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."

Comments

Re: 80% to 90%

[icoloma]

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

It's simply too much money

[Christian Engstrom]

We had a good idea, and only needed a couple million to design the software right so that it could scale as the idea got more popular.

Apparently, the limitied capital requirements you describe would be typical for new companies in the software industry. Compared to other businesses, such as manufacturing or hardware development or whatever, you simply don't need as much money.

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:

Hardware companies need capital, indeed, to build factories, but the demands of Software companies are much more modest. The following is the normal development pattern of small software companies, who intend to produce a product for retail.

A few -- at most 5 -- people get together to form a company and develop a piece of software. They look for funding. Unless some of the founders have rich parents, they receive none -- because they cannot convince the lenders to lend. This is because all they have to offer is their very bright idea. Ideas about the software I intend to develop are akin to ideas about the hit-CD my band intends to produce, or the great novel I will write some day. They sound great, but only rarely live up to their dreams. In the Software industry, we have a word for such unrealised dreams. We call them 'vapourware'. And financial lenders have learned to not invest in 'vapourware', for obvious reasons.

Undiscouraged, our hero-founders decide to develop their software anyway. In order to fund their venture, they take on a consulting contract, typically in an unrelated, but lucrative field. This means that their product gets developed more slowly than would otherwise be the case. If all goes well, they reach the point where they would dearly love to jettison the consulting business, and make all of their income on business related to their new product. Or, if their consulting business is related to their product, they need to expand.

In short, they need a round of financing. This is where I come in. This is where I do my investing, and most small innovative software companies need cash to the tune of 50,000 to 250,000 Euros. This is an incredibly small sum. There is a tremendous need for this sort of funding, but it is very hard to find. And Software Patents will not help you acquire this. The amount of money you need to 'go around the corner' is one or two orders of magnitude smaller than the amount of money that you need to open a factory. It is the same problem that faces small businesses in every industry.

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.