Venture Money in Open Source 135
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."
Re: 80% to 90% (Score:4, Interesting)
$714million is a lot, but... (Score:3, Interesting)
Also, what's the point of this article? It's good, right, that open source is being given this attention? Why the complaints about the power of venture capitalists? They are keeping these open source projects alive.
Most venture projects collapse... (Score:4, Interesting)
Interesting, too, that the Red Hat board member specifically talks about the comfort he feels in having big bucks backing that shop. It will be interesting to see if the few million that SugarCRM raised can possibly keep them going up against MS's CRM group, and hosted apps like SalesForce.com.
Re:All this money.... (Score:4, Interesting)
Re: 80% to 90% (Score:2, Interesting)
How many 10- or 20-baggers have their been in the open source world? I can't think of any.
Didn't virtually EVERY startup collapse in 2000? (Score:1, Interesting)
This study and the publication of it is sheer FUD. I'd love to see a counter-study that shows what the VCs lost by investing in closed-source companies.
The "closed-source" crowd loves to argue things like "Firefox isn't as secure as IE because it's not as pervasive, everyone targets IE because it's #1".
Ok, well since "open-source" wasn't as prevalent in 2000 as "closed-source", it clearly couldn't have been the cause of the losses of the VCs. Since the vast majority of the technology companies that crumbled in 2000 were "closed-source" companies.
Eat crow.
VC money is actually bad for business (Score:5, Interesting)
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/ [waxy.org]
Paul Graham has an interested 'unified theroy of VC suckage' on his page
http://store.yahoo.com/paulgraham/venturecapital.h tml [yahoo.com]
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 [greylock.com]
Red Hat is a failure (Score:1, Interesting)
And we're talking about pre-bust (Score:5, Interesting)
Like the old saying says -- lies damned lies and statistics.
Re: 80% to 90% (Score:4, Interesting)
Re:The bullshit bubble. (Score:3, Interesting)
IMHO, they really got a lot of the engineering right with BeOS that other operating systems (Windows, MacOS) are getting to only now. The doom of Be wasn't just that the internet appliance thing was a distraction, but also that BeOS was either too early, because its features weren't needed yet, or too late, because the OS wars had already concluded.
For those of you that would like a history lesson, Palm ended up buying Be for around $11M and then, on behalf of Be, suing Microsoft and getting around a $22M settlement a few years later.
Where's BeOS today? Here: http://yellowtab.com/ [yellowtab.com]
R.I.P.
Re:No mention of VA Software? (Score:3, Interesting)
Re:Most venture projects collapse... (Score:2, Interesting)
You'd be surprised. I was involved with a dot com startup that got $4 million in initial funding and after all was said and done probably wasted $10 million total.
Our investor gave us the money on the condition that he be our CEO. Biggest mistake we ever made. This guy proceeded to throw away money on all sorts of things. We didn't yet have any users, but the sales guys at Foundry Networks convinced him to buy not one, but two BigIron 8000s complete with fibre ports. All in all we probably spent half a million dollars just on switches and load balancers and the like. Our CEO suffered from the delusion that if you're spending more money you must be getting something better.
And best of all, none of it even worked! As I told the big boss man from the very beginning, the failover is useless when you've only got a single incoming connection, in order to do things properly you'd need two incoming connections with different IP addresses and the ability to send rerouting information to the upstream routers. But when we got to the hosting place, we didn't have any of that.
I only wish I was a few years older or had better persuasion/politician skills. We had a good idea, and only needed a couple million to design the software right so that it could scale as the idea got more popular. But instead I and the other co-founders got pushed to the side by others who promised infinite growth in no time at all and instead provided us with a half-assed product way late. I got to see the mythical man month up close and personal as we added more and more developers only to get further and further behind on our schedule. When we finally came out with a product, it was mid-2001, I had already quit, and another co-founder took a leave of absense which turned out to be permanent. In September of 2001 one of our big contracts, with the Republican National Committee, was pulled, due to the RNC having more important issues to focus on. That was pretty much the end of the end. I think there were 5 or 6 employees left, down from the peak of 40-50.
Not failure, fraud & graft (Score:4, Interesting)
Consider LinuxCare: the VCs installed crooked executives who raided the cash box, handing much of it to the VC's other ventures, and pocketing the rest.
How many startups got a few million and then handed half over to Oracle, Sun, and EMC, and handed the rest to the execs, and then folded? How many went on a buying spree, handing over boatloads of inflated shares to the VCs (to sell immediately) in exchange for other failing companies, right before they tanked themselves? How many went public and the bankers got enormous kickbacks, buying captive shares at a fraction of their value the next day, and then selling out immediately? The losers were not the VCs -- they made out like bandits on those "failures".
Enormous amounts of money changed hands under very little official scrutiny. That was the point. Business successes, where they happened despite all, were just icing on the cake.
Depends on your definition of failure (Score:5, Interesting)
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
Re:The REAL question is... (Score:1, Interesting)
Any VC that invested in Red Hat and didn't get a BIG return out of the IPO only has itself to blame. Whether Red Hat is a sustainable business is a separate question.
Not all of it was bullshit (Score:3, Interesting)
Exactly how many thousands of years have software companies been profitably running? A lot of what happened during the Bubble was in reaction to things that were wrong at regular monolithic companies. People do need more room to work than most companies give them. People need to take their mind off of work every now and then. (I remember visiting software development firms in the 80's and ping pong ball guns being present). Studies have shown that the average worker produces the most overall if they're slacking off 20% of the time. Aeron chairs, while gratuitous, are a lot more comfortable than the average office chair. Low light, and the narrow-spectrum light output by cheap flourescent office lights, are responsible for Seasonal Affective Disorder, or more plainly low light exposure levels cause depression. Out of this time we also got RSI-reduction keyboards, nonlinear office layouts, and a refocusing on morale of the individual over the "Office Space" style dronage where nobody cares what they do. There are also the "casual everydays," because a suit doesn't help you do your job as a coder any more than an optimized compiler would help an executive improve vendor relationships. Perks which had been dropping for years were suddenly brought forward as a way to improve worker relations and moral for less money than just paying them. My company is paying less for my health, dental, vision, accidental death and dismemberment, etc than they would have to pay me in cold hard cash to keep me as contented.
Maybe I should, but I don't feel so bad about the venture capitalists. To the average user with a clue, an internet-connected toaster was a joke, not something you would invest millions of dollars in. Even if the tech could be perfected, and it could pretty easily... so what? The investors in a company should know more than the average man on the street, but they allowed themselves to be blinded by greed. Instead of approaching anything rationally, they were driven by the potential for hundreds of trillions of dollars. Some of the ideas were either good or noble yet failed anyway, but many of the investors totally lost perspective and invested in junk. The AOL Time-Warner merger is the perfect example of this. Everyone at AOL knew they hit the proverbial jackpot, and everyone on the street knew Time-Warner was being an idiot.
In case you haven't noticed, companies are still releasing press releases that sound like they're from the bullshit generator.
It just goes to show ... (Score:3, Interesting)
Come one guys, lets consider the coder base difference between Open Source and Proprietary, what the adverage coder earns for his work.
Let me suggest that VC's, if provided a free worker base, would still manage to lose money for the most part.
Isn't that what this is really saying?
Open source is done in a mode of sharing code, and this includes the benefit of not having to start from scratch.
If you cannot take something of such nature and cause improvement to hapren that are of benefit in value return to you, then you genuinely are not very smart.
Maybe neither are those who get VCs to give them money and then fail.
NASA stories of recent seems to suggest they have something of a clue.
Here is an example:
who would find benefit in investing in GIMP? or CUPS improvements?
Printer and paper supply companies.
Investing in FOSS to improve the market for another product.
And what would anyone object to having such investors/sponsors lised in the "about" menu item and any other place that is non-interfering with the operation of teh application?
How about computer hardware vendors... Providing a FOSS OS with their system has to have some value in improving price performance of their product.
Seems to me there is a large failure to understand indirect profiting off of FOSS, cept for maybe those who pursue system support.
The Big question: How do you profit off of that which is free?
A: Indirectly.
Just as Open Source tracks code contributions, it can and should track sponsors. A matter of credit where credit is due.
Re:The Stock Market Works Differently (Score:3, Interesting)
Eivind is definitely on the right side of this argument.
Of course the stock market does some apparently bizarre things, simply due to the complex interactions between those investing in it and the companies they invest in. However, I find it telling that the most successful trader I've ever met worked almost entirely from solid, common sense investments. He didn't go for the big hype (and as a result he didn't lose money during the tech bust a few years back). He did go for solid investments, based on asset values, good P/E, and such metrics, not based on vastly inflated market cap. One of his best investments was the kind of "bad" choice Moraelin's been describing: he found a company whose share value was actually below the value of its assets. He invested a large sum of money, and promptly made a large sum of money when the rest of the market noticed this anomaly and the share price corrected.
This is a guy who has consistently outperformed the market, by upwards of 50% most years, and who has never lost money even in the major tech bust years. That puts him ahead of almost all of the clever private traders, professional fund managers, etc. who go for hype. Go figure. :-)
Novell (Score:1, Interesting)
Re:Differentiate the variables (Score:3, Interesting)
Once in a long while one of the lotterys that has a jackpot that grows until someone gets it will actually have a positive expected return. At that point venture capatilists DO invest in the lottery, buying millions of tickets.
Re:It's simply too much money (Score:2, Interesting)
So 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.
Yeah, that's exactly what we saw, and I've read some really insightful things lately and the whole experience finally makes a little bit of sense. I was forced to chalk it all up to incompetence, and that didn't sit right, because it seemed too hard for someone to be that incompetent. The mystery probably lies on the pressures which were coming from places even higher than our CEO (the board, and the outside investors, who I didn't get to interact with at all, it was my friend who was on the board and dealt with them, though he didn't have any real power either). This is not to say that our CEO wasn't at all incompetant, of course, but I now see how the outside investors were arguably even making rational decisions.
The sad thing is in our case there was probably no solution other than earning the money ourselves, maybe through years of consulting. That probably would have been the way to go, especially as the consulting market was doing very well back then. We could have made some money to pay for a few developers, and done some initial prototyping and high level design in our spare time.
Here I've always thought the solution was to have "found a better CEO", or "insisted upon retaining control of the company". But really our biggest problems were in the nature of the game more than the cards we happened to be dealt.