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Venture Capital in Open Source 68

Posted by ScuttleMonkey from the throwing-money-at-open-source-can't-hurt dept.
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.'"
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Venture Capital in Open Source More

Venture Capital in Open Source

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  • What's the revenue model? (Score:5, Interesting)

    by LeonGeeste ( 917243 ) * on Monday October 03, 2005 @04:27PM (#13707212) Journal
    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?

    • Did you not get the memo? (Score:5, Informative)

      by Anonymous Coward on Monday October 03, 2005 @04:35PM (#13707278)
      The F/OSS revenue model is consultancy, support and customization.
      • Which is something SugarCRM, one of the compaines listed in the FA, doesn't seem to get. SugarCRM started out as as a more-or-less commercial project, and while they distribute an 'open source' version of their software, it is poorly documented, not distributed under an OSI-approved license, missing important features available in the 'commercial version', and buggy as hell when compared to said 'commercial version'. Note that the commercial version costs something like $500 per user per year for licensin
    • A lot of open source 'companies' are making money via customization and support contracts. This pretty much requires the product to be something that businesses (medium to enterprise sized) would be interested in.
    • The Vulture Capitalists aren't looking for "The Next Big Thing", which was the failing of the 1990s bubble. It says they're looking for "The Current Big Thing" and investing in that.

      You made your situation sound like "I have a Next Big Thing" idea, but don't have the finished product or the rabid fan-boi base like MySQL. That's what failed to make them money in the past.

    • Also, as far as getting VC investment in your project - expect to need a fully formed business plan and a working beta before anyone will write you a check. Yes, a working prototype. You could look for grant money from various government agencies to fund the initial period of software creation and research, though.

      The VCs are going after these well known favorites because they are a sure bet. Unfortunately, I suspect it means we might be seeing 'premium' versions of these packages coming out that are s

    • OSS revenue threatened by piracy (Score:2, Funny)

      by Anonymous Coward
      One thing threatening Open Source revenue today--piracy.

      As we have already seen [slashdot.org], the GPL is under attack from evil forces known as "pirates." These shadowy folk silently steal source code and violate the GPL, infringing on the rights of GPL authors. They are nothing more than thieves getting a free ride off the work of others, and I for one am disgusted at the idea of it. As you can see in the previous article, clearly Slashdot is also sickened by the idea of copyright infringement and piracy.

      Some have even

    • From one of TFAs (Score:5, Insightful)

      by Karma_fucker_sucker ( 898393 ) on Monday October 03, 2005 @05:03PM (#13707488)
      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.

      • Re:From one of TFAs (Score:3, Interesting)

        by Wudbaer ( 48473 )
        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
    • Um, the article (I'm sorry, TFA) doesn't say anything about the, er, REVENUE MODEL that these "businesses" use

      That's step 2, remember? It comes right before "Profit!".

    • You have a legitimate question, but a lot of the smaller venture capita;ists aren't exactly betting the farm on some guys ideas, and then going off to pray that it all works out. They look at a longer view, and one condiseration is: How will investors, LATER, perceive the company and its revenue generating prospects.

      I knew some guys that needed $7 million or so to get some manufacturing going on a device they had invented.The 'banker', out on the West coast ran the thing through his head and decided, "Yeah

  • Oh god (Score:2, Funny)

    by Anonymous Coward
    It's the late 90s all over again.

  • Ironic (Score:5, Funny)

    by mysqlrocks ( 783488 ) on Monday October 03, 2005 @04:34PM (#13707267) Homepage Journal
    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?
    • No, not at all, unless the presentation is about the strengths of Openoffice (or KOffice, etc) over MS Office.

    • Re:Ironic (Score:3, Insightful)

      by HermanAB ( 661181 )
      No - insulting.
    • It's times like this that I wish I could mod the parent +1 "Super Funny" and then the parent would have a 6 - Funny rating and would explode and make the front page of every news station and everyone in the world would laugh really really hard. PowerPoint... Open Source... hahahahaha. Goooooooo investors!!!
      • 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...
        • hm, interesting. I'd mod you as interesting. But I think you don't give enough credit to the people out there. We're all familiar with how certain companies by being so big take over a product and change its name to their brand name. I wonder though, if the people of the world realize there are other ways to do PowerPoint than with PowerPoint. That would be a cool OpenOffice ad campaign:

          Yes, there is a way.
          Yes, it's free.
          Yes, it's all yours.

          Open Office.
          Just Open It.

  • What about the rest of us ? (Score:5, Insightful)

    by timeToy ( 643583 ) on Monday October 03, 2005 @04:36PM (#13707285)
    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.

  • Article Text (Score:3, Informative)

    by Anonymous Coward on Monday October 03, 2005 @04:36PM (#13707290)
    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.
    [0]

    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

  • Technical support contracts (Score:5, Insightful)

    by karvind ( 833059 ) <karvind.gmail@com> on Monday October 03, 2005 @04:37PM (#13707298) Journal
    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 [pmdapplied.com] about your open source project [sf.net]. 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.

  • Troll Community (Score:5, Funny)

    by Anonymous Coward on Monday October 03, 2005 @04:42PM (#13707343)
    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 /.

  • no VC for consumer open source (ease-of-use) (Score:5, Insightful)

    by G4from128k ( 686170 ) on Monday October 03, 2005 @04:43PM (#13707350)
    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.

  • Postgresql too. (Score:4, Informative)

    by team99parody ( 880782 ) on Monday October 03, 2005 @04:43PM (#13707359) Homepage
    The article mentioned MySQL so it's only fair to mention that EnterpriseDB Secures $7 Million in Venture Capital Financing [postgresql.org] for their postgresql-based database. They share many of their innovations back to the community.

  • economics (Score:4, Insightful)

    by sedyn ( 880034 ) on Monday October 03, 2005 @04:44PM (#13707366)
    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.

  • Gambling with OPM (Score:3, Interesting)

    by dada21 ( 163177 ) * <adam.dada@gmail.com> on Monday October 03, 2005 @04:50PM (#13707405) Homepage Journal
    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.
    • small business investment should reap 20% dividends

      This may be obvious to some:
      The theory is that VC's fund many projects with one or two actually hitting the big payout and paying for all of the others.

      More is profit is better, but the average over many VC is slightly above the average rate of return on an investment. What the ARR is these days I don't know.

      How you define the word dividends? Net Margin? EBITDA? EBIT? Have you gotten this return very consistently in the past?

      • Re:Dividends? (Score:3, Interesting)

        by dada21 ( 163177 ) *
        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 amortiza

  • Poor Investment. (Score:2, Insightful)

    by matr0x_x ( 919985 )
    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.

  • Asterisk is a no-brainer (Score:5, Interesting)

    by Toe, The ( 545098 ) on Monday October 03, 2005 @05:07PM (#13707524)
    I can't wait until VC discovers Asterisk [asterisk.org] (and Digium, the company behind the project).

    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. :)

    • I met the Asterisk and Digium people this past Saturday at Ohio Linux Fest and got to have a look at the software, hardware, and sat in on their presentation. It was rather cool.

      It looked rather cool. The one thing that really caught my interest was the mac mini they made into a pbx.
    • 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 :-)
  • I wonder what will be the impact that this article will have upon potential investors... it's businessweek, after all.

    Any ideas?

  • Supply Side OSS (Score:5, Interesting)

    by Doc Ruby ( 173196 ) on Monday October 03, 2005 @06:08PM (#13707914) Homepage Journal
    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?

  • you make money (Score:5, Insightful)

    by zogger ( 617870 ) on Monday October 03, 2005 @08:23PM (#13708798) Homepage Journal
    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's Influence (Score:4, Informative)

    by mparaz ( 31980 ) on Tuesday October 04, 2005 @12:00AM (#13709929) Homepage
    IBM bought Gluecode Software [paraz.com] and adopted its flagship product, the Apache Geronimo J2EE application server [apache.org]. Gluecode's founder went on to found Simula Labs [simulalabs.com] with portfolio of 2 companies [simulalabs.com] at the moment. One of them is sponsoring the ActiveMQ messaging server, a sister project of Geronimo.
  • I wonder how you have to get as a OO developer, before investors catch on? Do zou need the finished and boxed product, before potential investors catch on? I was told so, when I asked a friend to make some contacts for a project, I'm working on.

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