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Venture Money in Open Source

samzenpus posted more than 8 years ago | from the money-fixes-everything dept.

Programming 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."

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135 comments

Differentiate the variables (4, Insightful)

Anonymous Coward | more than 8 years ago | (#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:Differentiate the variables (1)

chucks86 (799149) | more than 8 years ago | (#12368054)

It's a conspiracy... I may still be paranoid, but my bet is that this story was paid for by a large corporation afraid of losing more revenue to small startups.

Re: 80% to 90% (3, Interesting)

iggymanz (596061) | more than 8 years ago | (#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% (2, Insightful)

chucks86 (799149) | more than 8 years ago | (#12368127)

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

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

Anonymous Coward | more than 8 years ago | (#12368163)

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.

Re: 80% to 90% (3, Interesting)

Directrix1 (157787) | more than 8 years ago | (#12368523)

Yes, and that just goes to show that most of the time open source is better in a business than as a business. Cooperative investments in open source by multiple businesses are what made open source what it is today.

And we're talking about pre-bust (4, Interesting)

darkonc (47285) | more than 8 years ago | (#12368411)

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.

80% to 90%-of Content Fails. (0)

Anonymous Coward | more than 8 years ago | (#12368670)

"... 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!"

Unless of course you're a content provider. Then by slashdot standards, you're "old and busted", or "old business model" if you take those kind of chances.

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

icoloma (322750) | more than 8 years ago | (#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 (3, Informative)

Senjutsu (614542) | more than 8 years ago | (#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.

Re:Differentiate the variables (1)

NineNine (235196) | more than 8 years ago | (#12368117)

You're right. Look at the "succeses". I think that'll answer your question. (The answer is that open-source ventures do not succeed)

Re:Differentiate the variables (0)

Anonymous Coward | more than 8 years ago | (#12368296)

Uh... somebody better tell IBM ... Novell ... Red Hat .... Good chunks of Apple ...

I'm sure they'll be glad to hear that Slashdot member # 235196 NineNine's ideas have yet again saved them from hemorrhaging even more billions on this fool's crusade :)

Re:Differentiate the variables (0)

Anonymous Coward | more than 8 years ago | (#12368462)

IBM is a services company with more intellectual property than any other company. Red Hat made as profit about 5x my salary. Apple is a hardware company that sells units with software that is anything but open source. If you think otherwise, I invite you to sell your own PowerPCs running Darwin.

Re:Differentiate the variables (0)

Anonymous Coward | more than 8 years ago | (#12368944)

IBM is a services company with more intellectual property than any other company.

You might as well say "IBM has a blue logo". It's true but it doesn't contradict the fact that IBM makes money off of open source. That's why they use and develop open source software.

Apple is a hardware company that sells units with software that is anything but open source.

Again, true but irrelevant. Do they or do they not use and contribute to open source software in order to make a profit?

Re:Differentiate the variables (1)

citog (206365) | more than 8 years ago | (#12369034)

Uh... somebody better tell IBM ... Novell ... Red Hat .... Good chunks of Apple ...

Ah yes, I'd forgotten about IBM, Novell and Apple as being among those new venture capital funded startups. Thanks for pointing them out.

The stats reflect the dot-com boom (1)

btarval (874919) | more than 8 years ago | (#12368293)

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 these stats are very misleading. Fortunately, it seems like VCs are smart enough to recognize that.

Re:Differentiate the variables (1)

davewalthall (878247) | more than 8 years ago | (#12368416)

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.

One other important question... (1)

CarpetShark (865376) | more than 8 years ago | (#12369838)

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 (4, Interesting)

sjbe (173966) | more than 8 years ago | (#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.

Finding a VC (0)

Anonymous Coward | more than 8 years ago | (#12369912)

Posted anonymously because I don't want to tip anyone off.

So how do you find one of these guys?

I'd like to run my own business, and I've got the technical wherewithal to pull it off, but I lack the short-term funding to pay for equipment, overhead, and my salary until the business could support it.

Some sort of VC investment would be perfect - I think.

How do you fid these guys? Are they all weasels?

Re:Differentiate the variables (1)

nickco3 (220146) | more than 8 years ago | (#12369149)

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.

Re:Differentiate the variables (0)

Anonymous Coward | more than 8 years ago | (#12369424)

About 9 out of 10 venture capital funded companies collapse within the first 3 years. It's the one that makes it that returns the money.

article on iwon.com (-1, Offtopic)

Anonymous Coward | more than 8 years ago | (#12368010)

iwon.com is so lame

Re:article on iwon.com (-1, Offtopic)

Anonymous Coward | more than 8 years ago | (#12368802)

How the fuck is that "insightful?"

zzz... (-1, Offtopic)

Anonymous Coward | more than 8 years ago | (#12368014)

First po.. *snore*

Really? They collapsed? (3, Insightful)

Quinn_Inuit (760445) | more than 8 years ago | (#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.

Re:Really? They collapsed? (1)

pHatidic (163975) | more than 8 years ago | (#12368257)

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? (1)

superpulpsicle (533373) | more than 8 years ago | (#12368824)

That kind of failure percentage is bigtime exaggeration. It's more like 5 out of 10 go bankrupt. Even then, it varies field to field. Not every startup is computer related.

Re:Really? They collapsed? (4, Insightful)

nthomas (10354) | more than 8 years ago | (#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

FP (-1, Offtopic)

Anonymous Coward | more than 8 years ago | (#12368032)

FP

Re:FP (-1, Troll)

Anonymous Coward | more than 8 years ago | (#12368052)

Failed post? You bet!

All this money.... (0, Offtopic)

demondawn (840015) | more than 8 years ago | (#12368036)

and how about America invest in educating our youth at the primary, secondary, and post-secondary levels, all of which are either horribly underfunded or horribly expensive? I guess the ROI isn't good enough, eh?

Re:All this money.... (2, Insightful)

JohnTheFisherman (225485) | more than 8 years ago | (#12368080)

How about we fix the system instead of just throwing more money at it and expecting that alone to fix it?

It's like it's 1999 and 'education' is 'an open source business opportunity.' Same lesson as TFA: throwing money at something doesn't fix it or make it work.

Re:All this money.... (4, Interesting)

zoogies (879569) | more than 8 years ago | (#12368103)

Same lesson as TFA: throwing money at something doesn't fix it or make it work.
Not all projects will turn out successful, but you can be sure none are getting off the ground without money. Throwing money at something doesn't make it work, but take money away, and it falls flat on its face.

Re:All this money.... (1)

demondawn (840015) | more than 8 years ago | (#12368123)

Well, ideally, a fixed, funded system would be nice. However, the article's lesson seems to be, rather than that, that the market is simply fickle.

Re:All this money.... (1)

ScentCone (795499) | more than 8 years ago | (#12368173)

Well, ideally, a fixed, funded system would be nice

I'm a little foggy, here. Fixed by what standards? And, funded by whom? If not by investors... then, what... tax dollars?

that the market is simply fickle

I've noticed that the open source community is pretty damn fickle, too. But that's the whole point, isn't it? That the market (of users, some of which vote with their wallet as investors) is the most nimble way to shape production to demand.

Re:All this money.... (1)

YourMissionForToday (556292) | more than 8 years ago | (#12368085)

You're not getting a cent out of us until you kill a deer, tan the hide, stretch it, make an anodized aluminum frame, and learn aerodynamics.

Now fly high, little bunny, or I'll pinch down my buttcheeks and rip your dick off!

Which is it? (4, Funny)

Anonymous Coward | more than 8 years ago | (#12368043)

So is RedHat a success or a failure?

Re:Which is it? (0)

Anonymous Coward | more than 8 years ago | (#12368252)

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.

Re:Which is it? (2, Informative)

Anonymous Coward | more than 8 years ago | (#12368993)

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

moD up (-1, Offtopic)

Anonymous Coward | more than 8 years ago | (#12368066)

WOOT and the Baz4ar

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

zoogies (879569) | more than 8 years ago | (#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.

Re:$714million is a lot, but... (2, Funny)

ErikZ (55491) | more than 8 years ago | (#12368982)

"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.

A novel idea (2)

gt_swagger (799065) | more than 8 years ago | (#12368075)

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).

Re:A novel idea (0)

Anonymous Coward | more than 8 years ago | (#12368139)

Yes, a nice idea. But, I don't think venture capitalists "donate" money. There might be an expected return somewhere in there.

Re:A novel idea (1)

gt_swagger (799065) | more than 8 years ago | (#12368249)

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 (2, Insightful)

cocotoni (594328) | more than 8 years ago | (#12369020)

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... (3, Interesting)

ScentCone (795499) | more than 8 years ago | (#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.

Re:Most venture projects collapse... (1)

symbolic (11752) | more than 8 years ago | (#12368261)


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.

Re:Most venture projects collapse... (1)

new-black-hand (197043) | more than 8 years ago | (#12368677)

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 (3, Interesting)

Markus Registrada (642224) | more than 8 years ago | (#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.

Re:Most venture projects collapse... (2, Interesting)

anthony_dipierro (543308) | more than 8 years ago | (#12368754)

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.

It's simply too much money (4, Informative)

Christian Engstrom (633834) | more than 8 years ago | (#12369660)

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.

Red Hat a success? (3, Insightful)

NineNine (235196) | more than 8 years ago | (#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.

Re:Red Hat a success? (1)

benjamindees (441808) | more than 8 years ago | (#12368510)

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.

Re:Red Hat a success? (1)

new-black-hand (197043) | more than 8 years ago | (#12368703)

But Open Source Software just wasn't meant to make money. Thats why a lot of these VCs are misguided and investing on hype, not based on purely business potential factors.

More comments here: Venture Capital Targets Open Source [perfected.org]

Re:Red Hat a success? (1)

mOdQuArK! (87332) | more than 8 years ago | (#12368937)

Open Source Software just wasn't meant to make money.

Open Source software is not meant to make money by selling the software - if somebody wants to base a business model on Open Source software, then it has to be primarily based on service.

Turbolinux made money in 2004 (1)

Donny Smith (567043) | more than 8 years ago | (#12368865)

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 (4, Insightful)

Moraelin (679338) | more than 8 years ago | (#12369391)

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.

Re:The Stock Market Works Differently (1)

Eivind (15695) | more than 8 years ago | (#12369498)

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.

Re:The Stock Market Works Differently (2, Informative)

Moraelin (679338) | more than 8 years ago | (#12369613)

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 bakery at the street corner. The best explanation I've ever read of it belonged to a psychiatrist-turned-stock-broker. He said it's acting like a manic-depressive.

But let's return to the point: If the company turns a profit and the money coffers grow, it still means exactly nothing, if the shares are already worth more than that.

Let's say 1 share is worth 10$ on the stock market, but only 5$ in assets (including that money coffer). That those assets grew last year by, say, 5%, making it a whole 5.25$ real worth of your share, is by far not enough guarantee to stabilize its 10$ shares. Those shares still have _plenty_ of room to fall, in spite of the company's turning a very healthy profit.

Now let's talk about the opposite situation, where the value of the assets (including that money-coffer) is _higher_ than the shares' value. It should stabilize the shares and make everyone buy them, right? Wrong. Chances are good it will just make the shareholders want to dismantle or sell the company and divide the loot. Because that loot is worth more than the shares.

Again, we're talking about a company which turns a profit.

That is, admittedly a very simplified view of the problem. The prospect of any kind of growth (e.g., that money-coffer growth) is one of the hype factors that can make investors buy. But the thing to understand is that _hype_ is the real factor, and the profits or assets are at most used to generate that hype. They are not the real things that dictate a share's value.

Re:The Stock Market Works Differently (1)

Eivind (15695) | more than 8 years ago | (#12369759)

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.

Re:The Stock Market Works Differently (2, Interesting)

Anonymous Brave Guy (457657) | more than 8 years ago | (#12369957)

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. :-)

$714 million in 71 open-source companies. (1, Redundant)

Ed Thomson (704721) | more than 8 years ago | (#12368148)

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!!!.

Re:$714 million in 71 open-source companies. (0, Offtopic)

atezun (755568) | more than 8 years ago | (#12368355)

to the MAXX

Leave out the last X, it makes you seem like a pretentious asshole. ;)

Re:$714 million in 71 open-source companies. (0)

Anonymous Coward | more than 8 years ago | (#12368454)

Why don't you ask VA Linux [yahoo.com]? I am sure any VC would love another deal like that one.

Didn't virtually EVERY startup collapse in 2000? (1, Interesting)

bergeron76 (176351) | more than 8 years ago | (#12368182)

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", 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.

Re:Didn't virtually EVERY startup collapse in 2000 (0)

Anonymous Coward | more than 8 years ago | (#12368288)

I'd be willing to be that if an equivalent study was done on "closed-source" companies, the losses would be substantially higher.

Unlikely. The google and salesforce.com IPOs along are enough to put several funds quite a ways into the money. While a lot of startups died when the bubble burst many made it through and have been on the upswing. VC funds have multi-year outlooks and expect a large fraction of the companies to fail.

The short answer is that very few funds lost by investing in closed source companies and many more ended up making a handsome profit. Not as much as in the bubble years of course, but how many VC groups have you noticed closing their doors and going back to I-banking? Thought so...

Re:Didn't virtually EVERY startup collapse in 2000 (0)

Anonymous Coward | more than 8 years ago | (#12368498)

Don't forget that while regular startups would fall because if high software and personnel costs, those open source startups with free software shipped Second Day Express from Free Software Foundation and friendly geeks, ready to work for peanuts, since Linux is is superior technology, were not supposed to have those problems.

Meanwhile those who understood that open source is a piece of shit most of the time, and switched to paid model (think SixApart), are still around.

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

lashi (822466) | more than 8 years ago | (#12368185)

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 (4, Insightful)

anthony_dipierro (543308) | more than 8 years ago | (#12368861)

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.

Re:VC money is actually bad for business (1)

Sjobeck (518934) | more than 8 years ago | (#12369206)

$750m is not peanuts for any one, any one, it can break most company's spines in a week. Can you imagine if Greylock's shareholders were told that $750m or their 2.2b (34%) was gone? What you think they would do? Exaggeration is the refuge of carelessness. (what do you think?, I just made that up.) Peace. Jason

you got a problem with tradition? (0, Redundant)

alizard (107678) | more than 8 years ago | (#12369237)

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.

The REAL question is... (4, Insightful)

ZuperDee (161571) | more than 8 years ago | (#12368223)

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... (1, Interesting)

Anonymous Coward | more than 8 years ago | (#12369054)

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 (1, Interesting)

Anonymous Coward | more than 8 years ago | (#12368269)

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.

Sounds reasonable... (1)

dantheman82 (765429) | more than 8 years ago | (#12368334)

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.

Re:Sounds reasonable... (1)

aztracker1 (702135) | more than 8 years ago | (#12368881)

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).

Reality (1)

jefedesign (869140) | more than 8 years ago | (#12368383)

Hope this doesn't come off as trolling, but starting anything, especially an open-source project is very demanding. I know from experience, starting a new business or venture is far from easy. Perhaps some of this startups lack essential skills required to keep them afloat, or there was no demand. One thing to be kept in mind is that many businesses fail within the first year, as previously stated.

The bullshit bubble. (4, Insightful)

rice_burners_suck (243660) | more than 8 years ago | (#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.

Re:The bullshit bubble. (3, Interesting)

payamchee (743476) | more than 8 years ago | (#12368708)

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 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:The bullshit bubble. (1)

aztracker1 (702135) | more than 8 years ago | (#12368908)

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 development going longer, and not had marketting until they had a working product...

Not all of it was bullshit (2, Interesting)

cgenman (325138) | more than 8 years ago | (#12369174)

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 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.

Re:The bullshit bubble (1)

Sjobeck (518934) | more than 8 years ago | (#12369193)

The bullshit bubble that Wall Street scumbags knew we bullshit. Those offerings were retarded .. open at $27 & close at $127. That is called screwing your client, or, put another way, gross negligence & violation of fiduciary duty. But, dont worry though, good ole Amerikan law come through & fined them $600 million for the billions that they made off of it. Meet the new boos, same as the old boss.

No mention of VA Software? (2, Funny)

anthony_dipierro (543308) | more than 8 years ago | (#12368632)

Now there's an open source company with a stock chart [yahoo.com] to be proud of.

Re:No mention of VA Software? (2, Interesting)

new-black-hand (197043) | more than 8 years ago | (#12368716)

They are not even an open source or linux company anymore, even the CEO said so. If you look into the financial reports, most of their income is from advertising on OSDN, and merchandise. The fact that their results and stock price fluctuates at christmas shopping time (thinkgeek sales) demonstrates just how much they are not and open source of linux company any more.

Re:No mention of VA Software? (1)

anthony_dipierro (543308) | more than 8 years ago | (#12368793)

Well, they're not a company which builds open source products any more. But you do know what OSDN stands for, right (actually nowadays it's called OSTG)?

Anyway, they certainly were an open source company at the time they received venture capital, so they're probably counted in the 71 companies of the story.

Re:No mention of VA Software? (1, Funny)

Anonymous Coward | more than 8 years ago | (#12369079)

actually nowadays it's called OSTG

Of course, like many companies it's renamed itself after its best known product: Open Source Talk and Goatse.

Re:No mention of VA Software? (1)

_Sprocket_ (42527) | more than 8 years ago | (#12368896)

"VA Linux" learned that it's hard to compete against Dell. Heck - even Compaq had a hard time doing that. And they invented the market.

Re:No mention of VA Software? (1)

dedazo (737510) | more than 8 years ago | (#12368945)

Really? I'll believe they're an "open source company" as soon as they release the code to the SourceForge site.

Re:No mention of VA Software? (0)

Anonymous Coward | more than 8 years ago | (#12369068)

Another example of a company where the Venture Capitalists, knowing their business, should have taken their profits around the IPO time when indeed they would have done very well for themselves. Nothing wrong with holding a stake for longer but VCs aren't primarily in the business of holding long term investments in listed companies. Any in VA Software should have long since cashed out.

What FUD (1)

MichaelPenne (605299) | more than 8 years ago | (#12368738)

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! (4, Funny)

xenocide2 (231786) | more than 8 years ago | (#12368986)

"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 ... (2, Interesting)

3seas (184403) | more than 8 years ago | (#12369332)

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.

Re:It just goes to show ... (1)

BrK (39585) | more than 8 years ago | (#12369572)


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 is some number greater than Y).

The fact that open source projects are being utilized is reflected in the size of the investment.

Additionally, these projects are not usually pitched as "we want to simply improve package P", it's more like "Imagine if you took package S and pre-loaded onto a 1U server with a managment GUI and then wrote a customized reporting application to go with it, and then sold the whole thing with a service and support contract..."

a mere pittance (1)

Usagi_yo (648836) | more than 8 years ago | (#12369733)

$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.

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