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Venture Money in Open Source 135

Posted by samzenpus from the money-fixes-everything dept.
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."
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Venture Money in Open Source More

Venture Money in Open Source

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  • Differentiate the variables (Score:4, Insightful)

    by Anonymous Coward on Wednesday April 27, 2005 @09:54PM (#12368006)
    Even more interesting stats: "Most of those projects collapsed."

    Don't a large portion of ventures fail? Perhaps not directly related to them being open source.

    • Re: 80% to 90% (Score:4, Interesting)

      by iggymanz ( 596061 ) on Wednesday April 27, 2005 @09:58PM (#12368056)
      of ventures are EXPECTED to fail by venture capitalists, it's par for the course. Sounds like open source is as good a venture as any!

      • Re: 80% to 90% (Score:1, Insightful)

        by chucks86 ( 799149 )
        Yeah, it only made the front page because of buzz-words. You can get anything by an administrator that way...

      • Re: 80% to 90% (Score:2, Interesting)

        by Anonymous Coward
        Typically at least four out of five fail, but they expect to make up for it with a 10- or 20-bagger (get out for 10x or 20x their initial investment).
        How many 10- or 20-baggers have their been in the open source world? I can't think of any.

      • And we're talking about pre-bust (Score:5, Interesting)

        by darkonc ( 47285 ) <`stephen_samuel' `at' `bcgreen.com'> on Wednesday April 27, 2005 @11:52PM (#12368411) Homepage Journal
        If they're looking at companies invested in in 1999-2000, we're talking about just before the dot-com bust. These companies would have just gotten going when the brown stuff hit the rapidly spinning blades. If 80-90% of venture capital investments are expected to crash and anywhere near half of those infant open source companies survived the dot-com bust, then I'd say that pretty much proves that open source is an incredibly good investment.

        Like the old saying says -- lies damned lies and statistics.

        • If 80-90% of venture capital investments are expected to crash and anywhere near half of those infant open source companies survived the dot-com bust, then I'd say that pretty much proves that open source is an incredibly good investment.

          You could say that, but you'd be wrong. What investors (venture capitalists) are looking for isn't mere survival, but a high rate of growth and a high rate of return.

          Assuming the investment in each company is the same: If 4 out of 5 companies fail, then the fifth has p

      • Re: 80% to 90% (Score:4, Informative)

        by icoloma ( 322750 ) on Thursday April 28, 2005 @02:29AM (#12369103)
        Not correct, I think.
        IIRC, they expect 20% to fail miserabily, 30% to not give any benefit at all, 30% to give very little benefits, and 20% to compense for the full stack.

        according to wikipedia, "anywhere from 20 to 90% of the enterprises funded fail to return the invested capital"
        http://en.wikipedia.org/wiki/Venture_capital [wikipedia.org]

    • Re:Differentiate the variables (Score:4, Informative)

      by Senjutsu ( 614542 ) on Wednesday April 27, 2005 @10:02PM (#12368088)
      Yeah, this smells of lying through statistics.

      Most ventures fail. Most IT ventures fail, especially when the IT bubble burst.

      The only relevant question is whether open-source ventures fail any more often than the average IT venture.
      • You're right. Look at the "succeses". I think that'll answer your question. (The answer is that open-source ventures do not succeed)
      • From The Fine Article:

        "In 1999 and 2000, according to VentureOne, venture capitalists invested $714 million in 71 open-source companies. Most of those projects collapsed."

        Excuse me, but these are heavily biased numbers. Tons of startups collapsed. Heck, IIRC, one set of VC's dumped $600 Million into a company selling dog-food over the internet; and a different group dumped another $600 Million.

        At least some of the Open Source companies survived from the general collapse of the dot-com era.

        So thes

      • A better question than whether open-source ventures fail more often than the average IT venture is asking whether the open-source ones that succeed have a better return on the investment than the closed-source ones. That is how VC companies measure success: earnings (or profit) vs investment, not what fraction fail.
      • The only relevant question is whether open-source ventures fail any more often than the average IT venture.
        Another important question is how likely are Venture Capitalists to "get" Free Software? Can any of them actually tell a good Free Software project from a bad one? Given the nature of Free Software, and the nature I suspect Venture Capitalists have, along with their probable low interest in such things, I truly doubt it.

    • Depends on your definition of failure (Score:5, Interesting)

      by sjbe ( 173966 ) on Thursday April 28, 2005 @02:13AM (#12369039)

      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 .com boom but I know quite a few and they are invariably very smart people. They knew what was going on perfectly well. The problem they had was they had money they had to invest and there was no where sane to put it. They just had to hope that they could cash out before everything blew up.
    • Yes, most new businesses fail in the first year. New businesses is where VCs put their money. It's a very risky game.

      It's not quite the same extreme point on the risk-return graph as, say, playing the lottery but it is going in the same direction.
      • If it were like the lottery it would always have a negative expected return, and generate crime. (Crime generation is an adapted non-fiction opinion from Dashiell Hammett.)

        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.

  • Really? They collapsed? (Score:4, Insightful)

    by Quinn_Inuit ( 760445 ) <Quinn_Inuit@ya h o o . com> on Wednesday April 27, 2005 @09:56PM (#12368027)
    Of course most of the projects collapsed! VCs dump money into lots of projects with the full knowledge that the vast majority won't come close to turning a profit. It's the handful that do that make a VC company a fortune.
    • Exactly. 9 out of 10 startups don't get money, and of those that do 9 out of 10 go bankrupt. The way I see it, these companies that are investing in open source are doing way better than average.

    • Re:Really? They collapsed? (Score:5, Insightful)

      by nthomas ( 10354 ) on Thursday April 28, 2005 @04:06AM (#12369412)

      Of course most of the projects collapsed! VCs dump money into lots of projects with the full knowledge that the vast majority won't come close to turning a profit.

      False.

      Steve Bourne gave a talk last year at Columbia University about his Venture Capital company, El Dorado Ventures (it's a fascinating story how he went from writing Unix shells to becoming a VC). I forget the exact details, but trust me when I say that VC firms most certainly do not expect their projects to fail. Out of all the proposals that come their way, they allow a very small fraction to give one hour presentations to the VC firm partners. From those, they select an even smaller percentage to actually fund.

      IIRC, roughly half the projects fail.

      It's the handful that do that make a VC company a fortune.

      Perhaps. Still referring to Dr. Bourne's talk, out of the half that do not fail, a majority of those are successful and give the VC firms fairly good returns on their investment. A very small fraction of those are "astronomically successful" and give the VC firm a very good return on their investment. He did emphasize however that the number of projects in this last group was quite small.

      Overall, I got the impression that they thoroughly screen the projects that they invest in and I'm fairly certain other VC firms do the exact same thing.

      You make a mistake in thinking that VC firms "gamble" with their capital, i.e. that they put a million dollars each into 10 companies, expect 9 to fail, and the 10th to return 100 million. This is most certainly not the case. Partners in VC firms did not get their positions by throwing huge sums of cash around so easily.

      Thomas

  • Which is it? (Score:4, Funny)

    by Anonymous Coward on Wednesday April 27, 2005 @09:56PM (#12368043)
    So is RedHat a success or a failure?

    • Re:Which is it? (Score:2, Informative)

      by Anonymous Coward
      In terms of venture capital? A success. Very high share price at the IPO. Venture capitalists cashed out very well on this one.

  • $714million is a lot, but... (Score:3, Interesting)

    by zoogies ( 879569 ) on Wednesday April 27, 2005 @10:00PM (#12368068)
    While the money invested in open source is a lot, I'd venture to say it's but a fraction of total venture capitalist investment? correct me if I'm wrong.

    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.
    • "While the money invested in open source is a lot, I'd venture to say it's but a fraction of total venture capitalist investment?"

      As opposed to what? All of the total of venture capital investment? 126% of the total?

      Even if it's 95% of the total, it's 19/20th. A fraction of the total venture capital investment!

      Man, I hate that phrase. When comparing two numbers, it's HARD to not have one be a fraction of the other.
  • Donate money to a standard (FHS) which can then reward distros for compliance with $$$.

    It provides motivation to achieve the great end result (driver support, ease of use, unification of major players, etc).
    • At 11:00 PM after a long day, the fine details don't matter :P

      The standard could easily require a VERY small percentage return on profit which then goes back to the venture capitalists... easy yet rewarding.

    • Re:A bad novel idea (Score:2, Insightful)

      by cocotoni ( 594328 )
      This isn't such a good idea. You see, Open Source, being Open Source, can be copied, modified, re-distributed free of charge. Now imagine that, say Debian, achieves this standard complience. What stops say Ubuntu to build on that success and then claim their piece of the pie?

      Now that was Ubuntu, but what stops me to create my own distro CocoTonix, based on this standardized Debian and claim my piece of the loot?

      And the line would have to be drawn somewhere. And it wouldn't be just in minds of many.

  • Most venture projects collapse... (Score:4, Interesting)

    by ScentCone ( 795499 ) on Wednesday April 27, 2005 @10:03PM (#12368090)
    There wouldn't be much "venture" if those investments were a sure thing. VCs throw a lot of money around and hope that once in a while it sticks, and more than make up for the ones that don't. They're a little more conservative now than they were a few years ago, but that's cyclical. But $10m each (more or less) for 71 different companies is enough to count. I'd be curious, though, where $95M went with Turbolinux.

    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.

    • I've gotta say that $10M is a BUTLOAD of cash. When I see those kinds of numbers, I can't help but wonder what in hell happened to make the project fail.

      • When I see those kinds of numbers, I can't help but wonder what in hell happened to make the project fail.

        Easy. They produced something that people didnt want to pay for. And that is more likely to happen with open source since cost is the main attraction factor.

        • Not failure, fraud & graft (Score:4, Interesting)

          by Markus Registrada ( 642224 ) on Thursday April 28, 2005 @01:46AM (#12368925)
          Most of these projects, like most VC projects of any kind, were not only expected to fail, they were required to fail.

          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.

      • 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

        • 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.
          Apparently, the limitied capital requirements you describe would be typical for new companies in the software industry. Compared to other businesses, such as manufacturing or hardware development or whatever, you simply don't need as much money.

          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.

          In the article Software patents and financial investing [vrijschrift.org] venture capitlist Laura Creighton explains how it typically works. (The article is is mostly about software patents, but covers the topic of investing in software companies as well.)

          An extract from the article:

          Hardware companies need capital, indeed, to build factories, but the demands of Software companies are much more modest. The following is the normal development pattern of small software companies, who intend to produce a product for retail.

          A few -- at most 5 -- people get together to form a company and develop a piece of software. They look for funding. Unless some of the founders have rich parents, they receive none -- because they cannot convince the lenders to lend. This is because all they have to offer is their very bright idea. Ideas about the software I intend to develop are akin to ideas about the hit-CD my band intends to produce, or the great novel I will write some day. They sound great, but only rarely live up to their dreams. In the Software industry, we have a word for such unrealised dreams. We call them 'vapourware'. And financial lenders have learned to not invest in 'vapourware', for obvious reasons.

          Undiscouraged, our hero-founders decide to develop their software anyway. In order to fund their venture, they take on a consulting contract, typically in an unrelated, but lucrative field. This means that their product gets developed more slowly than would otherwise be the case. If all goes well, they reach the point where they would dearly love to jettison the consulting business, and make all of their income on business related to their new product. Or, if their consulting business is related to their product, they need to expand.

          In short, they need a round of financing. This is where I come in. This is where I do my investing, and most small innovative software companies need cash to the tune of 50,000 to 250,000 Euros. This is an incredibly small sum. There is a tremendous need for this sort of funding, but it is very hard to find. And Software Patents will not help you acquire this. The amount of money you need to 'go around the corner' is one or two orders of magnitude smaller than the amount of money that you need to open a factory. It is the same problem that faces small businesses in every industry.

          She goes on to explain how software patents were percieved by some to provide a solution to this problem, but how that perception turned out to be an expensive mirage calle "the Internet Bubble".

          It's a long article, but an interesting read if you have the time.

          • 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, beca

  • Red Hat a success? (Score:3, Insightful)

    by NineNine ( 235196 ) on Wednesday April 27, 2005 @10:03PM (#12368093)
    Red Hat is barely breaking even. It has a market capitalization of $2 billion. Big fucking deal. That means that the stock is grossly overpriced. Their P/E is twice what it should be. Insiders are selling. If that's what you call a succes, then that's not sayin' much about Open Source's ability to make money.
    • Not money, profit. Open source can make money all day long. Turning a profit, which is all a capitalist is interested in, is more difficult.
    • I read somewhere that (the downsized) Turbolinux broke even in 2004. Still, that's because they're small, lean and focused, like other *small* Linux companies.

      >Insiders are selling.

      They'd better be; last time I checked their growth (newly added RHN subscriptions) was slowing down.
      Still, there were lucky that they went public when they did, else, they'd be a Sun department by now.

    • The Stock Market Works Differently (Score:5, Insightful)

      by Moraelin ( 679338 ) on Thursday April 28, 2005 @03:59AM (#12369391) Journal
      See, "profit" with stocks is _not_ the same thing as investing in a company that turns a profit from selling goods. Unless a company pays dividends, and most don't, the company's turning a profit is worth exactly _nothing_ by itself to a shareholder.

      Trading stock is no more than trading pieces of paper, with no intrinsic value. The only value is what everyone else is willing to pay for one. It's an exercise in guessing what the other lemmings will do, and which company's hype is more.

      The way to make money in the stock market is to buy low and sell high.

      Investing in a company that's steadily churning profit, but doesn't cause enough hype for its stock to rise, is actually a _bad_ investment. It's the kind of investment that gives _you_ exactly _zero_ profit. That's the kind of stocks you want to sell.

      (Point in case, at some point the value of 3Com was _less_ than the value of shares it owned in Palm. So the rest of 3Com actually had a _negative_ value on the stock market. We're talking divisions which turned a solid steady profit. Yet the stock market considered them a _liability_.)

      Investing in a startup that causes a lot of hype and whose shares quadruple in price within months, is good. It doesn't even matter if it makes a profit or even if it sells anything. Even if the company is dying a slow death, that quadrupling of share value means a 300% profit for _you_ if you sell before it bombs.

      So let's look at investing in a company like Red Hat: Investing 10 million in a non-profitable company and ending up with half a _billion_ worth of grossly overpriced stock anyway... is it a success? Yes, it is a success. It's a freaking huge success. It's such a great success, it's every VC's wet dream. It's the stuff that causes them to wake up and go change their underwear.
      • This simply ain't true.

        Owning stock is means owning a part of the company. If the company turns a profit, it means that either there's a dividend (which, like you say obviosly benefits those receiving it) OR the money-coffers of the company grows.

        Now, trough your stocks you own a part of those money-coffers. It is absurd to claim that it does not benefit you if a money-coffer that belongs 1% to you grows.

        • No. I believe the words you're looking for is "that doesn't make sense" (in which case we can argue very quickly) rather than "that simply ain't true". Because in the Real World, it simply _is_ true.

          It doesn't matter if it makes sense or not, it's the way it works. The profitable core 3Com divisions being valued a _negative_ number of dollars at one point was a reality.

          A _stupid_ reality, that's for sure. But a reality nevertheless.

          The stock market doesn't work in the way that you own, say, a mom-and-pop
          • No. Sorry but just no.

            It is very much true that money-coffers are not (by far!) the only thing influencing the market-pricing of companies.

            But that is not the same thing as saying that the size of the money-coffers does not influence the pricing of a company at all, which is what you're going to have to claim if you want profits going into money-coffers to provide no benefit whatsoever.

            • 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 ass

              • You may, or may not, be correct that investing in "safe" companies with stable historical profits is a better bet than in new unproven companies.

                But that wasn't what I said. What I said is that having a larger war-chest will, all other being equal, on the average lead to a greater market evaluation. Put another way, with a market-cap of 5 billion suddenly won a billion in Lotto, their market-cap very very likely *would* go up.

          • The short version is the stock is worth whatever someone else is willing to pay you for it. There is no intrinsic value that anyone _has_ to pay you. Stock traders buy and sell for the stupidest reasons.
  • How much are those investments worth now??? Evin if the majority of the investements fail the few remaining can make enough to offset the failed investments. VC's don't aim to lose money, they take calculated risks in the hope that some will pay off TO THE MAXX!!!.
  • I'd be willing to be that if an equivalent study was done on "closed-source" companies, the losses would be substantially higher.

    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"

  • VC money is actually bad for business (Score:5, Interesting)

    by lashi ( 822466 ) on Wednesday April 27, 2005 @11:12PM (#12368185) Homepage
    VC usually only care about maximize return on their investment in a short time. As a result, they take approach that's actually bad for the long term growth for business.

    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]

    • Re:VC money is actually bad for business (Score:5, Insightful)

      by anthony_dipierro ( 543308 ) on Thursday April 28, 2005 @01:32AM (#12368861) Journal

      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.

      Heh, that's pretty much exactly what happened to the company that I co-founded. Not in the same way as ArsDigita, of course. Our investor insisted on being CEO from the very beginning.

      It's interesting that you mention VCs only caring about maximizing their return in a short time. I never really thought about it that way, but that does explain the behaviors of our CEO pretty well. I guess it makes sense from a VC perspective. You throw lots of money trying for fast growth, and IPO as an exit strategy. If you fail, so what, you've got 10, 50, 100 other investments. It sucks from the POV of the founders, because we're relying solely on this one company and would prefer a less risky slow growth approach. But from the POV of the investors, it's just money and you reduce risk through diversification.

      • Heh, that's pretty much exactly what happened to the company that I co-founded. Not in the same way as ArsDigita, of course. Our investor insisted on being CEO from the very beginning.

        It's interesting that you mention VCs only caring about maximizing their return in a short time. I never really thought about it that way, but that does explain the behaviors of our CEO pretty well. I guess it makes sense from a VC perspective. You throw lots of money trying for fast growth, and IPO as an exit strategy. If

        • Which means the founders screwed up and chose a VC because they would fund them, not because the VC agreed with their business goals.

          Pretty much. When you've been out of college for a little over a year and someone offers to invest 4 million dollars in your idea, it's hard to refuse. In hindsight, we probably should have. Of course, that probably would have meant going it alone.

    • VCs tanking companies through greedy stupidity was happening before the dot.com boom or even a publically available Internet.

      Saw this happen at a VC-funded company I worked at back in the 1980s when they put in their own CEO who dictated a $70 price point for a C-64 music software package.

    • So his beef, if you've actually read that link, is that the VC actually started letting people work 40 hour weeks. No, really read the text. His company was oh, so profitable, based on asking people to work 6x12 weeks without compensation.

      Also he says "it would have been hard to lose money paying MIT-educated programmers $50-85,000 base salaries". Yet the limit at which you don't have to pay for overtime any more, even for software, is $90,000 per year.

      I.e., this fucktard was breaking the employment laws.

  • The REAL question is... (Score:5, Insightful)

    by ZuperDee ( 161571 ) <zuperdee@nospAM.yahoo.com> on Wednesday April 27, 2005 @11:18PM (#12368223) Homepage Journal
    I think we all pretty much know that most new ventures fail. By now, this is common knowledge, and there is NOTHING new or insightful about those kinds of remarks.

    A better question that digs deeper: Is the failure rate for open source ventures higher or lower than the expected rates of failure in the software industry?

    Personally, I'd be willing to bet that the failure rate for open source ventures IS higher than the expected industry average, because:

    1) The idea of a business model based on open source is still relatively new (in terms of the history of the computer industry), and therefore more prone to high failure rate than a more mature sort of business model, like proprietary software.

    2) Even though we may have seen some SMALL successes with new open source ventures here and there of late (e.g., Red Hat), it remains to be seen whether or not such ventures will be highly profitable in the long term. Red Hat is one of the few success stories you can point to, and even then, they are delivering nowhere NEAR the kind of returns Microsoft does. VCs generally tend to expect BIG returns, given that they're taking BIG risks.

    Given these points, the fact of the matter is, there IS good reason to be wary of open source ventures, because they ARE risky, and so far, it is clear that they probably won't be as profitable as Microsoft, or even Apple. If I were a VC, my first question would be: which is a better bet for me in terms of making ME rich in the long term: a Red Hat, or a Microsoft?

    • Re:The REAL question is... (Score:1, Interesting)

      by Anonymous Coward
      Red Hat is one of the few success stories you can point to, and even then, they are delivering nowhere NEAR the kind of returns Microsoft does. VCs generally tend to expect BIG returns, given that they're taking BIG risks.

      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.

  • Red Hat is a failure (Score:1, Interesting)

    by Anonymous Coward
    Failure : 3.2 Billion invested , another 500 million owed in 2024 ( 19 years , 27 million owed per year until then to make repayment. And they created there own worst nighmare : pulled out of the desktop and created Fedora ... Fedora is Red Hat competitor on the market costing them millions if not billions in income.

  • Only 70 companies (Score:3, Funny)

    by AnuradhaRatnaweera ( 757812 ) on Wednesday April 27, 2005 @11:35PM (#12368326) Homepage
    This number should go down to 70, because SCO can't be included in the count... :-)
  • A good idea, whether open source or not, can turn a profit. It just shows that many "great ideas" in IT are mediocre at best. It indeed is lying through statistics and I actually do enjoy working with Microsoft's products (minus IE and WMP)! It just seems to me that Microsoft does a bit better quality-wise with the products that cost you $$ - IE and WMP are sub-par while Excel and W2K are decent.
    • Wish I had mod points to give on this... I fint a few things MS puts out are better than alternatives.. though I use FF, and Tbird over IE, and OE (have for a few years now) ...

      I have some *big* issues with their security stance in the past.. it's improved a lot, but in some areas too little, too late... I like 2k, and xp is more responsive (after dissabling the fisher price interface).

  • The bullshit bubble. (Score:5, Insightful)

    by rice_burners_suck ( 243660 ) on Thursday April 28, 2005 @12:30AM (#12368597)
    Our company was the pride of the technological world. We were given $100 Million because we wrote a press release that began, "By leveraging innovative technologies, content providers streamline compelling enterprise solutions." We used that money to get fancy offices, fancy office furniture, kids fresh out of college who claimed they knew how to use a computer (we considered them experts), BMWs to give our computer experts, nerf toys that our computer experts could shoot each other with in the fancy offices, etc. After a year, we ran out of money. Unfortunately, all our computer experts were busy playing with the nerf toys, so they didn't make something we could sell.

    Well, the above is a joke, but what drove me nuts in the 1999-2000 time frame was that all kinds of companies with lame names that were supposed to sound innovative issued press release after press release that basically said nothing but used the kinds of words found in the Official Bullshit Generator [erikandanna.com]. All kinds of venture capitalists who thought they were going to be the next Gill Bates bet the farm on these companies, and subsequently lost everything. Some of these companies claimed they were so innovative because they provided programmers with lots of room, lots of light, allowed nerf toys to be used at the office (yes, I am serious!), and all kinds of further bullshit that businesses don't do because that's not how you make money. (As if, you know, businesses have existed for thousands of years, and only now, it took some innovative computer geek to come up with a better way to do business by throwing away centuries of experience.) And what's that about lots of light? What hacker do you know who likes lots of light? Personally, I like my screen dark, my room dark, the shades drawn, and sunglasses on, just in case, so I can't see the darker characters in the terminal... Otherwise, where would the grue come from? But what drove me the most nuts was that most of the vaporware these phony technology companies came up with were products that nobody would ever want or need anyway. For example, Be, Inc., whose programmers worked their asses off for a decade to create a bitchen OS, changed focus from operating systems to internet appliances in the wake of dumb press releases like the above. When asked what an internet appliance was, they said, "It's a refrigerator with an internet connection, so you can check your email on your refrigerator." What a dumb move, which shortly destroyed the company. Other companies, which didn't even exist prior to 1999, invented truly dumb devices... like a picture frame that's actually an LCD monitor, so you can have the picture change every so often. Yeah, like I'm gonna spend the $500 that an LCD cost back then to get such a useless gimmick out of it. Oh well... I don't want to think about the bullshit bubble.

    • You're talking about Be Inc.

      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 Microso
    • I worked in a .gone a lot like that... I was the only one that worked there that didn't accept stock options, and was out about 4 months before it died.

      Everyone there was all about "selling out, rich" .. they had hired more marketting people than they had developers around when I left, and they didn't even have a finished "product" (or a working one for that matter).. Me I came, I worked, it was a pretty good concept for the time, and could have been big, if they'd used more vc funds for keeping the dev
    • Actually, you can get an LCD picture frame [thinkgeek.com] for about 100 dollars these days. And with digital cameras outselling traditional cameras, the price is worth it. They were just ahead of their time.

      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

      • 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.

        [snippage discussion of various benefits like nerf toys and fancy chairs.]

        Wrong.

        A lot of what happened was that because so much money was chasing a fairly limited pool of employess that bennies (and salaries) to attract employees to Company A over Company B got out of hand, way, way out of hand.

        In case

  • No mention of VA Software? (Score:3, Funny)

    by anthony_dipierro ( 543308 ) on Thursday April 28, 2005 @12:38AM (#12368632) Journal
    Now there's an open source company with a stock chart [yahoo.com] to be proud of.
  • But given some spectacular open-source failures in the late 1990's, a natural question may be whether some of these venture capitalists have perhaps lost their minds.

    By this measure, VC's should run away from a closed source venture like Darl McBride from an honest judge...

  • Slashdot Extra Bonus Round! (Score:5, Funny)

    by xenocide2 ( 231786 ) on Thursday April 28, 2005 @02:01AM (#12368986) Homepage
    "The article talks about both successes and failures: Red Hat, TurboLinux, JBoss."

    For an extra 200 points, match which label goes with which product!

  • It just goes to show ... (Score:3, Interesting)

    by 3seas ( 184403 ) on Thursday April 28, 2005 @03:40AM (#12369332) Homepage Journal
    VCs simply are not that smart.

    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.


    • Open source is done in a mode of sharing code, and this includes the benefit of not having to start from scratch.

      You don't just ask for a check and then the VC gives you the cash. You have to prove somewhat of a business model and new idea, etc. That being said the pitch, when you're leveraging ANY existing code base, usually goes something like "Ordinarily we would need X million dollars to get this going. However, because we can build off of previous works we only need X/Y million dollars (where Y i
  • $714 million ... thats a mere pittance for venture capital.

    OSF is great for standards committees and good money for individual and localized experts and contributors, but as a business model -- spending ooodles and ooodles of money to develope something for the majority of people to use for free isn't a sucessfull big business venture model.

  • It's the timing that counts with VCs (Score:3, Informative)

    by blackhedd ( 412389 ) on Thursday April 28, 2005 @06:46AM (#12369959)
    One poster said correctly that, out of 10 deals, a VC looks for 1-2 home runs, maybe 3-4 breakevens and the rest are total losses. What smart VCs do is take a perspective on the market as a whole and bet on what are the coming hot segments. Then they carefully place a few bets in those spaces. To be chosen, a company has to have a top management team, be focused (or re-focusable) on the laser-narrow segment of the market that corresponds to the VC's view, have a "correct" business model, and can check off a whole list of other variables. Everything about the company has to right, down to what color ties the CEO wears (if any).
    Basically, a VC manages his risk by only choosing companies that meet a whole range of very narrow constraints, with the only degree of freedom being the specific market segment, and that is chosen by the VC.
    This year, the VCs' tea leaves are showing open source as the hot space.
    One very interesting comment in TFA was the initial reaction to Fleury's attempts to get funded four years ago: "you must be nuts." Since he didn't fit the VCs' pre-established business-model checkbox at that time, he couldn't get funded. The VC view of the world has changed, and now the "open source" aspect is the hot one.
    Another thing good VCs always do is fund to milestones. If you don't hit substantially all of your targets, they will ruthlessly shoot you in the head and not fund your next round.
    This will either win big for the early VCs or it will fail. We'll know in about a year (that's a typical length for a funding round).

  • Novell (Score:1, Interesting)

    by Anonymous Coward
    Novell is going to have a big influence on open source capital. If they succeed in transitioning their business, and so far they are looking good, the VC's will have another model to emulate.
  • In 1999 and 2000, it was going into the .com crash that saw a LOT of tech companies go under. If you make a product, opensource or not, and your customer base suddenly shrinks by a huge amount, is it the fault of the start-ups not having a good idea or product?

    A huge part of the .com crash was due to companies that were getting funding in 1997 and 1998 that didn't have a product yet. The hype surrounding the Internet was enough to get funding for a lot of go-nowhere companies that didn't have a product,
  • Disclaimer: I am not an investment advisor. This is not investment advice. Your actual mileage may vary.

    I have a modest amount of money that I used to set up a rollover IRA. I invest it in a combination of stocks and mutual funds. I chose some international funds, because some of the markets overseas are just too hot to pass up. Domestically, I have some open source companies -- Red Hat, Novell, and VA Linux. They have all taken quite a beating in the dot com bust, but I bought after that, buying at
  • I have been involved with many startups at pre/post incubation stages and on the road to (what the startup's regarded as "the holy grail") funding.

    The core team of the startup already cultivates a business idea. The core team and their advisors make the toughie decision to Opensource parts or the whole of their "software". Before going to the VCs, they consult a lawyer on the impact of what is opensourced and the VCs interest.

    Finally, the agreement is met, the pie is split between the "investment team
  • Here are two projects that are both older than 2000, anyone care to donate?

    1. NetBSD [netbsd.org] - Free, business-friendly open source operating system, donate at paypal@NetBSD.org
    2. g4u [feyrer.de] - Harddisk image cloning for PCs, donate at paypal@feyrer.de
  • The upshot of all this is there is certainly truth in the phrase "patience is a virtue".

    It is much better to keep control of your own operations and grow slowly, than to become beholden to VCs - who will more than likely take over and destroy your hard work.

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