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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."
of ventures are EXPECTED to fail by venture capitalists, it's par for the course. Sounds like open source is as good a venture as any!
While the money invested in open source is a lot, I'd venture to say it's but a fraction of total venture capitalist investment? correct me if I'm wrong.
Also, what's the point of this article? It's good, right, that open source is being given this attention? Why the complaints about the power of venture capitalists? They are keeping these open source projects alive.
There wouldn't be much "venture" if those investments were a sure thing. VCs throw a lot of money around and hope that once in a while it sticks, and more than make up for the ones that don't. They're a little more conservative now than they were a few years ago, but that's cyclical. But $10m each (more or less) for 71 different companies is enough to count. I'd be curious, though, where $95M went with Turbolinux.
Interesting, too, that the Red Hat board member specifically talks about the comfort he feels in having big bucks backing that shop. It will be interesting to see if the few million that SugarCRM raised can possibly keep them going up against MS's CRM group, and hosted apps like SalesForce.com.
Don't disappoint your bird dog. Go to the range.
Typically at least four out of five fail, but they expect to make up for it with a 10- or 20-bagger (get out for 10x or 20x their initial investment).
How many 10- or 20-baggers have their been in the open source world? I can't think of any.
I'd be willing to be that if an equivalent study was done on "closed-source" companies, the losses would be substantially higher.
This study and the publication of it is sheer FUD. I'd love to see a counter-study that shows what the VCs lost by investing in closed-source companies.
The "closed-source" crowd loves to argue things like "Firefox isn't as secure as IE because it's not as pervasive, everyone targets IE because it's #1".
Ok, well since "open-source" wasn't as prevalent in 2000 as "closed-source", it clearly couldn't have been the cause of the losses of the VCs. Since the vast majority of the technology companies that crumbled in 2000 were "closed-source" companies.
Eat crow.
Don't think that a small group of dedicated individuals can't change the world. It's the only thing that ever has.
According to the former chairman of ArsDigita, VC basically pushed him out and run the business with their own man as CEO and killed ArsDigita. At first I was surprised by this but it seems that's the way VC operates.
http://waxy.org/random/arsdigita/
Paul Graham has an interested 'unified theroy of VC suckage' on his page
http://store.yahoo.com/paulgraham/venturecapital.h tml
very interesting read. Also I agree $750 mil is peanuts for VC. Greylock and Partners (mentiion in the ArsDigita story) alone manages over $2.2 billion in investments. That's just one investment company.
http://www.greylock.com/strategy/funding.cfm
Failure : 3.2 Billion invested , another 500 million owed in 2024 ( 19 years , 27 million owed per year until then to make repayment. And they created there own worst nighmare : pulled out of the desktop and created Fedora ... Fedora is Red Hat competitor on the market costing them millions if not billions in income.
Like the old saying says -- lies damned lies and statistics.
Sometimes boldness is in fashion. Sometimes only the brave will be bold.
Yes, and that just goes to show that most of the time open source is better in a business than as a business. Cooperative investments in open source by multiple businesses are what made open source what it is today.
Occam's razor is the blind faith in the natural selection of least resistance and in universal oversimplification. -- EF
You're talking about Be Inc.
IMHO, they really got a lot of the engineering right with BeOS that other operating systems (Windows, MacOS) are getting to only now. The doom of Be wasn't just that the internet appliance thing was a distraction, but also that BeOS was either too early, because its features weren't needed yet, or too late, because the OS wars had already concluded.
For those of you that would like a history lesson, Palm ended up buying Be for around $11M and then, on behalf of Be, suing Microsoft and getting around a $22M settlement a few years later.
Where's BeOS today? Here: http://yellowtab.com/
R.I.P.
They are not even an open source or linux company anymore, even the CEO said so. If you look into the financial reports, most of their income is from advertising on OSDN, and merchandise. The fact that their results and stock price fluctuates at christmas shopping time (thinkgeek sales) demonstrates just how much they are not and open source of linux company any more.
Most of these projects, like most VC projects of any kind, were not only expected to fail, they were required to fail.
Consider LinuxCare: the VCs installed crooked executives who raided the cash box, handing much of it to the VC's other ventures, and pocketing the rest.
How many startups got a few million and then handed half over to Oracle, Sun, and EMC, and handed the rest to the execs, and then folded? How many went on a buying spree, handing over boatloads of inflated shares to the VCs (to sell immediately) in exchange for other failing companies, right before they tanked themselves? How many went public and the bankers got enormous kickbacks, buying captive shares at a fraction of their value the next day, and then selling out immediately? The losers were not the VCs -- they made out like bandits on those "failures".
Enormous amounts of money changed hands under very little official scrutiny. That was the point. Business successes, where they happened despite all, were just icing on the cake.
Don't a large portion of ventures fail? Perhaps not directly related to them being open source.
I deal with VCs pretty regularly. The basic rule of thumb is that out of 10 investments most VCs make, 1-3 will be total busts, 7-8 will be close to breakeven or make a small profit and 1-2 will be home runs. The key is that the home runs are big enough that they make up for the rest of the investments that go no where. In some ways it's high risk but they also have a lot more control over the investments than a mutual fund.
Things get tough for VCs when there is too much money chasing too few good opportunties. Venture funds are very much like the mutual funds we all own except the companies the fund owns aren't usually traded on a stock exchange. Rich individuals and companies/organizations contribute money to a pool which the VC then invests in companies. (could be start ups but not necessarily) They then either take these companies public or sell them to a larger company and return the profits to the investors. I've seen lots of people who think VCs were stupid during the
Red Hat is one of the few success stories you can point to, and even then, they are delivering nowhere NEAR the kind of returns Microsoft does. VCs generally tend to expect BIG returns, given that they're taking BIG risks.
Any VC that invested in Red Hat and didn't get a BIG return out of the IPO only has itself to blame. Whether Red Hat is a sustainable business is a separate question.
Actually, you can get an LCD picture frame for about 100 dollars these days. And with digital cameras outselling traditional cameras, the price is worth it. They were just ahead of their time.
Exactly how many thousands of years have software companies been profitably running? A lot of what happened during the Bubble was in reaction to things that were wrong at regular monolithic companies. People do need more room to work than most companies give them. People need to take their mind off of work every now and then. (I remember visiting software development firms in the 80's and ping pong ball guns being present). Studies have shown that the average worker produces the most overall if they're slacking off 20% of the time. Aeron chairs, while gratuitous, are a lot more comfortable than the average office chair. Low light, and the narrow-spectrum light output by cheap flourescent office lights, are responsible for Seasonal Affective Disorder, or more plainly low light exposure levels cause depression. Out of this time we also got RSI-reduction keyboards, nonlinear office layouts, and a refocusing on morale of the individual over the "Office Space" style dronage where nobody cares what they do. There are also the "casual everydays," because a suit doesn't help you do your job as a coder any more than an optimized compiler would help an executive improve vendor relationships. Perks which had been dropping for years were suddenly brought forward as a way to improve worker relations and moral for less money than just paying them. My company is paying less for my health, dental, vision, accidental death and dismemberment, etc than they would have to pay me in cold hard cash to keep me as contented.
Maybe I should, but I don't feel so bad about the venture capitalists. To the average user with a clue, an internet-connected toaster was a joke, not something you would invest millions of dollars in. Even if the tech could be perfected, and it could pretty easily... so what? The investors in a company should know more than the average man on the street, but they allowed themselves to be blinded by greed. Instead of approaching anything rationally, they were driven by the potential for hundreds of trillions of dollars. Some of the ideas were either good or noble yet failed anyway, but many of the investors totally lost perspective and invested in junk. The AOL Time-Warner merger is the perfect example of this. Everyone at AOL knew they hit the proverbial jackpot, and everyone on the street knew Time-Warner was being an idiot.
In case you haven't noticed, companies are still releasing press releases that sound like they're from the bullshit generator.
The ______ Agenda
VCs simply are not that smart.
Come one guys, lets consider the coder base difference between Open Source and Proprietary, what the adverage coder earns for his work.
Let me suggest that VC's, if provided a free worker base, would still manage to lose money for the most part.
Isn't that what this is really saying?
Open source is done in a mode of sharing code, and this includes the benefit of not having to start from scratch.
If you cannot take something of such nature and cause improvement to hapren that are of benefit in value return to you, then you genuinely are not very smart.
Maybe neither are those who get VCs to give them money and then fail.
NASA stories of recent seems to suggest they have something of a clue.
Here is an example:
who would find benefit in investing in GIMP? or CUPS improvements?
Printer and paper supply companies.
Investing in FOSS to improve the market for another product.
And what would anyone object to having such investors/sponsors lised in the "about" menu item and any other place that is non-interfering with the operation of teh application?
How about computer hardware vendors... Providing a FOSS OS with their system has to have some value in improving price performance of their product.
Seems to me there is a large failure to understand indirect profiting off of FOSS, cept for maybe those who pursue system support.
The Big question: How do you profit off of that which is free?
A: Indirectly.
Just as Open Source tracks code contributions, it can and should track sponsors. A matter of credit where credit is due.
Eivind is definitely on the right side of this argument.
Of course the stock market does some apparently bizarre things, simply due to the complex interactions between those investing in it and the companies they invest in. However, I find it telling that the most successful trader I've ever met worked almost entirely from solid, common sense investments. He didn't go for the big hype (and as a result he didn't lose money during the tech bust a few years back). He did go for solid investments, based on asset values, good P/E, and such metrics, not based on vastly inflated market cap. One of his best investments was the kind of "bad" choice Moraelin's been describing: he found a company whose share value was actually below the value of its assets. He invested a large sum of money, and promptly made a large sum of money when the rest of the market noticed this anomaly and the share price corrected.
This is a guy who has consistently outperformed the market, by upwards of 50% most years, and who has never lost money even in the major tech bust years. That puts him ahead of almost all of the clever private traders, professional fund managers, etc. who go for hype. Go figure. :-)
If you disagree, post your argument. (-1, Overrated) isn't your personal censorship tool for views you don't like.
Novell is going to have a big influence on open source capital. If they succeed in transitioning their business, and so far they are looking good, the VC's will have another model to emulate.
If it were like the lottery it would always have a negative expected return, and generate crime. (Crime generation is an adapted non-fiction opinion from Dashiell Hammett.)
Once in a long while one of the lotterys that has a jackpot that grows until someone gets it will actually have a positive expected return. At that point venture capatilists DO invest in the lottery, buying millions of tickets.
Exam 4/C again. Maybe I'll do better this time.
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.
Yeah, that's exactly what we saw, and I've read some really insightful things lately and the whole experience finally makes a little bit of sense. I was forced to chalk it all up to incompetence, and that didn't sit right, because it seemed too hard for someone to be that incompetent. The mystery probably lies on the pressures which were coming from places even higher than our CEO (the board, and the outside investors, who I didn't get to interact with at all, it was my friend who was on the board and dealt with them, though he didn't have any real power either). This is not to say that our CEO wasn't at all incompetant, of course, but I now see how the outside investors were arguably even making rational decisions.
The sad thing is in our case there was probably no solution other than earning the money ourselves, maybe through years of consulting. That probably would have been the way to go, especially as the consulting market was doing very well back then. We could have made some money to pay for a few developers, and done some initial prototyping and high level design in our spare time.
Here I've always thought the solution was to have "found a better CEO", or "insisted upon retaining control of the company". But really our biggest problems were in the nature of the game more than the cards we happened to be dealt.