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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.'"
Um, the article (I'm sorry, TFA) doesn't say anything about the, er, REVENUE MODEL that these "businesses" use (in fact, it specifically says that's big barrier, and only hints about the models in one line), and, uh, that's kind of important to consider when invensting venture capital. Remember the dot-com boom/bust, anyone? Enron? Didn't that teach ANYONE the merits of, you know, understanding how the businesses intends to make money before pouring putting your own funds into it?
I had a great idea for a open source project that could use a lot of funding (it relates to machine translation and is something people would pay a lot of money for), and I read the article (TFA) hoping to find ideas for revenue models for open source that I could then use to promote when seeking VC. No, I was unfortunately not successful. Maybe next time Business Week can remember to include the single most important part of the story?
Rank my idea: http://www.sinceslicedbread.com/node/531
...is simply to write a book about your open source project. The project users get better documentation for your project, the managers feel a bit better about using a product that has some paper documentation, and while you're writing the book you'll run across all sorts of interesting nooks and crannies in your code which you can fix and document.
Downsides are that it's a lot of work and that 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.
The Army reading list
OPM = Other People's Money
It amazes me constantly how middle class people invest so much in pies in the sky. I invest my money directly in local businesses that have products or services to sell. My 2 VC friends bust their asses lying to investors in order to get a commission.
VC in OSS is an even higher risk than investing in closed software -- where's the revenue?
VC is the ultimate form of gambling. Any decent small business investment should reap 20% dividends. The VC investment groups seem to gamble on getting 1000% back if the product gets bought out by someone bigger.
It's a no-brainer, in terms of market and community. And it's a classic open source project, in that it ties into everything, does everything, and is used by everyone.
I'll be installing next year. The more capital behind this project, the better.
And hopefully some of that capital will go to developing Mac drivers for the PCI cards. :)
EBITDA seems to be the current standard but not in my world. I stopped listening to the MBAs of the world a decade ago.
I assess my dividends in t is order:
1. Net Profit
2. Value of stale inventory versus long term debt
3. Net change in overhead versus gross income
4. demand of products sold versus supply of competition
5. Need for infrastructure updates
Corporations I invest in ("own") don't pay tax. They don't make security investments (interest). Depreciating products aren't a large investment, and amortizable items are preferably sold as used products (ie held as inventory rather than amortized).
Businesses I have some control over should return 100% or more annually. Those I help out should net 20% minimum.
If I can't get my money back in 5 years, it isn't worth it. Most of my investments aren't over $10K. Today's market offers a multitude of business options without needing to invest $100K's.
Average return should be 30% between winners and losers. I have one business that I'll lose almost $50K on due to my mistake. Ouch.
I'd rather mod the post as "interesting". Because, you see, you're thinking with the /. mentality again.
Don't think of powerpoint as SOFTWARE, but rather as "a computer thingy which mades cool slideshows". (Remember it's Mr. Joe Investor thinking).
I just hope i don't lose my geek license with this statement...
What about those scenarios applied to a developer who just uses an open-source product as the basis for their own operations? If I build a LAMP app, I'm leveraging the combined communities of Linux, Apache, MySQL and PHP - other OSS combos work similarly, even if some other SW is proprietary. The components are mainstream, but my new app has to make its way. Assuming my proprietary part presents a barrier to market entry to my competitors, how much value do VCs place on my risk mitigation by betting on the right OSS components? PHP is a good example: it's not nearly as compelling without ruding on OSS like Apache, MySQL and (also OSS) Perl. If PHP weren't OSS itself, how attractive to investors would it be?
--
make install -not war
But OS is a different economic paradigm so I guess it takes a different investment paradigm.
Yeah, I know. "The Internet is a different economic paradigm so I guess it takes a different investment paradigm.". Worked quite well. Ahem.
Usually things like that are only said because noone really has an idea how to make real money with the big new different thingy. Which usually leads to events like the dotcom bubble. I know, there are open source companies that make real money. But there were and still are quite some dotcoms that made money, too, only the largest part of dotcoms back then and OSS companies now don't have any viable business model and will tank eventually. If you have to seek refuge in new paradigms it usually is a sure sign your business model sucks rocks.