Venture Capital in Open Source

conq writes "BusinessWeek has an interesting article on the recent interest of Venture Capitalists in Open Source. Also, a look at some of the latest companies they are supporting. According to the article, the first of three main criteria VCs look at in choosing an open source company is 'community. There has to be a huge amount of interest in it. [MySQL, Zend, and TrollTech] were already incredibly popular [when we invested]. The community is your marketing and evangelism arm. They're going to contribute and make sure this piece of software truly becomes mainstream.'"

Comments

What about the rest of us ?

[timeToy]

So after spending countless nights (and days) coding and fine tuning your software, after having burn all your saving trying to maintain a website and paid for the bandwidth, after having lost all humans relationship to a handful of porn-addicted-cubicles-geeks, after being on the edge of personal bankruptcy, your project finally catches up and a small but dedicated community is backing you up, then you only half way there !
VC seems not to take *any* risks when investing in Open-Source companies, you got to be *already* successful in order to be one of the lucky one that is being given some cash, and then, hopefully, you are not going to be asked to give up control in exchange for that well deserved life-saving money.

Technical support contracts

[karvind]

People tend to understimate the value of technical support. I think it is decent answer to (in perspective of new business model) : How do you make money on something that is developed and distributed for free?

no VC for consumer open source (ease-of-use)

[G4from128k]

100% of the funded ventures in TFA target businesses as the end customer. Customization, implementation, & support seem to be the core of every company's revenue model. Being dependent on support revenues means that these businesses have a vested interest in keeping open source software hard to configure and hard to use. Although getting businesses to adopt a product sure worked for IBM and Microsoft, I wonder if this VC activity will actually lead to the creation and widespread adoption of easy-to-use open source software.

VCs need to own something and in this case they want to own customers that can't use the software without them.

Re:Ironic

[HermanAB]

No - insulting.

economics

[sedyn]

How well does investing in a product that is already popular work?

I ask this, because let's assume it is good advice. Then the tactic works, more VCs will be looking for "opportunity" (I use quotations because if the product is popular meaning many eyes can and are looking at it, then that opportunity will be exploited to any means necessary, until there is nothing left to exploit, meaning not much opportunity) which will limit the gains of the sector. At least that is what my rudimentary knowledge of economics is telling me.

Kinda sounds like the .com bubble...
1) Get users
2) ??? (see FREELOADING. in the article)
3) Profit!

And if it doesn't work, then move along nothing to see here.

Same with any business

[L.Bob.Rife]

Most small businesses fail. Whether its software or brick-n-mortar, the simple fact is that most business ventures simply don't work out. Venture capitalists are not going to take extra risks to support Open Source companies versus any other small business, especially when the business model is so new.

Poor Investment.

[matr0x_x]

Investing in OSS hoping that the product gets bought out by someone bigger is like buying an over-valued stock hoping to cash in on the divident and then jump ship... it works a small percentage of the time and every time it doesn't work you're stuck between a rock and a hard place.

From one of TFAs

[Karma_fucker_sucker]

Take Google (GOOG ). They didn't know their business model until they had launched, gotten traffic, and saw what Overture had done [with paid-search advertising], then tweaked that model. It takes a while for a business model to mature when you're building that kind of momentum. - Rimmer's Rules

I think this is going to be the norm. Find an existing OS project, see whose using it, and then figure a way to make money. I agree with what your saying. It does seem like a haphazard way of building a business. But OS is a different economic paradigm so I guess it takes a different investment paradigm.

a better way to get revenue...

[master_meio]

...is simply to write a book about your open source project. The users get better documentation for your project, the managers can relax a little about using a product that has some paper documentation, and while you're writing the book you'll run across all sorts of interesting stuff in your code which you can fix and document.

Downsides: it's a lot of work and it doesn't make a ton of money; maybe just enough to keep one person going. But in my experience it's well worth the effort.

Re:Did you not get the memo?

[chreekat]

"Build your product and say that MySQL is a prerequisite and required that the end-user must download and install it."

Well yeah, if you target OSS junkies, you aren't gonna make a dime selling OSS. Here's a concept: sell it to *everyone else*. A lot of people stand to benefit from OSS, even if they pay for it. Witness Apple's OS X.

Re:Asterisk is a no-brainer

[deander2]

i'm pretty sure mark (digium/asterisk founder) has been offered VC already. but his company is profitable already, and he is in control. i don't blame him for wanting to keep the vultures at bay.

he's a really cool guy, btw, and prob one of the smartest i know. you should give him a shout. (if you haven't done so already :-)

you make money

[zogger]

you "make money" in open source (primarily) by using it in your OTHER meat and potatoes widget making and selling business. Software is a tool to "do other real tangible stuff", it's the "do stuff" part where you make your money if you are joe corporation. If you are joe IT nerd, you make YOUR money by using open source for your employer at joe corporation making and selling widgets better than his competitor. If you forget that part, you will lose out and most likely get replaced.

This is 2005, not 1975, the software tool business is becoming "free", as in FOSS free, it's beyond mature, the "tools" are plenty good enough to "do business with" now, so look to actually DOING SOMETHING with the tools to "make money".

In meat space, there are just so many hammers and saws you will be able to sell to a contractor, eventually those hammers and saws go build a lot of buildings, THAT is where the real serious folding money is made, not on the sales of hammers and saws. If you try to keep coming out with a new hammer or saw that is only marginally different from the previous, the contractor is just going to go 'fuggit" and stop buying "new" tools as long as the old ones are functional and still making his living for him.

Yes, *some* loot is made on the tool, *some* people are employed manufacturing and selling them, but it's a tiny industry compared to the general construction industry. Home Depot is a big company, but it's a miniscule fraction of a percentage of the entire construction and remodeling industry dollars wise and raw numbers of gainfully employed people wise.

Staying focused on the "tools only" side will only result in a set of economic blinders to the really big picture. and this is also being lost on US corporations who have forgoten that eventually you really actually have to go to work and make something, you have to create wealth, not re arrange wealth, manage wealth, leverage wealth, trade wealth around, nope, you have to MAKE IT for any NEW wealth to actually get into circulation or in peoples hands. You can't just keep opening sales outlets while you close down wealth manufacturing outlets and expect it to last for generations, it just is not possible.

The same with an economy based primarily on intangibles, it just isn't possible.