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Open Source Venture Capitalist Answers Your Questions

Roblimo posted about 8 years ago | from the Money-isn't-everything-but-having-some-never-hurts dept.

38

The venture capitalist is, of course, Richard Gorman, of Bay Partners, to whom we sent your questions earlier this week. He prefaces his answers by saying: "Thanks for all of your questions. They were very insightful and I enjoyed answering them. I also want to thank Salil Deshpande of Bay Partners who contributed to these answers and provided some healthy discussion. Salil is a successful two-time entrepreneur and is very knowledgeable."

1) On the subject of strong teams...
by AKAImBatman

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 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?

A: Thanks for the question. For initial investments in startups (Series A) it is almost always the case that key members of the team need to be recruited, and we very much help in this process. In fact we have a person dedicated full time (Karen Loebbaka) to just recruiting people to work for the startups that we fund - we're one of only a handful of VC firms to have a dedicated recruiting director. So we are committed to recruiting world class teams for our startups.

We also often help in the formation of the business strategy; this includes target markets strategy, distribution channel strategy, product strategy, and competitive strategy.

Important in our decision-making about early stage startups is the quality of the team. Usually early stage startups are primarily bets on the founding team.

There are usually a number of important questions about the team. What have team members "done" before? What have they invented / built / grown / managed / sold perhaps at other companies or startups? Have they worked with each other before? Have they toiled away at something before? Even if they haven't had entrepreneurial successes, are they just on to something big? Are they passionate about what they're about to do next? Why? Do they like each other? Will they be able to lead people / will people enjoy going to battle with them? Realize not all of these questions need to have positive answers. Some of the best startups have been founded by very driven people under 30. YouTube is the latest example.

2) Exit Strategy
by blinder

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.

A: This is a very good question. Yes, open source companies tend to be more of a challenge than traditional companies that own all of their intellectual property. The primary difference is that many potential acquirers may come from traditional business models and have to accept this new open source model that does have ownership of the intellectual property. For instance, in the recent of acquisition of JBoss by Redhat, there was at least one additional company that was ready to put an offer on the table, but stopped its negotiations when it realized that JBoss did not own any of its intellectual property.

JBoss ended up selling to Red Hat for $420M which was 28 times trailing 12 month revenue ($15M). Red Hat is a publicly held company; its shareholders and management team are clearly comfortable with the open source business model of not owning your intellectual property and valuing the company based upon unit marketshare and support and service revenue. Unit marketshare is a proxy for long term revenue because if the number is large it indicates a lot of customers; the shareholders are betting the management team can figure out how to get revenue from customers over time (ie by potentially introducing new product and services).

3) Common Failures
by paulevans

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

A: Most of the early stage startups are very technology-focused but do not have real customers committed to using their products. Customer feedback and adoption of the products is key.

In the consumer internet space, we are looking for initial adoption by consumers. In the enterprise space, we want real businesses that have evaluated the product and would be willing to buy the product if it were available.

4) When to seek VC, when to bootstrap
by morcego

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?

A: The answer varies by business and target market. In the consumer Internet space, marketshare is key. Marketshare is the percent of the market that you own. So many companies will be burning money while they are pursuing marketshare. The best recent example of this is YouTube.com. Youtube is #1 in marketshare with 45%+ share of videos viewed on the web, but they are not profitable and are burning cash. That is OK, they lead in marketshare and were just purchased this week by Google for $1.65 billion.

This is an extreme case, but it illustrates for early stage consumer Internet companies that marketshare is often more important than profitability. The founders can significantly hurt the value of their company by delaying taking investment capital in order to wait for a "higher price." Ironically, if the founders later take investment money they will be in the #2 marketshare position or lower and will end up getting a "lower price" for their stock from the venture investors.

As a general rule, for early stage startups in the consumer Internet space and/or the "open source" area being #1 in marketshare is much more important than profitability.

5) How did you get your job?
by s20451

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?

A: For myself I have over 20 years of software experience including managing a set of products that had revenue over $1 billion before becoming a venture capitalist. In general, the process for becoming a venture capitalist varies dramatically by person. If you are interested in pursuing this industry it is important that you get to know venture capitalists that you can potentially work with.

I really enjoy this job because I get to work with very intelligent and driven entrepreneurs. This is very exciting. It is also fascinating to work across many industries and many different target markets. You are always learning something new everyday.

6) Why Open Source?
by bit trollent

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?

A: The big advantage open source companies have over traditional software companies is the ability to rapidly take unit marketshare and create a new standard. The best example of this is MySQL. Who would have thought five years ago there would have been another database to rival IBM DB2, Oracle, and MS SQL Server? By all estimates MySQL now has my more installations than IBM or Oracle; some estimates show that MySQL has more installations than SQL Server!

Open source allows a company to completely change the rules of the game. MySQL has over $40M in revenue the past 12 months and is probably valued at over $1 Billion. This is an amazing company.

7) First on my mind
by UbuntuDupe

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?

A: There are a couple of open source business models that have had some success.

a)The open source version as a "trial" product. For Sugar CRM this is basically the strategy. They give away an open source version that has limited functionality, most customers upgrade to a version that is not available 100% as an open source product. They charge customers for the full functionality product.

b)Charge for service and support; give away the full product as open source. This is the JBoss & MySQL version of the business. Realize companies are then valued on a combination of their unit marketshare and their revenue in this model. c)New open source models. This market is still very young and I am sure other business models will evolve for open source companies.

8) Financing / Control Questions
by grondak

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%?

A: Thanks for the question. Most software companies consist of intellectual property (IT), but more importantly are the skills of the founders. There are many challenges both from a technical and business perspective that must be addressed by the team. So the founding team is key.

The investments from the Venture Capitalist are almost always for an equity ownership in the company. The venture capitalist makes money when the stock is sold (to another company or through an initial public offering - IPO). It would be very unusual for a venture investor to take a percentage of the profits.

The percentage ownership that an investor takes for a company varies dramatically by company. They key for an entrepreneur is to get investors who will actively work to make the company stronger. Good Investors will help find and recruit key employees, make key business contacts, and help shape the strategy of the company.

9) How do I get to talk to your kind?
by Qbertino

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?
--
[My english is better than most other people's german, so please point out mistakes politely. Thank you.]

A: The best approach to talk with a venture capitalist is to try to have an introduction made through a common acquaintance. If this is not an option, directly approach the venture capitalist by email. Be sure to give your personal background in the email, this will hopefully entice the venture capitalist to spend time with you. If you have a business plan submit this as part of the email.

The ideal proposed business would have the following characteristics:

1)A large clearly identifiable untapped market; ideally an entrepreneur would have personally experienced the pain he or she is trying to solve.

2)A strong management team. This typically includes a strong founding CEO and technical founders. Other members of the team (sales, marketing, CFO etc., can be added over time).

3)Ideally some type of technology lock that prevents other competitors from closely following your success. (YouTube is a clear counterexample to this; here the 1st mover advantage was all that was necessary. Note that YouTube had very good traction before it received its first venture financing).

10) The Magic Ingredient
by Phoenix666

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?

A: This is very good question. There is no "magic bullet." The answer varies by business and person. It is not easy to learn to be an entrepreneur. Many entrepreneurs learn a lot through a customer experience, where they are the customer. This often helps them to understand the need and how to monetize it (sell it to the customers).

Sometimes entrepreneurs will learn by studying business models and then dramatically innovating upon them. Google innovated in both its search algorithm and its advertising model. There were a number of well known search engines prior to its entering the market.

One of the best ways to "learn" is from other entrepreneurs.

In Northern California there is a group call "Stirr" (www.stirr.net) where entrepreneurs get together once a month to discuss their proposed businesses and network with other entrepreneurs and investors. The Women Technology Cluster (www.wtc-sf.org) is targeted at startups with women as part of the founding teams and provides the entrepreneurs with very good coaching, preparation, feedback and opportunities to meet potential investors. TIE (The Indus Entrepreneur www.tie.org ) helps entrepreneurs with seminars, networking, and forums to seek feedback from potential investors. I attend events from all three organizations on a regular basis.

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Thank you! (4, Insightful)

AKAImBatman (238306) | about 8 years ago | (#16425581)

I'd just like to thank Mr. Gorman and Salil Deshpande for answering all our questions, and providing such useful and insightful information. These answers are some of the best I've ever seen on an Ask Slashdot. They are informative, straight to the point, and well researched. You may very well have enabled a new generation of entrepenuers.

Kudos!

Re:Thank you! (-1, Troll)

Anonymous Coward | about 8 years ago | (#16425685)

lick my fucking balls you ass-kissing fagget

What a snore-fest (0)

Anonymous Coward | about 8 years ago | (#16425837)

Everybody thinks 1998 is coming back and the VC crowd is so hot again. Can we please get back to the tech? I liked it after 2001, the only people involved were real geeks.

Re:What a snore-fest (1)

AKAImBatman (238306) | about 8 years ago | (#16426095)

Everybody thinks 1998 is coming back and the VC crowd is so hot again.

I'm not aware of anyone who thinks that. VCs have been around for a very long time now, investing in multitudes of startups. Where do you think Silicon Valley's big tech companies like Apple, SGI, Sun, and others came from? They all had VC money to start their businesses with. The only difference is that we now live in a connected world where things like Venture Capital are more readily spoken about in open forums.

Can we please get back to the tech?

I hate to break it to you, but tech usually needs funding for development. Venture Capital is one way of getting that funding. It's especially important if your plans require that you build a large corporation to properly develop and exploit the technology.

There's a better than average chance that Venture Capital is partly to thank for your current job in technology. Especially if you're working on the more cutting edge developments rather than menial business-support tasks.

Like I said, what a snore-fest (0)

Anonymous Coward | about 8 years ago | (#16468555)

Four days later and this only attracted 36 comments. Many of these are total suck-up "thank you" posts by karma whores hoping that somehow they will one day get a break from a VC who will magically know they will sacrifice their pride at the drop of a hat to VCs on Slashdot. These are as insightful as the bland and predictable answers in the "interview."

Not "owning" the IP? (2, Insightful)

vlad_petric (94134) | about 8 years ago | (#16425919)

If I understand correctly companies like MySQL own their IP, they just license it under GPL ... Seems like a strange omission from a seasoned VC.

Re:Not "owning" the IP? (0)

Anonymous Coward | about 8 years ago | (#16431659)

Sure, but it's irrelevant. If you can't leverage control, you effectively don't own it. The world of business is mostly practical.

Re:Not "owning" the IP? (5, Informative)

Richard Gorman (1013441) | about 8 years ago | (#16433675)

Vlad, Thanks for your post. Your posts corrects a mistake that I made. Some of the open source companies do own their IP, MySQL is an example of this. This issue I was trying to communicate is that that the IP of Open Source companies is not protectable from use by competitors because it is licensed under GPL (or a similiar license agreement). Some potential acquirers are comfortable with this, some are not. Thanks Very Much Richard Gorman

Re:Not "owning" the IP? (1)

the donner party (1000036) | about 8 years ago | (#16434411)

But certainly MySQL is an example of an open source company that has a very useful amount of control over their product: They own the copyight and they sell proprietary licenses to the software. The GPL version cannot be incorporated into commercial products (unless those products are GPL themselves). It seems to me that their business model is very close to some traditional "closed source" companies that offer free evaluation versions.

Re:Not "owning" the IP? (0)

Anonymous Coward | about 8 years ago | (#16434613)

First off, thanks for all the insight so far! One small nitpick about MySQL (since this is Slashdot where we nitpick...), from the interview:

Who would have thought five years ago there would have been another database to rival IBM DB2, Oracle, and MS SQL Server? By all estimates MySQL now has my more installations than IBM or Oracle; some estimates show that MySQL has more installations than SQL Server!

Not really rivalling though -- more like complementing. DB2 and MS SQLS cannot touch Oracle in truly massive databases, and likewise MySQL isn't quite on par with those two for enterprise use. MySQL is hugely popular, granted, but the vast majority of installations are fairly simple or small websites. It has its own place in the database ecosystem. (Beating the technically somewhat better Postgres on the head with a Swedish easy-to-use stick.)

It's quite enlightening how MySQL AB took the "gambling" approach: for years, MySQL clearly lacked in reliability (it maimed data quite easily), but garnered marketshare for its speed and admin-friendliness. They are lucky nobody sued them for data loss; maybe because almost all of the installations have been "just web stuff" outside the mission-critical domain.

And they have a smart dual-licensing policy (GPL for the masses, commercial for the paying customer in need of support and maybe uncomfortable with "viral licenses"). That's the way to do it: the one builds huge userbase, the other earns revenue.

This Fp for gNAA. (-1, Flamebait)

Anonymous Coward | about 8 years ago | (#16425935)

Goals I personally Cuntwipes Jordan NIGGER ASSoCIATION despite the 4osts. Due to the there are

vulture capitalists (1)

Jah Shaka (562375) | about 8 years ago | (#16425943)

ok so what about the question - what do i do when the vulture capitalists have come in, taken over 70% of the company, changed all the licences on your projects, put in a entire new team, fired everyone that mattered, changed development from what it was to some web 2.0 dream and then put all the cash into management instead of development and tanked the community?

Daja-vu? (1)

zitintheass (1005533) | about 8 years ago | (#16425959)

Richard Gorman, Bay Partners

I read..
Richard Stallman, Bruce Parens

Damn I am crank today, have to stop smoking...

How to Profit from open source? (0)

Anonymous Coward | about 8 years ago | (#16425967)

Easy.
- Be paid, to help MS expand (Mono, .NET)
- Take the cash, to promote some new standard or to deny implementing some standard [that removes the ads] (Moz)
- Get money, to allow drivers/boycot drivers (x.org)
- Receive funds, to sell backdoors
- Make money, by rivaling another technology which is more threatening to those with the cash (Napster, allofpm3, etc).

- Profit!

Outside these scopes, good and damm useful open source projects will never receive a dime.

Re:How to Profit from open source? (1)

try_anything (880404) | about 8 years ago | (#16497893)

Be paid to help any big company expand by commoditizing their complements [joelonsoftware.com] . (As usual for Joel, you can't tell whether it's his own idea or whether there's another, better treatment out there.)

FOSS firms don't own their IP? (0)

Anonymous Coward | about 8 years ago | (#16425995)

I think a serious mischaracterization, particularly crucial to the business aspect of FOSS, is being made in a description of open-source companies as "not owning their intellectual property". When companies develop code that they then license under an FOSS license, they do in fact retain copyright, and as long as they maintain a "pure" version of the tree free of copylefted (or anything more restrictive than copyleft) code, they can license that just like a proprietary source base to use for exploitation by business models that might be incompatible with FOSS terms. The business dynamics surrounding this obviously aren't the same when there's a free version alongside it, but it is still an asset that should be taken into account when evaluating the worth of a company.

Re:FOSS firms don't own their IP? (4, Insightful)

WhiplashII (542766) | about 8 years ago | (#16426127)

What he is getting at is that you cannot use your IP to block your competition. That is the ownership he is talking about, not whether you still retain rights to it or not.

That is a very big difference compared to other companies.

Re:FOSS firms don't own their IP? (1)

kthejoker (931838) | about 8 years ago | (#16428269)

And more importantly, with OSS (or, indeed, any quote unquote free product), it is the "support" side that will entirely carry your business to success.

Listening to your customers, updating constantly, being flexible, being openminded, and never resting on your laurels - those things will generate "sales" and increased business revenue more than anything. Consider the converse: nothing is more frustrating than abandonware, because all of its limitations are frozen in place.

Re:FOSS firms don't own their IP? (3, Insightful)

gatesvp (957062) | about 8 years ago | (#16428395)

What you're both missing is that it shouldn't matter that you cannot block your competition. If competitors have my code but not my expertise, then they'll constantly be a step behind me.

This isn't like a new drug that can be reproduced by two lab techs in two weeks. It's not a cotton gin (copied despite Whitney's patent, due to its simplicity). This stuff is so complex that I can give you the code and you may not even be able to make it work, let alone make money off it.

All of this FOSS stuff is completely dependent on having skilled staff and being able to simply apply knowledge that others would need to learn. MySQL is quite vast, I can't just pick up the code and start selling my own "improved distro".

On these big FOSS projects, it would seem to me that not having the IP is a small loss. The most important IP are the bodies who actually know how the system ticks.

Re:FOSS firms don't own their IP? (2, Insightful)

WhiplashII (542766) | about 8 years ago | (#16428895)

No, I get that. What I and the original poster were saying is that others don't get that - and that causes problems.

Look at it this way - if I buy your company, you can then leave and form a new one. So I can't rely on you, I have to rely on your assets... and you don't own the IP. (So what you have to do is say: but I own (and am selling you) the market; or I own (and am selling you) a reliable system of retaining good talent; or I own (and am selling you) the best code that is the real IP.

Re:FOSS firms don't own their IP? (1)

psykocrime (61037) | about 8 years ago | (#16430229)

MySQL is quite vast, I can't just pick up the code and start selling my own "improved distro".

No, but it would be fairly easy to fork the code and have a release that (initiall) is 100% functionally
equivelant to MySQL. In which case, the only thing keeping customers on MySQL's distro instead of yours
is reputation, brand recognition, etc.

And while you probably couldn't roll out a significantly improved MySQL tomorrow (unless you'd been
working with the code for a few years and were a RDBMS expert) it would be a lot easier to roll
out an improved MySQL (where you do have the code) than an improved SQL Server or Oracle 10g or DB/2.

And for all MySQL know, there *is* some guy out there who's silently been working on an improved
version for the last 3 years, who is just about to release a new version which will be much better
and which *their* developers won't (initially) be familiar with.

IMO, the "unable to block the competition" factor is a significant difference between an
open-source business and a business based on proprietary code. The barrier to entry for
a competitor might not be non-existent, but it is lower.

Re:FOSS firms don't own their IP? (2, Interesting)

DaftShadow (548731) | about 8 years ago | (#16428453)

That's the big "challenge" with the open source mentality and reconciling it with our society, especially in our culture as it stands today. The concept over many years has become "I created it, thus it is mine." We as a society have continued to value this belief, especially due to its connotation in relation to the capitalism that has brought us where we are today. Ask 95% of people in the Western World who owns Mickey Mouse, and they will unequivocally say Disney. While I may be a growing proponent of the Pirate Party, I know that I am personally torn between my desire to create an open opportunity VS a closed opportunity.

To me, it comes down to expectations and control. Not total control, nor wishing my competitors to be unable to catch up so that I can extract all the cash, but simply to me being just risk-averse enough that I don't want the company or IP to fall outside the scope that I can design and "profit from." (whether financially or societally). It's the intrapersonal conflict between personal responsibility, the desire to increase your own stature/safety, and our desire to give.

Look at the recent mini-hubbubs over IceWeasel [slashdot.org] and Citizendium [slashdot.org] . Forking a project is at the CORE of open source, right? Being able to expand upon something to make it better (in your eyes). Yet here we have a situation where people are saying "this will hurt browser acceptance, don't do it," or "this will confuse people with 2 wikipedias... just fix wikipedia!" We've all heard the usual "we need a central linux desktop" arguments, right?

But that's not the heart of the GPL, in my mind. It's not to fight a war, it's to create something that can grow in quality and eventually win out in the marketplace thru sheer force of greatness.

However, therein lies the rub: In order to put together an 'open' opportunity, and give it value, you have to be willing to move in the open direction. You have to create something *potentially* outside of your control, that could, on a whim, toss you aside and pick someone else as a favorite. Because of the uncontrollable possibilities inherent in a system built around such ideals, I can completely understand why many investors will find that challenging to get behind. I'm not sure there's really a way to change that, other than to continue to impress upon people the value of an 'open' future.

The tricks are not what's important. You have to just continue doing great things until people realize the value contained within. If need be, infuse a bit of marketing to help people along the path of understanding... but CREATE something that gives value to others, and you will find yourself at the heart of the GPL.

- DaftShadow

Re:FOSS firms don't own their IP? (0)

Anonymous Coward | about 8 years ago | (#16428765)

What he is getting at is that you cannot use your IP to block your competition.

You can never block competition in a market unhampered by government. You can merely enforce your property rights.

Now, if there is some government intervention, that's another story. For instance, a government-granted monopoly, such as a patent, can be used to block competition.

Owning a copyright, however, is like owning a piece of land. You can't block your competition...but you can prevent them from violating your property rights.

Thanks. (1)

v1ncent (997828) | about 8 years ago | (#16426041)

Very good info here. Thanks for the insights!

SCORE (1)

_iris (92554) | about 8 years ago | (#16426251)

A counselor from SCORE [score.org] could help aspiring entrepreneurs learn to monetize their IP.

Strengths and limitations (2, Interesting)

jd (1658) | about 8 years ago | (#16427709)

Venture Capital is great if your primary purpose is to make money. The VCs have a percentage of the control, not the profits. The replies said that marketshare is important - and it is, you can't sell anything without a market to sell it to. However, marketshare is only a key factor if you have most of it. The difference between having 0.1% and 0.2% marketshare is very small, as far as the market is concerned, but might easily work out to be the amount you need to make that profit. It is also true that maximum profits won't necessarily happen at maximum marketshare. However, ignoring the market entirely is a Bad Idea if you want that same market to buy something. Those who pay the piper call the tune.


I know of no VC at all who has ever invested in a "blue sky" research group, even if there's a decent chance of producing valuable intellectual property. 99% of the time, in blue sky work, there is no defined market. The remaining 1% of the time, the market is exactly 1 - whoever buys the technology from you. The reneissance was almost entirely "blue sky". Venture Capital is neither geared towards, nor capable of, backing the Hookes', Huygens' or daVincis' of the world. This is a Bad Mistake, in my opinion - many revolutionary developments in everything from art and culture through to science and technology have their origins in "blue sky" work. The only place such research exists on any scale, these days, is with military establishments. They may turn up some interesting stuff, but the nature of the beast precludes all but some very narrow fields of interest - and by the time it does reach the average person, most of the real strengths have been watered down or eliminated.


DARPAnet is a good example. That was designed to keep military facilities and labs connected in the event of a nuke war. The modernday lovechild of DARPAnet can barely survive the background traffic levels and the times a conventional war or disaster has occurred in a wired region, the Internet is one of the first pieces of infrastructure to go. It got so bad even ten years ago that most of the DARPAnet sites were running their own private "Internet 2" (with IPv6 and IPSec) in preference to continuing to mourn the desecrated skeletal remains of an unsalvageable wreck - mostly made unsalveagable by corporations squeezing the strengths out of the system in search of gold.


But the real abstract ideas? The inventions that can't be implemented for another 10, 20, 30, 300 years? Who funds the research that will be the bedrock for the next generation, or the next 15 generations, of developers and corporations? Observations of kettles boiling ultimately made the internal combustion engine possible. The equations of motion for non-linear springs made international travel reliable and safe, and made international communications possible. But if you'd tried to get James Watt a research grant or financial backing from any modern institution, they'd tell you to go take a long walk off a short plank.

Re:Strengths and limitations (3, Interesting)

garyrich (30652) | about 8 years ago | (#16428795)

"But the real abstract ideas? The inventions that can't be implemented for another 10, 20, 30, 300 years? Who funds the research that will be the bedrock for the next generation, or the next 15 generations, of developers and corporations? Observations of kettles boiling ultimately made the internal combustion engine possible. The equations of motion for non-linear springs made international travel reliable and safe, and made international communications possible. But if you'd tried to get James Watt a research grant or financial backing from any modern institution, they'd tell you to go take a long walk off a short plank."

VCs don't do this. You are right. It's not their business. It's not what they promise their *own* investors when they take their $. Once upon a time this stuff was funded by Medicis (in a loose sense)... and don't fool yourself, they make a buttload from Da Vinci. Now who does it? If it's long term research investment you can still probably call the japanese. If it makes the world a better place, but only makes limited profit? Gates, Buffet, that fund that Google is starting, Bono (not Sonny). Muhammad Yunus just won the Nobel Peace Prize for microcredit. People fund him. It's not the "Future of Banking" and it's not going to make those who fund it rich, but it's a Good Thing and it doesn't lose $.

Watt is probably a very bad example of your point. Not only could he get VC $ now - he got it then. Carron Iron Works backed him - not only would Roebuck he make a killing on sucess, but iron consumption would go up. Roebuck's timing was off and he lost his ass (still happens to VCs today). Boulton picked up his patent rights like India picked up the "dark fibre" from the 90's and ran with them. Watt's steam engine was not any sort of blue sky investment. And Watt was connected - a family of well heeled shipwrights with strong connections in the Presbyterian Church.

Can we put this hoary old story to rest? (0)

Anonymous Coward | about 8 years ago | (#16428825)

Repeat after me. The Internet is not designed to survive a nuclear war.

Chant that a few times.

Don't believe it? Look up what the effects of a nuclear bomb's EMP pulse are. One nuclear bomb exploded in the stratosphere over the middle of the USA would knock out every public computer network for the continental USA. Oops, the first shot in the nuclear war doesn't even have to kill anyone and the Internet is already down!

Now why do people believe this legend? The source of this legend is the fact that Paul Baran at RAND was one of the first to publish the idea of packet switched networks. He came up with the idea while trying to design secure networks that would withstand nuclear attack. The idea was independently invented by other researchers, including Donald Davies, who were interested in reliable communications but didn't particularly care about nuclear war. The term "packet", incidentally, is due to Davies. These groups did not become aware of each other for a few years. Significantly the groups that actually went to build packet switched networks didn't hear about Baran until after they'd actually built prototype packet switched networks!

The problem that the original ARPANET was designed to solve was much more mundane. Take a room with 3 computers from 3 manufacturers. How do you get them to talk to each other? Furthermore how do you get computers that are a ways from each other to talk? They weren't concerned about hardening the equipment for nuclear war - in the event of an EMP the computers would all be toast anyways. They just wanted them to talk under normal circumstances. Packet switching was chosen for the simple reason that it offered the best performance of the alternatives that they were aware of. In fact one can trivially demonstrate that reliability wasn't a particularly important consideration in the early network - the original backbone was linear. Cut it in one place and the network was down. Not exactly reliable, is it?

Now in fact there is an inherent reliability to packet switched networks. Stories you hear of the Internet starting to work after natural disasters faster than regular telephone lines are true. But that's an emergent property of the kind of network, not a design consideration. (And I've already pointed out that the actual Internet wouldn't survive a nuclear war.)

The moral of the story is that the Internet is not, and never was, intended to withstand nuclear war. There is a kernel of truth to the story, one of the inventors of the idea of packet switching was trying to design networks that would withstand nuclear war. But that is not the whole story and it isn't a particularly relevant piece of the history.

Incidentally for a basic timeline and the people involved, see this history [computerhistory.org] .

Re:Strengths and limitations (0)

Anonymous Coward | about 8 years ago | (#16432837)

Funny you should use Da Vinci as an example of someone who did "pure" research and was well-supported by his times, in contrast to nowadays when only the military is doing research... IIRC, Da Vinci supported himself for much of his career as a military engineer! So perhaps things weren't so different then as we'd like to believe.

That said, I agree with you 100% about the importance of basic research, and that it doesn't get enough attention/resources.

Wow! (1)

Builder (103701) | about 8 years ago | (#16430395)

Wow... just wow! This is an actual detailed and insightful interview. Compare this with the 'interview with a lawyer' recently and it becomes even clearer how good these responses are.

This guy actually answers insightfully and in detail, rather than fobbing people off with half truths and then being surprised when they are called on the inconsistencies with the facts.

Thanks!

Re:Wow! (1)

NewYorkCountryLawyer (912032) | about 8 years ago | (#16432919)

Even though I'm the lawyer you're dumping on, I have to agree with you. This is a terrific, informative, and insightful interview.

In my defense, however, I must say that this interview is marked by good questions, while mine was dominated by two troll-like questions, and a lot of people beating me up because they didn't like my answers to those two absurd questions.

Secondly, because of the fact that I was a lawyer and the troll-like questions were asking me for legal advice, it would have been unprofessional for me to respond. People shouldn't have been asking me for legal advice, because I can't come here and do that.

The interview would have been a lot more useful if the questioners had asked me for information about what was going on out there in the RIAA v. Consumer litigations, or in the post MGM v. Grokster legal landscape, which is the subject I could have dispensed a lot of information about. Nobody seemed interested in that. Everyone seemed more interested in how I might be able to advise them how to skirt the law by making illegal copies, or getting illegal downloads from Russian web sites.

I would not be surprised to learn that the 'interview' was controlled by some RIAA trolls.

But getting back to this one, the questioners and the interviewee all deserve a lot of praise. The questions are thoughtful, and the answers are very informative.

momd down (-1, Offtopic)

Anonymous Coward | about 8 years ago | (#16430443)

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keep your ears open for (0)

Anonymous Coward | about 8 years ago | (#16433957)

Matson Systems. It is the most exciting story I've heard in open source. Still stealth though.

The other side of the coin (0)

Anonymous Coward | about 8 years ago | (#16434293)

Here is an old link [antiventurecapital.com] but it still offers a useful alternative perspective.

Stirr.net online-version? (1)

daybyter (684997) | about 8 years ago | (#16434715)

I liked the stirr.net site a lot, but it seems to me, that it definitely lacks a (online-) forum. I'd like to attend those meetings, but since I'm located in Germany, that's not so easy...
Is there a online version of this concept, where you can discuss your ideas in a forum?

How is this Open Source? (1)

jam-pearl (1007951) | about 8 years ago | (#16435085)

The open source version as a "trial" product. For Sugar CRM this is basically the strategy. They give away an open source version that has limited functionality, most customers upgrade to a version that is not available 100% as an open source product. They charge customers for the full functionality product.

Someone explain to me what this means!!I thought Open Source means giving away (no choice here) the source code of whole functionality.

Re:How is this Open Source? (1)

dublin (31215) | about 8 years ago | (#16451669)

The open source version as a "trial" product. For Sugar CRM this is basically the strategy. They give away an open source version that has limited functionality, most customers upgrade to a version that is not available 100% as an open source product. They charge customers for the full functionality product.

Someone explain to me what this means!!I thought Open Source means giving away (no choice here) the source code of whole functionality.


Obviously, GPL restrictions don't apply to the *originator* of a program. Under the GPL, that person/company has an advantage no one else can have - they *can* legally distribute the program with proprietary, closed-source bits (after all, it's theirs, and they set the license - for everyone else, it's the GPL, for them, it's whatever they want!)

[soapbox]As an aside, I think this is the real motivation behind some of the controversial GPL3 provisions - you have to remember that despite his claims, Stallman's actions *always* take a very anti-commerce, communist tone. Since the FSF's apparent *real* primary goal is to make commerce in software impossible/illegal, this is hardly surprising.[/soapbox]

Why go for VC funding at all? (1)

shomon2 (71232) | about 8 years ago | (#16451143)

Reading this interview made me remember something I studied at university about startups and the IT industry: Ricardo Semler, boss of a Brazillian company named Semco was branching out into IT, and decided NOT to go for VC funding. In his opinion, the company would lose too much control with this, and therefore I think a sense of responsibility to be realistic with the money spent in breaking even. Semco's way was to start small and grow gradually, rather than go for all the huge funding deals...

Shouldn't this be the case for open source sometimes too? I think it's a bit more like non-profit coop/volunteer based work than just all out business, isn't it?
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