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Vulture capital, making a successful OSS business

Story: Too much money in open sourceTotal Replies: 0
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tuxchick

Nov 16, 2005
8:18 AM EST 		Take a look at the source article: [url=http://news.com.com/Open source, open wallet/2100-7344_3-5934144.html?part=rss&tag=5934144&subj=news]http://news.com.com/Open source, open wallet/2100-7344_3-593...[/url]

It's pretty good, and it's right on. I don't know about the "too much money" part, it seems that investment in OSS-based businesses is pretty small yet. The bit about being able to build a good active user and developer community is right on- lotsa folks (**cough Sun cough**) don't understand that all-your-code-are-belong-to-us licenses aren't much incentive for attracting developers.

They missed two key points:

1. Venture capital will kill you. 2. Most businesses fail within five years

The goal of the venture capitalist is to realize a minimum of 3x their investment. They do this by acquiring majority ownership in the new business, taking control, and taking the company public as quickly as possible, within 3-5 years. The IPO (initial public offering) is where they make out like bandits.

The VC will also dilute their risk by selling shares, and taking a "management" fee, typically 20%, off the top. So investors are 20% in the hole from the start, which puts more pressure on the VC to squeeze every last bit of value out of the startup.

If the business survives and makes it to the IPO, the original founders are lucky if they are left with a 5% share.

Most businesses fail in due course, and blaming it on using an OSS model will make a convenient scapegoat.

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