no turning back and Microsoft has finally legitimized Office in the cloud.

Ray Ozzie has a track record of slowly but surely getting things done and Microsoft is famously persistent and cash rich. But building a platform, or Internet operating system, at planetary scale supporting billions of users and trillions of transactions per day, and having fleet Google as a primary competitor will be a major test of Microsoft’s brain trust and resolve. Don’t be surprised to find a recharged Bill Gates parachuting into the fray as Azure evolves and the cloud war for developers escalates.

See also:

Scoble: Never underestimate Microsoft’s ability to turn a corner

Wilcox: How Can You Be So Sure about Azure?

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