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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."
Even more interesting stats: "Most of those projects collapsed."
Don't a large portion of ventures fail? Perhaps not directly related to them being open source.
Of course most of the projects collapsed! VCs dump money into lots of projects with the full knowledge that the vast majority won't come close to turning a profit. It's the handful that do that make a VC company a fortune.
Stop learning! Only you can prevent esoterrorism.
So is RedHat a success or a failure?
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.
Donate money to a standard (FHS) which can then reward distros for compliance with $$$.
It provides motivation to achieve the great end result (driver support, ease of use, unification of major players, etc).
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How about we fix the system instead of just throwing more money at it and expecting that alone to fix it?
It's like it's 1999 and 'education' is 'an open source business opportunity.' Same lesson as TFA: throwing money at something doesn't fix it or make it work.
+5:offtopic,but anti-American
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.
Red Hat is barely breaking even. It has a market capitalization of $2 billion. Big fucking deal. That means that the stock is grossly overpriced. Their P/E is twice what it should be. Insiders are selling. If that's what you call a succes, then that's not sayin' much about Open Source's ability to make money.
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.
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
I think we all pretty much know that most new ventures fail. By now, this is common knowledge, and there is NOTHING new or insightful about those kinds of remarks.
A better question that digs deeper: Is the failure rate for open source ventures higher or lower than the expected rates of failure in the software industry?
Personally, I'd be willing to bet that the failure rate for open source ventures IS higher than the expected industry average, because:
1) The idea of a business model based on open source is still relatively new (in terms of the history of the computer industry), and therefore more prone to high failure rate than a more mature sort of business model, like proprietary software.
2) Even though we may have seen some SMALL successes with new open source ventures here and there of late (e.g., Red Hat), it remains to be seen whether or not such ventures will be highly profitable in the long term. 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.
Given these points, the fact of the matter is, there IS good reason to be wary of open source ventures, because they ARE risky, and so far, it is clear that they probably won't be as profitable as Microsoft, or even Apple. If I were a VC, my first question would be: which is a better bet for me in terms of making ME rich in the long term: a Red Hat, or a Microsoft?
This number should go down to 70, because SCO can't be included in the count... :-)
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
Well, the above is a joke, but what drove me nuts in the 1999-2000 time frame was that all kinds of companies with lame names that were supposed to sound innovative issued press release after press release that basically said nothing but used the kinds of words found in the Official Bullshit Generator. All kinds of venture capitalists who thought they were going to be the next Gill Bates bet the farm on these companies, and subsequently lost everything. Some of these companies claimed they were so innovative because they provided programmers with lots of room, lots of light, allowed nerf toys to be used at the office (yes, I am serious!), and all kinds of further bullshit that businesses don't do because that's not how you make money. (As if, you know, businesses have existed for thousands of years, and only now, it took some innovative computer geek to come up with a better way to do business by throwing away centuries of experience.) And what's that about lots of light? What hacker do you know who likes lots of light? Personally, I like my screen dark, my room dark, the shades drawn, and sunglasses on, just in case, so I can't see the darker characters in the terminal... Otherwise, where would the grue come from? But what drove me the most nuts was that most of the vaporware these phony technology companies came up with were products that nobody would ever want or need anyway. For example, Be, Inc., whose programmers worked their asses off for a decade to create a bitchen OS, changed focus from operating systems to internet appliances in the wake of dumb press releases like the above. When asked what an internet appliance was, they said, "It's a refrigerator with an internet connection, so you can check your email on your refrigerator." What a dumb move, which shortly destroyed the company. Other companies, which didn't even exist prior to 1999, invented truly dumb devices... like a picture frame that's actually an LCD monitor, so you can have the picture change every so often. Yeah, like I'm gonna spend the $500 that an LCD cost back then to get such a useless gimmick out of it. Oh well... I don't want to think about the bullshit bubble.
Now there's an open source company with a stock chart to be proud of.
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.
"The article talks about both successes and failures: Red Hat, TurboLinux, JBoss."
For an extra 200 points, match which label goes with which product!
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Open Source Sysadmin
This isn't such a good idea. You see, Open Source, being Open Source, can be copied, modified, re-distributed free of charge. Now imagine that, say Debian, achieves this standard complience. What stops say Ubuntu to build on that success and then claim their piece of the pie?
Now that was Ubuntu, but what stops me to create my own distro CocoTonix, based on this standardized Debian and claim my piece of the loot?
And the line would have to be drawn somewhere. And it wouldn't be just in minds of many.
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
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
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.
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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.
See, "profit" with stocks is _not_ the same thing as investing in a company that turns a profit from selling goods. Unless a company pays dividends, and most don't, the company's turning a profit is worth exactly _nothing_ by itself to a shareholder.
Trading stock is no more than trading pieces of paper, with no intrinsic value. The only value is what everyone else is willing to pay for one. It's an exercise in guessing what the other lemmings will do, and which company's hype is more.
The way to make money in the stock market is to buy low and sell high.
Investing in a company that's steadily churning profit, but doesn't cause enough hype for its stock to rise, is actually a _bad_ investment. It's the kind of investment that gives _you_ exactly _zero_ profit. That's the kind of stocks you want to sell.
(Point in case, at some point the value of 3Com was _less_ than the value of shares it owned in Palm. So the rest of 3Com actually had a _negative_ value on the stock market. We're talking divisions which turned a solid steady profit. Yet the stock market considered them a _liability_.)
Investing in a startup that causes a lot of hype and whose shares quadruple in price within months, is good. It doesn't even matter if it makes a profit or even if it sells anything. Even if the company is dying a slow death, that quadrupling of share value means a 300% profit for _you_ if you sell before it bombs.
So let's look at investing in a company like Red Hat: Investing 10 million in a non-profitable company and ending up with half a _billion_ worth of grossly overpriced stock anyway... is it a success? Yes, it is a success. It's a freaking huge success. It's such a great success, it's every VC's wet dream. It's the stuff that causes them to wake up and go change their underwear.
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Of course most of the projects collapsed! VCs dump money into lots of projects with the full knowledge that the vast majority won't come close to turning a profit.
False.
Steve Bourne gave a talk last year at Columbia University about his Venture Capital company, El Dorado Ventures (it's a fascinating story how he went from writing Unix shells to becoming a VC). I forget the exact details, but trust me when I say that VC firms most certainly do not expect their projects to fail. Out of all the proposals that come their way, they allow a very small fraction to give one hour presentations to the VC firm partners. From those, they select an even smaller percentage to actually fund.
IIRC, roughly half the projects fail.
It's the handful that do that make a VC company a fortune.
Perhaps. Still referring to Dr. Bourne's talk, out of the half that do not fail, a majority of those are successful and give the VC firms fairly good returns on their investment. A very small fraction of those are "astronomically successful" and give the VC firm a very good return on their investment. He did emphasize however that the number of projects in this last group was quite small.
Overall, I got the impression that they thoroughly screen the projects that they invest in and I'm fairly certain other VC firms do the exact same thing.
You make a mistake in thinking that VC firms "gamble" with their capital, i.e. that they put a million dollars each into 10 companies, expect 9 to fail, and the 10th to return 100 million. This is most certainly not the case. Partners in VC firms did not get their positions by throwing huge sums of cash around so easily.
ThomasSo 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).