Ask an Open Source Venture Capitalist

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.)

Common Failures

[paulevans]

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

How did you get your job?

[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?

Why Open Source?

[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?

CS and mgmt

[gEvil (beta)]

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

The Magic Ingredient

[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?

When do you pull out

[cyborch]

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?

[Anonymous Coward]

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...

[psykocrime]

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?

Prevent getting thrown out of my own startup?

[Cr0w T. Trollbot]

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

Do you plan for patent reform?

[daeg]

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.

First on my mind

[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?

How user experience expertise impact OSS investing

[count0]

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

Use Parent as question please.

[Anonymous Coward]

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.

10 Most common

[Anon-Admin]

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

Dear Sir

[Anonymous Coward]

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

Financing / Control Questions

[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%?
   

When to seek VC, when to bootstrap?

[b0r1s]

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?

I have an idea

[emil10001]

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?

Open Source vs. $$$

[Twixter]

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?

[mrand]

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!

Re:How did you get your job?

[Anonymous Coward]

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.

How do I get to talk to your kind?

[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?

Working Tech, New Idea

[BlueStraggler]

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?

How to do you open-source a development tool?

[kjam_build_tool]

I have developed a next generation build tool, a make replacement, called KJam ( http://www.oroboro.com/kjam [oroboro.com] ). I am having some success licensing it under a traditional 'closed' license to software development companies.

I have received interest from some large open source projects to switch to using kjam as their build tool. The problem is that since they are open source they can only allow development tools in their toolchain which are themselves open source. Since they give all their users the right to build their software, they can only use tools that their users are also licensed to use.

Clearly I would love to make it possible for these projects to be able to use kjam as it would be a tremendous endorsement. But if I do that won't I need to provide such liberal licensing terms that I would be unable to continue to sell commercial licenses?

I have seen some open source software projects succeed with 'dual licensing' where the product is free for non-commercial use, but requires a license for commercial use ( e.g. license required for integration into your commercial product like trolltech, or commercial licenses required for some applications or configurations like mySql and Asterisk ).

Are there open source licenses which would be liberal enough to allow other open source projects ( and their users ) to use my build tool and still give me an avenue to sell licenses to large corporate software developers?

How does a developer get his project funded?

[nahdude812]

My project (a web based game; see my user profile) sees about 40,000 users every day across the globe. Right now our operational costs (two dedicated servers w/ substantial bandwidth) are 100% funded (and well in the black) by user donations.

To me, this makes the project a success, and demonstrates clearly that there's a real market for such a project, as users are of their own free will willing to support it wholly.

Real life gets in the way of me being able to dedicate the same level of devotion that I used to be able to give the project, but I personally am confident that if we had funding that enabled us to hire just one or two developers and purchase some additional equipment, the project could take off like a rocket. We have a huge list of ideas for improvement -- things that we simply don't have the time to successfully realize today, but which we could if it was our job.

So my question is, what would you recommend we do to seriously pursue getting real funding. How do we first find someone that is not turned off by the idea of an open source model, and second will actually listen to our proposed business plan? When talking to them, what sort of things are they looking for that demonstrates that we're serious, willing to work hard, and aren't just looking for a free ride to tinker around on code?