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Ask an Open Source Venture Capitalist

Posted by ryuzaki0 on from the Money-isn't-everything-but-having-some-never-hurts dept.

Richard Gorman, of Bay Partners, is a venture capitalist. Part of his job is to seek out and finance open source companies. He's not easy to snow technically; he has a Master's degree in Computer Science from MIT. And he's not easy to snow financially, either; he also has a Master's in Management. This is a golden opporttunity for all you budding entrepreneurs out there to find out exactly what a tech-hip, management-hip venture capitalist looks for in an open source-based startup. (As always, Slashdot interview rules apply.)

24 of 118 comments (clear)

  1. On the subject of strong teams... by AKAImBatman · · Score: 5, Insightful

    Your profile states your feelings that a "very strong team" is important to the success of a startup. However, most startups only have the basis for a technology team in place, and rarely have a strong executive team. In a recent interview with Robert X. Cringley, technologist-cum-Venture Capitalist Bill Joy stated that his firm worked with startups to assist in installing team members that are missing from a venture. (Google is an excellent example of this in action, with Page and Brin turning over the Chief Executive reigns to the more experienced Eric Schmidt.)

    What are your thoughts and opinions on this practice? Does your firm assist startups with more than just financial matters, or do you feel it important that the startup be fully formed by the time you invest?

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    Javascript + Nintendo DSi = DSiCade
  2. Exit Strategy by blinder · · Score: 5, Insightful

    In my (very) limited experience in dealing with the VC world, one of the key concepts that was always in any discussion was the exit strategy. Typically that translated into IPO or sale to someone else. Is this any different with respect to open source companies?

    It just seems to me, and I'm just a knuckle-dragging developer here (who also engages in diy projects), that the exit strategies might be a bit different than your traditional concerns.

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    sad robot making broken music
  3. Somewhat broad question by andyring · · Score: 5, Funny

    Mr. Gorman,

    In general, what qualities in an open source project do you find attractive and worthy of consideration for venture capital?

  4. Common Failures by paulevans · · Score: 5, Interesting

    What are the most common problems that most startups have when begining talks with you?

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    "When I want your opinion, I'll give it to you." --leonstryker
  5. How did you get your job? by s20451 · · Score: 5, Interesting

    I have graduate degrees and experience in engineering, and I have good managerial and interpersonal skills. I have often wondered what it would take to sit on the other side of the table, and what it is like to have plenty of funding, helping other people bring good ideas to market.

    How did you get your job? Is it hard, easy, boring, fascinating, soul-destroying, fulfilling, all of the above?

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    Toronto-area transit rider? Rate your ride.
  6. Why Open Source? by bit+trollent · · Score: 5, Interesting

    Why have you chosen to fund Open Source based companies?

    From a Venture Capitalist's point of view what advantages do open source based companies have over other software companies?

  7. CS and mgmt by gEvil+(beta) · · Score: 5, Interesting

    A masters in both CS and management? I'd love to see some of the arguments he gets into with himself...

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    This guy's the limit!
  8. The Magic Ingredient by Phoenix666 · · Score: 4, Interesting

    You can and must know your subject area, in this case, tech. You also need to put together a business plan and shop it around. But the thing that there doesn't seem to be a lot of help out there on is the magic ingredient: learning to think like a Yankee trader. There's a certain kind of thinking that works out ways to monetize a technology product or service. Sales people kind of have it. MBAs don't have it, or if they do, in small degrees (learning the CAPM doesn't teach you how). Engineers definitely don't have it.

    So where/how can the aspiring entrepreneurs among us learn how to think about how to make money with their marvelous inventions? Do you have any books, organizations, or workshops you could recommend?

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    Do what you can, with what you have, where you are.
  9. When do you pull out by cyborch · · Score: 5, Interesting

    Given that the nature of venture capitalism is to fund startups, at what point do you pull out? Is there a critical size of a company which is a warning to pull out and cash in? If so, what size is it?

    To put it more precisely: When, in your opinion, does a startup stop being a startup, and do you pull out and cash in when that point is reached?

  10. Why limit the questions to open source startups? by Anonymous Coward · · Score: 3, Interesting

    In general, what drives you to fund a startup? Just as interesting would be what drives you away from funding a startup (other than the obvious answer of "their idea sucks").

  11. Let's start with the basics... by psykocrime · · Score: 5, Interesting

    Traditionally it's held that one of the things a company should have, if seeking venture capital, is "proprietary technology." Obviously in the
    case of an open-source company this will never hold. Open-Source based businesses are always fundamentally different from an old-school technology
    company in that you're not really selling bits; you're selling "something else" where the "something else" may vary depending on the business model.

    So given that, and the thesis (mine at least) that the barriers to entry for competition are lower for an open-source company, what do you look for
    in a potential investment? Are you looking for some radically new and innovative business model; with accompanying patent? Or is it all
    about execution, suggesting that a would-be open-source company has to meet a higher standard in terms of attracting business and establishing
    a customer base *before* getting funded?

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  12. Prevent getting thrown out of my own startup? by Cr0w+T.+Trollbot · · Score: 5, Interesting
    More than once, I've seen the founder of a startup get thrown out of his own company by venture capitalists, despite the fact that it was his idea and technology in the first place. How do I structure a VC deal so that I can't be kicked out of my own company?

    Crow T. Trollbot

    1. Re:Prevent getting thrown out of my own startup? by frank_adrian314159 · · Score: 3, Insightful
      How do I structure a VC deal so that I can't be kicked out of my own company?

      Oh! This one's easy!

      You can't. It's *their* money. Even if you can't be kicked out, they can destroy the company out from underneath you. If you can't live with this fact of life, find alternate funding sources.

      Actually, the fact that you're even asking this question shows that you're enough out of touch with the reality of the situation that you probably shouldn't be looking at VC funding at all.

      In general, the VC's *do* want you to succeed. Places where you might have conflict generally revolve around three issues - your performance in your chosen position isn't very good, you have a hard time "playing with others" including personnel the VC might bring in to help you (and by asking for VC money, you've already acknowledged that you can't do it on your own), or there's a fundamental disconnect in your vision and the vision of the board WRT strategy (in which case, you shouldn't have taken the money in the first place).

      VC's are not there to screw up your life, steal your work, or eat your children (OK, maybe the eat the children thing, but...). They are there to make money. As long as you and *their* company can help them do that, you're golden. If you can't, you should be kicked out.

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      That is all.
  13. First on my mind by UbuntuDupe · · Score: 5, Interesting

    What are the best ways to actually earn a profit, when you're giving away the source code? Are entrepreneurs in this area limited to "support, support, support", or are there other ways?

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  14. How user experience expertise impact OSS investing by count0 · · Score: 3, Interesting

    Creating good UI and an overall understanding of user experience is a common shortcoming in OSS. The notable exceptions have had significant help from commercial companies with ui design expertise (say, Firefox, Ruby on Rails). Can you please describe how you think about user experience and OSS, and how that impacts investment decisions?

    - initial thoughts on the UI when assessing products (obviously not so important for server tools)
    - thoughts on UX expertise of the team
    - more importantly, how you take a promising OSS company and add UX expertise?

    thanks,

    cz

  15. 10 Most common by Anon-Admin · · Score: 5, Interesting

    In your opinion, what are the 10 most common mistakes open source-based startups make when seeking venture capitol?

    1. Re:10 Most common by flynt · · Score: 3, Funny

      Number 1: Spelling 'capital' incorrectly on their business plan.

  16. Planning ahead by Rob+T+Firefly · · Score: 3, Informative

    What do you plan to do for a living after BubbleBurst 2.0?

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  17. Financing / Control Questions by grondak · · Score: 5, Interesting
    I realize the answers to these questions vary by project, but let's say we have a pretty hot idea and the only contribution is the software IP. Let's say it's a web site. We've got something working but need money for a production deployment (ie bandwidth, systems hosting, customer service reps, support staff, etc. In short, our cost model can look like PayPal's cost model).
    1. What amount of control (ie % ownership) typically goes to the investors? 90% ?
    2. How is the VC money returned to the investors? Examples: is it given back as percentage of profit (20 % of gross or NIAT), or like a loan (all returned within 5 years?) or is it in perpetuity (VCs get 20% of everything, forever) ?
    3. Does risk still equal reward? Seems to me the reward in the Internet/OSS project space is outrageously high, but the risk can't get any greater than the money you lay out + potential loss of goodwill/reputation.
    4. What's the percentage in item 2 that VCs actually get for a project like this? 20%?
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  18. When to seek VC, when to bootstrap? by b0r1s · · Score: 5, Interesting

    Having started a small website, that quickly turned into a medium sized website, that led to mentions in Private Equity Weekly, calls from Turner, speaking engagements, and emails from a couple Investment Banking firms, at what point should a startup seek outside funding vs. trying to bootstrap their way to success? We wanted to carry it as long as we could (we're not losing money, we can afford to run at this level forever), but we have since been equaled (or, in some cases passed) by a dozen or so copycats with big bankrolls funding their marketing and PR.

    At this point, it feels like we've missed the boat (though our traffic and membership is higher than ever before), simply because we didn't take on the outside management and marketting expertise that would have come with real funding.

    The question, then, is: does there exist a fundamental 'right time' to contact a VC/IB to avoid losing your competitive edge? Or, does it always vary by company?

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    Mooniacs for iOS and Android
  19. I have an idea by emil10001 · · Score: 3, Interesting

    I have a really great idea that I would like to market. Without getting into specifics it's along the lines of (legal) media distribution, and would involve licensing from big television/media companies. I haven't seen anything like my idea out there, and have been activly looking, as I have intrest in this idea as a consumer as well. I think it has a lot of potential and would compete well in the current market.

    My question is this, how does one go about getting started? Could you give a general overview of how a successful startup works, as well as perhaps some good references for further research?

  20. Open Source vs. $$$ by Twixter · · Score: 3, Interesting
    It seems that the nature of Open Source, at least on the surface, is counter to the capitalist model. Since the company doesn't have a technological advantage, they will be subject to perfect competition. Being closed allows the company to maintain a technical advantage.

    Why then invest in Open Source? What are the advantages to this model of business from an investment standpoint? Are there disadvantages from an investor's standpoint? How do you weigh those?

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    -Todd

    Put down the sig, and step away from the computer.

  21. Open source hardware opportunities? by mrand · · Score: 3, Interesting
    Mr. Gorman, There are a few major open source hardware projects (most are listed on wikipedia's open source hardware page.

    What is your opinion of the open source hardware projects that you are aware of, and do any stand chance of becoming success stories like so many of the software projects have?

    Also, have you come across many business opportunities that could be filled by open source hardware (care the describe them?), or do companies shy away from open source hardware for some reason (if so, why?)?

    Thank you!

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  22. How do I get to talk to your kind? by Qbertino · · Score: 4, Interesting

    As a lead-maintainer / developer of a successfull open source project and a freelancer and company partner who focuses on OSS I have a three-part question:

    1) How do I get to talk to someone like you? What would be the best approach?

    2) What do you want to see from someone who approaches you? Neat, well formulated ideas? Implementations? Finished business plans? A running company? All four?

    3) What bores you to death and what talks have you had with VC seekers that where a total waste of your time? What where the things they did wrong?

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    We suffer more in our imagination than in reality. - Seneca