Subject: Re: Valuation of Open Source companies
From: Ian Lance Taylor <>
Date: 02 Nov 2005 16:41:32 -0800

 02 Nov 2005 16:41:32 -0800
David Fetter <> writes:

> > > Venture capitalists are essentially antagonistic to any company
> > > they fund, FLOSS or otherwise.  Their goal in life is to buy a
> > > winning lottery ticket that others provide the work and talent to
> > > fill in, and they are ruthless toward anything they fund that is
> > > not providing this ticket.  When they think they can cash that
> > > ticket in, they screw everybody who did the actual work.  Why
> > > would anybody here want to help them, FLOSS or otherwise?
> > 
> > That is not really accurate, though there is certainly a grain of
> > truth in it.
> In what particular(s) is it inaccurate?

The antagonism only arises after the company is already successful.
The VCs have every interest in the company becoming successful.  Up to
that point the interests of the VCs and the interests of most others
involved with the company are aligned.  Since most VC backed companies
are not successful, the problems generally never arise in practice.
So I think it is inaccurate to assert that VCs are essentially
antagonistic.  The interests of the VCs are not identical to the
interests of most other people involved in the company.  But they
often run together for several years.

And while it's convenient to speak in short hand of the interests of a
company, as you do above, in truth there are many different interests
involved in a company.  Most VC backed companies break down broadly
into different classes: investors, founders, early employees, and
later employees.  Founders and employees are further divided between
those in it for short-term money and those in it to build a long-term
company.  All those groups have different interests, and in various
situations they can all conflict.  So I think it is inaccurate to
single out the VCs in speaking of antagonistic interests.

> > But the reason to work with VCs is obvious: they have money, lots of
> > money, and they are willing to give it to you.  Sure, there are
> > strings attached,
> As I've seen it go down, it's more like there is a giant tangle of
> strings, many of which are involve whole areas of human endeavor that
> most technical people don't even know exist, attached to the illusion
> of money.  VCs certainly don't mention them.  The naïveté of technical
> people is part of what helps them collect that aforementioned lottery
> ticket.

Again, anybody who accepts millions of dollars from somebody else
without paying very close attention to the strings is a fool.  That
goes beyond naïveté.

Yes, many technical people don't know much about such things.  Nobody
can be an expert on all things.  But there are literally millions of
dollars at stake.  They can, and should, look for help.  Where there
are VCs, there are VC consultants, and there are lawyers.  You can pay
these people to be on your side.  If they think you have a good idea,
they will often work on spec.

> > But if you need money to start a company, there is no easier way to
> > get it.  (I was a co-founder of a VC-backed company, now defunct.)
> Again no offense meant here, but I have to turn your assertion around.
> Is there some *harder* way to get startup capital than going to VCs?
> If so, what is that?

There are quite a few ways to get startup capital.  VCs are probably
the only way to get $10 million off the bat, so if your first step is
to build a factory you may have to go to them.  But some other ways

1) Your credit cards, your family, your friends (who may then become
   your former friends).
2) Small business loans.
3) If you happen to be a minority or a woman, minority business
   development loans.
4) Lines of credit, secured by the rights to your software.
5) Customer financing--find your customer(s), and get them to finance
6) Real estate finacing--people who lease office space often have
   money, and some are willing to make a deal.
7) Angel investors--essentially, unprofessional VCs.
8) Bootstrap--produce the first version of the product while not
   working or while moonlighting, and start selling it to make money
   to produce the second version.

With all of these options you will get less money than you will from a
VC.  That's the real sense in which they are harder.  Getting money
from a VC does generally involve doing quite a bit of development
beforehand and quite a few pitches.

> > I have no special comments for the original poster.  I only know a
> > few VCs.  I would say that in general they don't understand open
> > source in the way that I understand it.  The ones I know tend to
> > view it as a business tactic--essentially, a way to get people to do
> > work without having to pay them.  They don't understand what is
> > required for that work to actually occur.  That said, I'm sure there
> > are some VCs out there who do understand it.
> There may be some, but VCs are people for whom you must assume /male
> fides/, i.e. they will use that knowlege to hurt you.

No.  They will use that knowledge to benefit themselves.  They may
hurt you, but that is not the goal.  There is a big difference.

> > I personally can't see any reason that use of open source software
> > in a business plan should cause valuation to change in and of
> > itself.
> I can.  A business plan that's sheer crack smoke if it involves paying
> Larry and/or Bill a few hundred thousand a year for infrastructure
> (RDBMS, compilers, operating systems, editors, mail servers, etc.)
> right from the start and increasing as the business grows could look
> good quite reasonable with a FLOSS infrastructure.

That is certainly true.  I guess I was thinking of that more as the
incidentals to support the main idea--and the main idea might or might
not be based on open source.  Saving costs is useful, but if you could
build a business only on cost savings then you could build a great
business by simply doing nothing at all.