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Venture Money in Open Source
prostoalex writes "Interesting statistics from VentureOne and New York Times on open source venture capital investments: "In 1999 and 2000, according to VentureOne, venture capitalists invested $714 million in 71 open-source companies." Even more interesting stats: "Most of those projects collapsed." The article talks about both successes and failures: Red Hat, TurboLinux, JBoss."
Yeah, this smells of lying through statistics.
Most ventures fail. Most IT ventures fail, especially when the IT bubble burst.
The only relevant question is whether open-source ventures fail any more often than the average IT venture.
In terms of venture capital? A success. Very high share price at the IPO. Venture capitalists cashed out very well on this one.
Not correct, I think.
IIRC, they expect 20% to fail miserabily, 30% to not give any benefit at all, 30% to give very little benefits, and 20% to compense for the full stack.
according to wikipedia, "anywhere from 20 to 90% of the enterprises funded fail to return the invested capital"
http://en.wikipedia.org/wiki/Venture_capital
No. I believe the words you're looking for is "that doesn't make sense" (in which case we can argue very quickly) rather than "that simply ain't true". Because in the Real World, it simply _is_ true.
It doesn't matter if it makes sense or not, it's the way it works. The profitable core 3Com divisions being valued a _negative_ number of dollars at one point was a reality.
A _stupid_ reality, that's for sure. But a reality nevertheless.
The stock market doesn't work in the way that you own, say, a mom-and-pop bakery at the street corner. The best explanation I've ever read of it belonged to a psychiatrist-turned-stock-broker. He said it's acting like a manic-depressive.
But let's return to the point: If the company turns a profit and the money coffers grow, it still means exactly nothing, if the shares are already worth more than that.
Let's say 1 share is worth 10$ on the stock market, but only 5$ in assets (including that money coffer). That those assets grew last year by, say, 5%, making it a whole 5.25$ real worth of your share, is by far not enough guarantee to stabilize its 10$ shares. Those shares still have _plenty_ of room to fall, in spite of the company's turning a very healthy profit.
Now let's talk about the opposite situation, where the value of the assets (including that money-coffer) is _higher_ than the shares' value. It should stabilize the shares and make everyone buy them, right? Wrong. Chances are good it will just make the shareholders want to dismantle or sell the company and divide the loot. Because that loot is worth more than the shares.
Again, we're talking about a company which turns a profit.
That is, admittedly a very simplified view of the problem. The prospect of any kind of growth (e.g., that money-coffer growth) is one of the hype factors that can make investors buy. But the thing to understand is that _hype_ is the real factor, and the profits or assets are at most used to generate that hype. They are not the real things that dictate a share's value.
A polar bear is a cartesian bear after a coordinate transform.
So while getting 10M$ on a silver plate would of course be a cause for celebration for the recipient, it would normally be very difficult for a software company in its early stages to find ways of spending it productively, so that you can actually get any return on the investment.
In the article Software patents and financial investing venture capitlist Laura Creighton explains how it typically works. (The article is is mostly about software patents, but covers the topic of investing in software companies as well.)
An extract from the article:
She goes on to explain how software patents were percieved by some to provide a solution to this problem, but how that perception turned out to be an expensive mirage calle "the Internet Bubble".It's a long article, but an interesting read if you have the time.
Christian Engström, Former Member of the European Parliament 2009-2014 for The Pirate Party, Sweden
One poster said correctly that, out of 10 deals, a VC looks for 1-2 home runs, maybe 3-4 breakevens and the rest are total losses. What smart VCs do is take a perspective on the market as a whole and bet on what are the coming hot segments. Then they carefully place a few bets in those spaces. To be chosen, a company has to have a top management team, be focused (or re-focusable) on the laser-narrow segment of the market that corresponds to the VC's view, have a "correct" business model, and can check off a whole list of other variables. Everything about the company has to right, down to what color ties the CEO wears (if any).
Basically, a VC manages his risk by only choosing companies that meet a whole range of very narrow constraints, with the only degree of freedom being the specific market segment, and that is chosen by the VC.
This year, the VCs' tea leaves are showing open source as the hot space.
One very interesting comment in TFA was the initial reaction to Fleury's attempts to get funded four years ago: "you must be nuts." Since he didn't fit the VCs' pre-established business-model checkbox at that time, he couldn't get funded. The VC view of the world has changed, and now the "open source" aspect is the hot one.
Another thing good VCs always do is fund to milestones. If you don't hit substantially all of your targets, they will ruthlessly shoot you in the head and not fund your next round.
This will either win big for the early VCs or it will fail. We'll know in about a year (that's a typical length for a funding round).