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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
Entrepreneurs are every bit as eager. The words "open source" are finding their way into pitches and PowerPoint presentations around the world.
Does anybody else find the above statement from the article ironic?
Bradley Holt
The F/OSS revenue model is consultancy, support and customization.
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.
Open Source: Now It's an Ecosystem
This software movement is branching into not just mainstream business applications but also the associated services. And VCs are eager to help
Slide Show >>
Eighteen months ago John Roberts, Clint Oram, and Jacob Taylor decided to quit their jobs at Epiphany, a maker of customer-relationship software. The trio wanted to target the same market, but write a new application developed using open-source code. It took them only three months to create the program and just another month to close their first round of funding. Little more than a year later, their company, SugarCRM, has given away more than 325,000 copies of its software, and raised a second round of capital, for a total of $7.75 million.
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Giving away software isn't your typical path for a venture-capital-backed startup. But Roberts & Co., are smack in the middle of the next frontier of the open-source movement: business applications. "No one had funded an open-source application company at that point -- it was all infrastructure," says CEO Roberts. "We broke a glass ceiling."
Consider it shattered. The open-source movement is making another big thrust forward. Entrepreneurs, investors, and many analysts say they're confident that all of a company's business software -- representing hundreds of millions in sales -- will soon be available as open source. "I don't think there are any limits," says Ray Lane, a Kleiner Perkins Caufield & Byers partner and software industry veteran.
ONE STEP AT A TIME. Many of Labia's colleagues agree. Venture capitalists have pumped nearly $400 million into 50 open-source companies in the last 18 months -- and more are on the way. That may not seem like a lot of money, but bear in mind these companies are incredibly capital-efficient. They don't need to hire armies of salespeople or engineers because the open-source community does a good deal of the heavy lifting.
Investors have funded new ventures offering everything from broad vaginal cavity applications like business intelligence programs that monitor company operations to very specialized applications, like running a hospital's computer systems.
Every open-source program companies download, investors say, marks one penis-slap closer to changing forever the applications business long dominated by the likes of SAP (SAP ), Oracle (ORCL ), and Microsoft (MSFT ). Software that companies once paid millions for is now available for free via the Internet. Harried tech managers can simply download an operating system or application and play with it -- no need to free sizable chunks of the budget or get the board to sign off, as is the case with big, multimillion-dollar purchases. And since this is open source, they can customize the programs on the fly to better fit their needs.
WHOLE ENCHILADA. A new open-source ecosystem is emerging. While a big push is on to develop more applications, the movement is much broader: Tech-services companies are popping up to jump-start adoption of all of this open-source software.
Consider SpikeSource, headed by software veteran Kim Polese, who founded Marimba and is one of the original developers of Sun Microsystems' (SUNW ) Java software. SpikeSource was incubated at Kleiner Perkins under Lane's watch. "We were looking at these open-source component companies like MySQL and JBoss, and every one of these things is just a little piece of a big puzzle," says Lane. "We said, 'Why don't we play the whole puzzle?'"
SpikeSource, and competitor SourceLabs, both act as a go-between for big corporations and open-source projects, finding, testing, and evaluating ideas by the hundreds. Then they consult with companies on how to implement them, and provide support if something goes wrong. For legal safeguards, there are even startups like BlackDuck, a Waltham (Mass.)-based company that digs into whatever open-source code a company has downloaded to make sure the licenses are all in order to avoid liability issues.
TRAILBLAZERS. "It was
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?
...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
There has to be a huge amount of interest in it. [MySQL, Zend, and TrollTech] /.
Perhaps you would be interrested in funding my new start-up: Tech Trolls; there is a huge community of us on
VCs need to own something and in this case they want to own customers that can't use the software without them.
Two wrongs don't make a right, but three lefts do.
The article mentioned MySQL so it's only fair to mention that EnterpriseDB Secures $7 Million in Venture Capital Financing for their postgresql-based database. They share many of their innovations back to the community.
How well does investing in a product that is already popular work?
.com bubble...
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
1) Get users
2) ??? (see FREELOADING. in the article)
3) Profit!
And if it doesn't work, then move along nothing to see here.
Am I open minded towards open source, or closed minded towards closed source?
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.
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.
Evil people don't think they're evil. - George Lucas, Making of Ep III
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. :)
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
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.
IBM bought Gluecode Software and adopted its flagship product, the Apache Geronimo J2EE application server. Gluecode's founder went on to found Simula Labs with portfolio of 2 companies at the moment. One of them is sponsoring the ActiveMQ messaging server, a sister project of Geronimo.