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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.
So is RedHat a success or a failure?
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?
Like the old saying says -- lies damned lies and statistics.
Sometimes boldness is in fashion. Sometimes only the brave will be bold.
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.
"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
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
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.
A polar bear is a cartesian bear after a coordinate transform.
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