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Ask an Open Source Venture Capitalist

Roblimo posted more than 7 years ago | from the Money-isn't-everything-but-having-some-never-hurts dept.

118

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

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VC Secret Society (1)

jo42 (227475) | more than 7 years ago | (#16308047)

What is The Secret Handshake to join the Secret Society?

Re:VC Secret Society (0)

Anonymous Coward | more than 7 years ago | (#16308067)

Money?

Re:VC Secret Society (2, Funny)

Austerity Empowers (669817) | more than 7 years ago | (#16308301)

getting your resume summary posted on a slashdot summary.

Dear Sir (1, Interesting)

Anonymous Coward | more than 7 years ago | (#16308727)

I have been told that open source represents communism. Please explain how you reconcile this concept with venture capitalism. Thank you.

Re:Dear Sir (1)

iamageek (264018) | more than 7 years ago | (#16309267)

Who told Open source represents communism. Maybe you should check http://opensource.goingon.com/permalink/post/4374 [goingon.com] . In fact, there are many articles debunking the concept that open source is a manifestation of communism.

If.. (1)

joshetc (955226) | more than 7 years ago | (#16309509)

..You were a /.'er in my situation what would you ask yourself?

Mr. Gorman, (0)

Anonymous Coward | more than 7 years ago | (#16309547)

Why are you such a fucking arrogant prick?

Re:VC Secret Society (1)

Rei (128717) | more than 7 years ago | (#16312353)

When your company goes bankrupt under questionable accounting practices and SEC investigators are closing in on your Cayman Islands accounts, do you plan to wreck your stolen Ferrari going 200 on a state highway, or do you plan to set up annuities that can't be confiscated by the government for your family, then flee to Heard Island and live out your days in an ice cave?

On the subject of strong teams... (5, Insightful)

AKAImBatman (238306) | more than 7 years ago | (#16308055)

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

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

Exit Strategy (5, Insightful)

blinder (153117) | more than 7 years ago | (#16308087)

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

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

MOD PARENT UP (1)

49152 (690909) | more than 7 years ago | (#16309157)

Wish I had mod points, this is a very interesting question to get answered. Exit strategy is always a key question when discussing business with VC people.

Re:Exit Strategy (1)

smilindog2000 (907665) | more than 7 years ago | (#16309835)

That's just what I was wondering. Open source is such a powerful force, yet making IPO kinds of money off it seems quite difficult.

In my own experience, open source takes over where profits leave off. Once the profits have left a market, you get all kinds of open source projects supporting it. So long as there are strong profits to be made, the developers prefer to sell their wares. Seems pretty natural to me. The obvious exception is M$, as monopolies have different market dynamics. In the age of robust, versatile, free open source operating systems, what really counts is market dominance.

So, no question here... please pose the one the parent asked. However, now that I've said that, let me contradict myself and state what I think would be a kicking open source startup concept.

Those Garmin guys piss me off. The hardware is expensive as heck, and then they charge you tons for the stupid maps. So, what if you built a Linux based GPS guidance system, which could be taken out of your car and connected to the Internet for map updates. It could also keep track (anonymously - thus the need for open source) of where you went, and this data could be used to automatically update the global map database. How cool would that be?

Taking it one step further, add a low-bandwidth wireless capability (like the ham-radio guys do with packet radio), and now you could track traffic in real time, and view congestion as it happens on your GPS display.

The software would be free, so you'd have to make your money on the hardware.

Your Propaganda, I mean "Business Ink" page has.. (1)

agent (7471) | more than 7 years ago | (#16311045)

an ERROR! It does work in Internet Explorer, but fails in Flock and Opera.

http://www.business-ink.com/ [business-ink.com]

Line zero, the Java Script, is the problem. Also, the page title is "Untitled Document" for God's sake, come on! Is this the way a professional adult is supposed to act during a time of WAR?

Are you happy, I used one of my two possible post in a 24 hour period on you. I guess my "karma" is Terrible!

Good Night Cow Boy.

Re:Exit Strategy (1)

aevans (933829) | more than 7 years ago | (#16311259)

So the hardware is expensive and it costs a lot for the maps. So it looks like the software isn't the problem. You might get them to open source it. It's like thinking you'd get free movies if you open source DVD player software. You still have to create the content and have the hardware to play it. It doesn't make cameras and crew any cheaper.

Somewhat broad question (5, Funny)

andyring (100627) | more than 7 years ago | (#16308093)

Mr. Gorman,

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

Guys (0)

Anonymous Coward | more than 7 years ago | (#16308095)

Someone submit a story about the new Vista antipiracy measures instead of this.

http://www.microsoft.com/presspass/features/2006/o ct06/10-04SoftwareProtection.mspx [microsoft.com]

Re:Guys (1)

Ucklak (755284) | more than 7 years ago | (#16308589)

Actually is the same functionality that currently exists in XP except you'll actually have a `limited use` feature instead of "YOU MUST ACTIVATE NOW" feature.

Typical Microsoft, same old shit repackaged under a new name.

Re:Guys (1)

Calydor (739835) | more than 7 years ago | (#16308639)

Collectively termed the Microsoft Software Protection Platform (except by SlashDotters, who'll always call it the MS pee-pee) ...

Common Failures (5, Interesting)

paulevans (791844) | more than 7 years ago | (#16308105)

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

When to seek VC, when to bootstrap? (5, Interesting)

b0r1s (170449) | more than 7 years ago | (#16308923)

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

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

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

Re:When to seek VC, when to bootstrap? (1)

morcego (260031) | more than 7 years ago | (#16310673)

Pfft. I can answer this for you, based on my enterpreneurship experience (worked with 30+ startups).

The answer is: as soon as you reach "break even" and have had at least 60% of your investment returned, provided a few other criterias are met. Before that, you risk loosing control (and thus your competitive edge). After that, you risk getting put out of the game by other players that have more money than you do.

Don't kid yourself with ideas of the "bright great future". All other (relevant) things being the same, the player with more money will ALWAYS win.

About those other few criterias, I would suggest not doing that before 6 months (in most cases 1 year is better). All other criterias are pretty standard, and without then, you will not be able to get an investor.

Of course this is a rule of thumb, but it will hold true for 99% of the tech companies.

How did you get your job? (5, Interesting)

s20451 (410424) | more than 7 years ago | (#16308153)

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

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

Re:How did you get your job? (0, Redundant)

malahoo (128370) | more than 7 years ago | (#16309853)

I'm also considering a career in VC. What is the lifestyle like? How do the hours compare to, say, the 24x7x365 in a start-up, or the 9-to-5 of an accountant?

Re:How did you get your job? (1, Interesting)

Anonymous Coward | more than 7 years ago | (#16311359)

This is America man, rich people are born rich.
You get born on 3rd base, and then spend your life thinking you've hit a triple.

I have a question (1)

shareme (897587) | more than 7 years ago | (#16308171)

While Mobile is certainly hot among the young demographic groups nad mobile device sales have over taken sales of both servers and desktop PCs by a 2 to 1 ratio is often hard to break into this market as an opne source mobile application solutions company. What obstacles do you see in the form of: -Services Marketing -Tiered Markets -Funding -Mobile Operator Lock out I have wondered at times why Mobile Operators who geographically distant do not band together as VC fund to fund new mobile application/service companies to supply new stuff to hook customers..

devils advocate... (1)

pfz (965654) | more than 7 years ago | (#16308177)

Venture capitalist for the open source sounds like a great way for someone to make a ton of cash off some patents (and patents are bad news). What do we need open source capitalists for when established corporations have gone "open"?? What does open matter if the code is linked to non-open code? What needs more protection science or commerce???

ALTERNATIVE FREEDOM
A documentary about the invisible war on culture.
Features RMS, Danger Mouse (of Gnarls Barkley and the Grey Album), Lawrence Lessig, and more...

http://alternativefreedom.org/ [alternativefreedom.org]

Why Open Source? (5, Interesting)

bit trollent (824666) | more than 7 years ago | (#16308209)

Why have you chosen to fund Open Source based companies?

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

CS and mgmt (5, Interesting)

gEvil (beta) (945888) | more than 7 years ago | (#16308211)

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

Use Parent as question please. (2, Interesting)

Anonymous Coward | more than 7 years ago | (#16308573)

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

That's more insightful than "Funny".

For example, how many ideas that were/are great ideas from an engineering perspective, but you had to pass because there wasn't a market for them? And what was it about those ideas that made them unmarketable?

I'm sure there are plenty of times where the business and engineering clashed.

Re:CS and mgmt (1)

KefabiMe (730997) | more than 7 years ago | (#16309665)

He probably comes to better conclusions than most people (including myself) who don't/can't consider all points of view.

Re:CS and mgmt (1)

gEvil (beta) (945888) | more than 7 years ago | (#16309791)

Oh, I fully agree. It's the same as saying that an evolutionary biologist who also has a degree in theology will have a better grasp on the arguments made from both sides and where they're coming from. It adds to their depth of perspective.

No such thing (0)

Anonymous Coward | more than 7 years ago | (#16308239)

We ain't giving high quality products to an industry that doesn't pay back, anymore. First yuo pay, *then* you get the right to see the source and distribute software.

one question... (1, Redundant)

spirit_fingers (777604) | more than 7 years ago | (#16308257)

What are the most common mistakes that tech startups make when they approach VCs such as yourself?

The Magic Ingredient (4, Interesting)

Phoenix666 (184391) | more than 7 years ago | (#16308275)

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

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

MOD PARENT DOWN ...CAPM ??!? (0)

Anonymous Coward | more than 7 years ago | (#16310383)

CAPM is a Voodoo method of pricing publicly traded securities.

See here [investopedia.com]

What you want to ask is .... how do YOU value a business?

Repeat after me: Engineering math and thinking DOES NOT APPLY TO BUSINESS...

If somebody had an idea... (0)

Anonymous Coward | more than 7 years ago | (#16308327)

How exactly should somebody go about pitching that idea to a VC? Are there rules of thumb that should be followed by anybody who wants to gain the interest of a Venture Capitalist?

When do you pull out (5, Interesting)

cyborch (524661) | more than 7 years ago | (#16308345)

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

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

Why limit the questions to open source startups? (3, Interesting)

Anonymous Coward | more than 7 years ago | (#16308351)

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

Let's start with the basics... (5, Interesting)

psykocrime (61037) | more than 7 years ago | (#16308367)

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

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

Re:Let's start with the basics... (1)

psykocrime (61037) | more than 7 years ago | (#16308773)

Bad form to reply to oneself, but I should point out that I'm NOT a fan of "business process" patents, not do I advocate getting such things.
But they do exist and in the context of the question do seem relevant, which is why I asked. Please do not take my post as
an endorsement of business process patents (or patents in general).

Prevent getting thrown out of my own startup? (5, Interesting)

Cr0w T. Trollbot (848674) | more than 7 years ago | (#16308419)

More than once, I've seen the founder of a startup get thrown out of his own company by venture capitalists, despite the fact that it was his idea and technology in the first place. How do I structure a VC deal so that I can't be kicked out of my own company?

Crow T. Trollbot

Re:Prevent getting thrown out of my own startup? (3, Insightful)

frank_adrian314159 (469671) | more than 7 years ago | (#16309117)

How do I structure a VC deal so that I can't be kicked out of my own company?

Oh! This one's easy!

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

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

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

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

Re:Prevent getting thrown out of my own startup? (2, Informative)

Neologic (48268) | more than 7 years ago | (#16309277)

Actually, the fact that you're even asking this question shows that you're enough out of touch with the reality of the situation that you probably shouldn't be looking at VC funding at all.
Actually, the fact he is asking the question shows he is in touch with reality- its a good question and one that comes from seeing previous examples of founders losing their companies.

Speaking of reality, your statement shows that you probably aren't tactful enough to answer questions without slipping in some sort of insult.

The vast majority of founders have never had to deal with VC before, which isn't too surprising as they have been busy forming a company. Its only natural that they will ask questions like this. Obviously, asking questions is a good way to learn more about dealing with VC's.

Re:Prevent getting thrown out of my own startup? (1)

frank_adrian314159 (469671) | more than 7 years ago | (#16309579)

And what I'll say is that if you look at the "horror" stories, there are usually one of the three issues I mentioned involved (most of which are never mentioned by those doing the story telling). Yes, people may be busy building their own companies, but if they have time to listen to horror stories, they should also have time to hear about the reality of the situation. If they don't, they have an issue with doing due dilligence, anyway. So, I stand by my take on the situation - I don't think that people who are so paranoid as to think that VC's are out to "steal their company" have much hope of working well with VC's. They should look elsewhere.

Re:Prevent getting thrown out of my own startup? (1)

Svartalf (2997) | more than 7 years ago | (#16309905)

It also shows that you actually know diddly about VC too.

Yes, it's their money. It's typically NOT given as an "investment" in the same sense as what we'd associate
with investments, though. It's typically framed as a loan of X dollars, with a 2-5 year use of proceeds, and
a payment term for the loan with grants of shares in the company, and options to extend the use of proceeds, etc.

Yes, it's their money, but unless you get tattooed with them having the option to exercise control
at any time over your company, you typically don't have them meddling TOO much in your affairs.

Like you said, they want you to succeed- they want to see the money back at the least, if not the interest and
share values for the warrants or preferred/common stock that they took in exchange for giving you that big a
loan of money to do the project. Many of the VC's screw themselves up because they exercise their control clauses
when they didn't need to or similar- and many people get stuck with control option terms, so we end up with the
pictures we do with VC's.

Like any other loan, there's prime lenders (Goldman Sachs...) and not so prime ones (Far too many to list...);
many companies go to someone other than the Goldman Sachs and Dell Ventures of the world and they end up getting
screwy mortgage terms on their loan- not unlike what people typically get on their mortgage.

Re:Prevent getting thrown out of my own startup? (1)

certain death (947081) | more than 7 years ago | (#16309121)

Don't throw a controlling share of the company to the VC Firm. Keep it for yourself.

Do you plan for patent reform? (2, Interesting)

daeg (828071) | more than 7 years ago | (#16308429)

Does the license of the open source matter to you? Do you have a preferred form of license, e.g., GPL vs. BSD? Obviously, some licenses are better for the developers to make a buck on versus others which aren't designed to hold cash flow.

Why is there a lack of OSS Back Office Apps? (1)

987286 (712917) | more than 7 years ago | (#16308457)

The most successful OSS ventures have been focused on infrastructure needs (operating systems, networking, file serving, web serving, etc.). We haven't seen the same type of success with back office applications like accounting, ERP, supply chain management, asset management, warehouse management, etc. Is there something inherent in the OSS model that is preventing investment in back office OSS applications? Will we ever see successful OSS ventures in the back office?

First on my mind (5, Interesting)

UbuntuDupe (970646) | more than 7 years ago | (#16308493)

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

Re:First on my mind (2, Insightful)

psykocrime (61037) | more than 7 years ago | (#16308739)

You don't need to be an Open-Source VC expert to see that there are options other than just support. At least, depending on how
exactly you define "support." Consider things like:

professional services; integration, consulting: "Can you make FooBar2003 work with BlazzleFlaz1998?" "Sure, that'll be $300 / hour
for custom integration work"

one-of customizations for $$$: "Can you add a feature to FooBar2003 to make it do Blah?" "Sure, that'll be X-thousand dollars if
you want the resulting change to be proprietary (eg, we don't roll it into the open-source version) or Y-thousand if the change
gets rolled into the base version.

Hosted systems-management that works with the product in some meaningful way; see RHN from RedHat for an example of that.

Sell hardware as well, and package hardware / software bundles that are pre-assembled to fit some specific purpose.

Sell "stacks" where you assemble various open-source packages into a cohesive whole to solve some problem. In this case, what
you're really selling isn't the bits, but the expertise and time to research, review, experiment, validate, etc.

Sell T-Shirts and stuff on CafePress.com

There are others of course, but those are a couple that jumped to mind. Google for Open Source Business Models [google.com] for more.

Re:First on my mind (1)

UbuntuDupe (970646) | more than 7 years ago | (#16308897)

True, you can make money that way. But those are all along the lines of "write the code, maybe an opportunity will come up later that will earn us a profit", which isn't the kind of thing a VC would fund, at least, not after 1999.

Re:First on my mind (1)

psykocrime (61037) | more than 7 years ago | (#16309095)

I can sorta agree with that, but not completely. In a sense, all startups have a touch of "let's build this and hope we can make money off of it." I mean, nothing is guaranteed to succeed in the market, even if it's some really clever new technology that's kept proprietary. To me, the big difference between an open-source company and a "regular" company is the lower barrier to entry for competition. Since anybody can come along tomorrow, fork your source, rename it and suddenly you have a new competitor that has a product technically equivelant to yours.

This is why I think running an open-source business requires a different focus, different skills, attitudes, etc. My thesis is that running
a successful open-source business requires much more emphasis on building relationships and establishing more of a partnership with customers
than a traditional "us supplier, you customer" model. A good open-source company, to me, should be able to partner with a customer to
provide a broad spectrum of services and products and should treat things very holistically. I guess you could say that I see services
and relationships as the real lynchpin of the company, not the actual software product; since those things aren't as easy to replicate (by a would be competitor).

Re:First on my mind (1)

UbuntuDupe (970646) | more than 7 years ago | (#16309201)

In a sense, all startups have a touch of "let's build this and hope we can make money off of it."

Yes, but the difference between typical startups and your ideas is that in typical startups they first have an understanding of how it would make them money -- which for post-1999 VC's is nice to know.

Re:First on my mind (1)

psykocrime (61037) | more than 7 years ago | (#16309409)

Yes, but the difference between typical startups and your ideas is that in typical startups they first have an understanding of how it would make them money -- which for post-1999 VC's is nice to know.

Ok, point taken. However, none of these ideas is entirely speculative; there are companies out there employing some or all of these approaches, among others. Digium [digium.com] is a good example of the model that involves selling both hardware and an
open-source software solution along with training, services, etc.

I should also say that I think a successful open-source company will probably need a combination of approaches. Take RedHat for example: they do "regular" support subscriptions, professional services, training and the hosted systems-management model. Looking at that model as a "whole" you could argue that it is somewhat "proven" now. Of course one could also argue that RH hasn't been around long enough to really "prove" that this model
is viable for the long haul.

Re:First on my mind (1)

Martz (861209) | more than 7 years ago | (#16309351)

I'd disagree and say its pretty much the same, it's not about creating a product first, marketing it and trying to sell it. It's about being approached by a business to provide a solution. Forget the old method of doing it the old and backwards way - creating something, then finding a market. Instead, find the client and find out what they want to do - find the solution either in FOSS or proprietary software.

Most businesses wouldn't care if its free and/or open source software or otherwise. They usually just need to do one of a few things within a defined budget (i.e. as cheap as possible). In my experience they want to either:

1) Change a manual system into a computerised system

2) Automate an existing computerised system which has become repetative or tedious

3) Implement a new system/department/product/revenue earner.

If you can correctly capture the clients vision of what they want, I look for a FOSS solution which will do what they need. I then look at "off the shelf/internet" applications which are proprietary and will do the job. Otherwise, it's a custom written application or system that they need.

If you're in the business of providing software solutions to small-medium sized businesses, you can leverage all of the available tools at your fingertips.

Revenue is generated just the same as proprietary software solutions. A third party company would usually manage the project from the initial requirements to implementation. The third party might usually make a small margin of profit in actually reselling this software from the software company that created it. However, the main bulk of the income will be on the implementation and then (hopefully) the annual support contracts which are just as lucrative. New installs are draining and demand a lot of time, after that a lot more profit can be extracted from the client by providing support and extensions. They are still earners, but its the long term potential.

There are so many benefits to working with and providing open source software, it's the area where I hope to be full time within the next 12 months.

Team retention and control (1)

NetDanzr (619387) | more than 7 years ago | (#16308495)

Open source is not known for tight self-governance. Many techies tend to leave their work unfinished - instead of polishing it they rely on workarounds - which is why I found that they need to be tightly controlled. In a business with proprietary technology this is relatively easy to do, because the techies don't own any of the technology that's being developed. In open source technology fields, however, the techies may have less incentive to stay put, and they may leave the company easier if they feel constrained. My question is, how do you keep a high employee retention while controlling them enough to deliver adequate results in a realistic time frame?

How user experience expertise impact OSS investing (3, Interesting)

count0 (28810) | more than 7 years ago | (#16308565)

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

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

thanks,

cz

Where should I begin? (1)

kellyfj1 (1009265) | more than 7 years ago | (#16308633)

I think I have a great idea for a company that creates a product and provides services - the product would be build on largely on Open Source components and would be largely open-sourced itself (Similar to how IBM WSAD is built on Eclipse). I have a CS background but no MBA / startup experience. What are next steps do you recommend (e.g., books to read, people to contact, plans to formulate) etc. Thanks! -Frank

Fork:Where should I begin? (0)

Anonymous Coward | more than 7 years ago | (#16310551)

I think I have a great idea for a company that creates a product and provides services - the product would be build on largely on Open Source components and would be largely open-sourced itself (Similar to how IBM WSAD is built on Eclipse). I have a CS background but no MBA / startup experience. What are next steps do you recommend (e.g., books to read, people to contact, plans to formulate) etc. Thanks! - Weiner

Step 3: Profit! (1)

cryptomancer (158526) | more than 7 years ago | (#16308659)

How often do you pass over useful, society-benefitting projects because some other novelty has a better bottom line? Is there funding for such beneficial projects, that may not have a strong commercial opening?

10 Most common (5, Interesting)

Anon-Admin (443764) | more than 7 years ago | (#16308723)

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

Re:10 Most common (3, Funny)

flynt (248848) | more than 7 years ago | (#16309923)

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

Re:10 Most common (2, Funny)

QuantumFTL (197300) | more than 7 years ago | (#16310009)

What are the 10 most common mistakes open source-based startups make when seeking venture capitol?
1. Mispelling venture capital...

Management and Financial moxy (1)

MECC (8478) | more than 7 years ago | (#16308725)

Would you say a masters in management easily translates into a strong footing in financial understanding?

Bootstrapping versus VC (2, Insightful)

YoJ (20860) | more than 7 years ago | (#16308745)

Arnold Kling in Under the Radar recommends that entrepreneurs start out by bootstrapping their operation by finding paying customers and actually making money before thinking about outside funding. What are your opinions about this way of starting up?

Easy to snow?? (0)

Anonymous Coward | more than 7 years ago | (#16308761)

Okay, first I thought "snow" was a typo... but could someone explain what the "easy to snow" lingo term means? (technically?) I'm thinking it's some sort of VC-specific lingo. Thanks.

Re:Easy to snow?? (1)

psykocrime (61037) | more than 7 years ago | (#16308861)

Think of "snow" as being synonymous with "fool" or "trick" or "mislead." See the various definitions of snow job [urbandictionary.com] .

VC Job (1)

Anonu (233018) | more than 7 years ago | (#16308799)

How did you move from the computer science to the VC world? What is the ideal way to make the transition from a highly technical environment to one that is more about business and management.

Re:VC Job (0)

Anonymous Coward | more than 7 years ago | (#16313243)

Sell your soul. I hear a Mr. Gates is buying.

Advice for Physics Crackpots (0)

Anonymous Coward | more than 7 years ago | (#16308801)

Possibly more about science than software but anyway...

Suppose you don't have any real scientific credentials but you do have a solid science education. You're interested in the big questions in science: energy, fundamental laws of physics, etc. You cobble together a computer program that simulates a fairly simple phenomenon at the atomic level. You get some surprising results that seem to contradict an obscure theorem in solid state physics.

This, in itself, is not a big deal but suppose that the implication of this contradiction is that there might, just maybe, be a way around the second law of thermodynamics. That is, it would probably be difficult to observe the contradiction experimentally but, in the unlikely event that it could be verified, it would have tremendous theoretical significance and some day might even solve the world's energy problems.

So what do you do?

  • Do you take your delusions of grandeur as a sign that you need psychological help?
  • Do you take the time in the evening you would normally spend watching reruns of "Friends" and learn some solid state physics?
  • Do you track down an expert in the field and ask them to explain why you're wrong?
  • Do you allow for the possibility that you might be right and try to position yourself to gain from your ideas (patents, secrecy, etc.)?

I suppose the main thing is to not waste too much of your (or anyone else's) time or money. Given this, is there an easy way to position yourself so that, if you did turn out to be right, you could become reasonably wealthy? That is, is there something you can do that isn't expensive or time consuming to avoid laying awake at night worrying that someone else might "steal" your idea?

Re:Advice for Physics Crackpots (1)

AKAImBatman (238306) | more than 7 years ago | (#16309305)

Do you track down an expert in the field and ask them to explain why you're wrong?

This is usually the best answer. I've found that anything from a simple misunderstanding of how a bit of physics works to a lack of the necessary modeling calculations can cause you to start down a path that won't really work. Consulting with an expert (most of whom are happy to answer questions from someone who's honestly interested in the field) can often help you understand the problem, should one exist.

However, don't take an expert's word on something not working. If his answer doesn't make sense, then it may be a set of prejudices rather than known science. In which case you should continue to investigate the science behind your discovery until you either find the problem on your own, or feel you can prove it to the experts.

Good luck! :)

P.S. If you're questioning if you are a crackpot for your findings, then you're probably not a crackpot. The actual crackpots stick to their guns in the face of irrefutable evidence, and usually manufacture hilarous conspiracy stories on why they have to keep secrets about their work. I'd take the time to tell you about this one fellow (supposedly a Ph.D.) who tried to prove his super-luminal engine based on the relativistic mass increases in fuel, but that would be a rather lengthy tangent. :D

Re:Advice for Physics Crackpots (0)

Anonymous Coward | more than 7 years ago | (#16309423)

Why did you pay for two masters degrees? Wasn't the first dissapointing enough?

Re:Advice for Physics Crackpots (0)

Anonymous Coward | more than 7 years ago | (#16311607)

Do you track down an expert in the field and ask them to explain why you're wrong?
This is usually the best answer.

That sounds like really solid advice. At the risk of sounding like a crackpot, though, that is a really scary option.

It's not scary because of credit or idea ownership issues, per se. If the discovery is really important then there will be more than enough credit/money/etc. to go around.

The thing is, if you collaborate with someone else on an important discovery then you are linked to that person for the rest of your life. The internet is great for finding experts but it's not great for getting a sense for whether the expert has a decent personality.

I suppose it's a matter of trusting that most people are fundamentally decent people. What with how the news these days is so focused on conflicts around the world, that's a tough thing to do.

Re:Advice for Physics Crackpots (0)

Anonymous Coward | more than 7 years ago | (#16309927)

Most of the time, unless your simulation only uses integers, these types of results can be due to numerical instability in your simulation. That is, 3.5 + 5.0 only approximately equals 8.0 because of how floating point numbers are represented in binary. The result is a certain amount "approximation error". Depending on how your simulation is structured, you may have a numerical instability in your program that compounds this approximation error at a very high rate. My advice would be to first find a computer scientist who would be willing to do a numerical analysis of your program (they don't need to know what it models) to prove that numerical instability is not what is causing your result. It isn't that hard. Only after that, go talk to a physicist.

Re:Advice for Physics Crackpots (0)

Anonymous Coward | more than 7 years ago | (#16310823)

...these types of results can be due to numerical instability in your simulation.

That's an important point.

For statistical ensembles, random number generation may also be important. Either way, there's a lot of ways that the implementation of the model could be wrong even if the model itself is correct.

barrier to entry? (0)

Anonymous Coward | more than 7 years ago | (#16308813)

Is open source VC invenstment wise, given the reduced barrier to entry when there is no proprietary source code?

If an open-source company becomes *really* successful, why won't someone come and take their code and compete with them. E.g. if JBoss becomes profitable, won't others start to install/support/train on that codebase, and even fork and extend the code?

Planning ahead (3, Informative)

Rob T Firefly (844560) | more than 7 years ago | (#16308839)

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

Financing / Control Questions (5, Interesting)

grondak (80002) | more than 7 years ago | (#16308869)

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

Does a VC understand what is driving us? (1)

wmaster (987425) | more than 7 years ago | (#16308901)

And - even more specific - how is your understanding of doing this job? Do you understand it as bridging two worlds? Greetings, Chris

I have an idea (3, Interesting)

emil10001 (985596) | more than 7 years ago | (#16308957)

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

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

Re:I have an idea (0)

Anonymous Coward | more than 7 years ago | (#16311801)

Generally you sell stuff to make money. But a reality check - I would think a business that you describe, i.e. sophiticated licensing arrangements with big media, would be better suited to someone who wouldn't ask the questions you ask.

Cost of VC for Open Source (1)

russ1337 (938915) | more than 7 years ago | (#16308961)

I occasionally listen to the Stanford Entrepreneurial thought leaders podcast, [stanford.edu] and Tom Byers mentioned in his presentation on 18 Jan 06 in his section on cashflow (min-36:38), the very high cost of traditional Venture Capitalist funding.

My understanding of typical Open Source projects is they're typically undertaken by smaller companies with a distributed team, sometimes with many staff working from home, and often have little corporate resources.

Why should a small company in this situation risk taking on 'expensive' VC funding over bootstrapping? (i.e trying to get money up front from a customer etc); And how do you make the actual cost of VC affordable for smaller companies and projects?

Where to start? (0)

Anonymous Coward | more than 7 years ago | (#16308973)

Like probably many slashdotters, I have an open-source product that I have been developing, mostly on my own, in my spare time. It fills the needs of a niche market better than any of the current offerings, and is nearly ready for it's 1.0 release (0.x releases have been posting on sourceforge for over a year). Everything is done by me, I have no management team, or even a development team outside myself. I have experience in the target industry, but no high-level contacts (I've always been a lowly developer). I have no business plan, or enough information to even know the potential of the market I'm targeting. All I know is that the products available now suck, and not just a little. So my question is, what should be my first step to starting a startup at this point? What do I need before I can approach investors?

Re:Where to start? (1)

psykocrime (61037) | more than 7 years ago | (#16309691)

I have no business plan, or enough information to even know the potential of the market I'm targeting. All I know is that the products available now suck, and not just a little. So my question is, what should be my first step to starting a startup at this point? What do I need before I can approach investors?

I would say that you need several things: some fundamental business know-how, some idea of what business model you might adopt for your business, and some contacts that can help out. You can gain these things in a variety of ways.

Regarding basic business know-how:

You could take classes in the basics of management, micro-economics, macro-enonomics, business finance, etc. at a local community college or something. You could self educate yourself by just doing a lot of reading; taking the appraoch I've dubbed the used bookstore MBA [jroller.com] , etc.

Regarding business model:

Google and blogs are your friend here, as well as books about existing open-source companies and startups. Google for
Open Source Business Models [google.com] and just start reading. Read Under The Radar [amazon.com] , Under The Radar [amazon.com] , Art of the Start [amazon.com] and High Tech Startup [amazon.com] among others.

Regarding contacts:

See if you have any friends or acquaintances that run their own business (it doesn't have to be tech related). Ask them to meet you for lunch
to sit and just chat about business. Ask them for advice, tips, other contacts, etc. Find out if your area has any sort of business networking group, a "leads group," etc. If so, join and attend meetings. Meet people, talk to them, throw ideas around, ask interesting people out to lunch, etc. Attend local users groups meetings, LUGs, JUGs, etc. Not all of the attendees will be (just) techies: some will be entrepreneurs, managers, etc. that could be potential partners, future employees, etc. Attend and get to know people. Chat, schmooze and take notes. Ask interesting people out to lunch. Lather, rinse, repeat. Read The Little Black Book of Connections [amazon.com] and similiar books.

If you do enough of this, you will eventually reach a point where you have some solid ideas about what to do, and more specific questions to ask. Once you reach that point, you can start digging deeper with help from your new-found connections and other resources.

How to add business competence to a OSS venture? (1)

daybyter (684997) | more than 7 years ago | (#16309027)

Most OSS ideas come from coders with very few business experience, I guess. So the code might be there, but not the business plan. I guess you won't invest at such a early stage. Are you aware of any good concept where to find this marketing know how, so the projects gets far enough to find an investor?

One of the answers might be 'business angels', but at least in my state, the whole BA scene has disappeared (the local BA organisation has not helped any entrepreneur in the first 3 years of it's existence and then decided to close the organisation completely).

How do you protect your IP? (1)

weedenbc (719416) | more than 7 years ago | (#16309039)

I have been cautioned by others with startup experience that without sufficient capital to defend the patent you might as well not have the patent in the first place. There is nothing to prevent a competitor with more resources from exploiting it. And even if you do have the funds, defending it be a very lengthy process with many appeals, all the time you could be bleeding more cash than your competitor. How serious of a concern should this be for an open-source software project and should funds for patent defense be part of the original VC outlay and planned for from the beginning?

Open Source vs. $$$ (3, Interesting)

Twixter (662877) | more than 7 years ago | (#16309151)

It seems that the nature of Open Source, at least on the surface, is counter to the capitalist model. Since the company doesn't have a technological advantage, they will be subject to perfect competition. Being closed allows the company to maintain a technical advantage.

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

Open source hardware opportunities? (3, Interesting)

mrand (147739) | more than 7 years ago | (#16309231)

Mr. Gorman, There are a few major open source hardware projects (most are listed on wikipedia's open source hardware page [wikipedia.org] .

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

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

Thank you!

Non-disclosure (1)

desNotes (900643) | more than 7 years ago | (#16309507)

My question is if I want to send information and/or do a presentation, should I first get a NDA or some other legal document signed by you that says you won't just take the idea and give it to someone you are already dealing with?

Re:Non-disclosure (1)

AKAImBatman (238306) | more than 7 years ago | (#16310349)

should I first get a NDA or some other legal document signed by you that says you won't just take the idea and give it to someone you are already dealing with?

Most VCs will kick you out the door if you ask for an NDA. They see far too many screwball ideas to go through the legal proceedings that an NDA would require. In any case, they're more interested in the implementation of the company than the idea that founds it. i.e. They're investing in monetary potential, not your amazing brilliance.

Return on investment? (1)

RingDev (879105) | more than 7 years ago | (#16310091)

How can we as developers of OS Software improve our chances to get funding? What types of business plans options (support, shrink wrapped software, pay-pal donations, etc...) do you see as being potential profit turners that can result in a return on investment? IOW: What features/functionality should we add to our teams and products to make them more attractive to investors?

-Rick

I have a question... (0)

Anonymous Coward | more than 7 years ago | (#16310925)

Mr. Venture Capitalist, have you ever thought of using your education, skills and talents to do something to benefit humanity, instead of just seeking to enrich yourself?

How do I get to talk to your kind? (4, Interesting)

Qbertino (265505) | more than 7 years ago | (#16311445)

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

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

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

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

... What WERE the things they did wrong. (1)

Qbertino (265505) | more than 7 years ago | (#16311545)

.. Eeeuuw. Sorry about the spelling.

Oblig: He has a Masters Degree... (1)

ElysianAudio (651965) | more than 7 years ago | (#16311683)

... in science.

Could Washington Carver get funded today? (0)

Anonymous Coward | more than 7 years ago | (#16312043)

It takes only a little analysis to discover that the overwhelming majority of venture firms are run by white males who have attended a select number of Ivy League schools. There is little doubt that these men are very talented and it would be very surprising to learn that there was a conscious policy of discrimination in place. However, in any homogeneous group, there are often implicit assumptions that disadvantage those who are not members of that group.

This can be illustrated with a personal example that I still find humorous: when I first started my business we approached a group of venture capitalists about investing. They asked us several questions about our technology and market which we answered. At that point, one of them asked where I went to school and I named a state school. The decrease in interest was palpable once they learned I had not attended a brand name university.

Now, I had received a 1450 on the SAT, the third highest GPA in my graduating class, and far, far more awards than any other student in my class. Other students in my class with significantly fewer accomplishments went to Ivy League schools because their parents were wealthy. My parents were poor and even the application fees of Ivy League schools ($500 in 1993) was astronomical from our perspective. A state school was the only option.

I don't think the venture capitalists were intentionally prejudiced or even realized the assumptions behind their question. They were simply all members of the same social class, for whom the only reason one would not attend an Ivy League school was lack of talent. They lacked the perspective to understand those different from their group.

This brings me to the central question: could Washington Carver get venture-funded today. I'm pretty sure that someone who was Indian, Asian, or European could, but I have grave doubts about the ability of the venture community to fund traditionally prejudiced groups like African Americans or Native Americans. As someone who grew up in minority neighborhoods, I'm pretty sure that I would never have had the meeting if I was, for example, black. This is not because venture capitalists are prejudiced, but because from my experience in poor minority neighborhoods, the connections to make such a meeting happen do not exist.

I am very conscious of the fact that I was able to have the meeting because, as a white male, I was able to connect to another white male who was wealthy and set it up. The person who set this meeting up was an angel investor in my company, so I was also able to obtain funding because of my race. I frequently wonder if I would have a business today if I had not been a white male able to make these connections. I wonder this because I have known many people who are poor, female, and of a minority race, and that have in my opinion the capacity for exceptional entrepeneurship but who have never had the opportunities that I have had. And I've never see venture capitalists making an effort to reach these groups and find the exceptional individuals within them.

So my question is this: are venture capitalists aware of the demographic groups that they are not looking at for entrepeneurship? And, if they are aware, is the reason that they are not looking is because they don't believe there are any more Washington Carvers or because they are unaware of the group-based assumptions in their searches? I ask this not for myself because as a white male I have had extraordinary opportuntiies. I ask this instead for those I have known that are exceptional but it seems will never have those same opportunities.

Thank you for your time.

Working Tech, New Idea (2, Interesting)

BlueStraggler (765543) | more than 7 years ago | (#16312099)

Take the case of a company that has been in business for 7 years or so, and has successfully bootstrapped themselves into a modest little venture using their own open source technology. They have offices, employees (even salesmen!), a small management team, a decent little client base, and no debt. But they are very much a small business.

Now, with their hard-fought, real-world experience, understanding of their sector, and practical experience with using open source to make real money, they think they see a new opportunity in the marketplace, which their technology is well-positioned for. But going after this market will require a big investment, at least doubling the company size, and will probably require a whole new management team.

The question is: how is this problem like or unlike a start-up? Do VCs tackle this situation differently than they would a pure start-up? Should the company approach VCs differently than a start-up would? Or is this out of VC territory altogether?

A question from a young entrepreneur (2)

spoonerist (839751) | more than 7 years ago | (#16312213)

As a college student who is starting up a business, the biggest hindrance is my seeming lack of appearance. What tips would you have for young people with good ideas who want to present their researched business ideas/plans in a way that gets noticed?

How much risk is too much? (1)

jhfry (829244) | more than 7 years ago | (#16312367)

I have what I believe to be an excellent open source opportunity that I would love to develop around an existing open source product. There are a number of potential concerns however, namely:

1. The parent software has some issues that may make my company a target for patient and other legal attacks. For example, it uses Mpeg4, and plays DVD's under Linux.

2. The product would be heavily dependant upon COTS (commercial off the shelf) hardware from a manufacturer that does not provide detailed specifications, and thus could easily force us into a licensing agreement by simply changing the hardware and making all current open source drivers obsolete.

3. The product would be competing in a several hundred million dollar industry where it is not likely to be well liked by it's powerful and wealthy competitors, and thus would be a target for any shenanigans they might dream up.

4. Finally, I have essentially no development experience, nor do I have any skilled developers at my disposal. Instead I would need to attempt to bribe (for lack of a better word) the parent software's developers to make changes to their software as well as recruit my own developers to handle the proprietary end of the product that will be used to make the OSS marketable for the application in mind.

I can imagine that issues such as these have great influence in your decisions. There could be nothing worse that funding the next best thing since sliced bread only to have the project destroyed by legal, political, or underhanded business practices. How big a part do these factors play in your decision making process?

Do you believe that open source startups should be headed by a business minded developer, or is it more important for that leader to have a clear vision and a larger view of the project? In other words, would I, with no way to demonstrate what I hope to accomplish, even be taken seriously with just an idea, a business plan, and a lot of motivation? Even if that idea had enormous potential to become a leader in a multi-hundred-million dollar industry?

I appreciate your willingness to participate in this Q&A, I am sure this discussion will be very popular as I know that most of /.'s audience is bright enough to have thought up an idea like mine.

By the way, I conceived an internet connected, MP3 downloading/playing Jukebox... called a lawyer who specialized in Jukebox copyright law, had a great discussion with him regarding how Jukebox law might apply to downloaded music, and I never heard back from him again. A year or so later they started hitting bars and pool halls in my area. A little research found that this lawyer had his name on a patent or two related to the product. I have since learned to be a cryptic as possible about my ideas, sorry about that!

Here's the multi-million dollar question (0)

Anonymous Coward | more than 7 years ago | (#16312483)

For the last four years I've been building my own open-source company, completely out of pocket, and the technology requires so much of my time that it needs new employees. I can't be the sales force, the technology, the manager, the accountant, the artist, the Q&A team and the client so if there was a company that needs a VC, this would be it.

Do I have help? Yes, I have two executives ready to come aboard, one is a VP for a major technology company the other is an expert in start-ups with a 30 year career working as a business intermediary at the small-to-midsize level. Talent and management wise we're cool to grow, but right now we're hovering.

The business plan seems perfectly fine -- we're working on the fifth version now as we've had lots of time to review and improve it. Our numbers look good.

Product? Demand seems great, we've had thousands of downloads in the last quarter. No bad reviews and was in the SourceForge "top 1000" for better part of two months this year and we really haven't been advertising anything... Mostly our interest comes from curiosity seekers.

So, what are my questions? I'll pose to you the same ones that were asked to me many times by VCs who are in your shoes, that has essentially killed every deal so far:

"Exactly how does making open source software protect my investment?"

"How do we protect our business in an open-source environment?"

People like myself don't have much ability to improve how an investment "feels" to the VC in what is open an instinct-driven industry. The numbers sometimes look great, but a talented VC can see right through them. They aren't supposed to trust everything that lands on their desk. In my case, I've got technology that people seem to want badly, and the software has very good reason to be open-source instead of closed-source, but the whole idea open open-source scares investors away.
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