Subject: Re: Thoughts on GPL
From: Peter Deutsch <peterd@Bunyip.Com>
Date: Wed, 25 Feb 1998 15:42:32 -0500

[ You wrote: ]
.  .  .
} >As I understand it, the theory in the software financing business is
} >that it is not really the company that they are investing in, which is
} >normally the case in other industries, but the software product.  The
} >idea being that the software product (ie the whole company) will be sold
} >to CA, or IBM or Microsoft, if it is useful.
} 
} Not necessarily.  Most VC's say that the major thing they invest in is the
} management team.  Few plans survive contact with the enemy -- er, um, the
} market -- so it is expected that the plan will change.  A good management
} group can adapt to circumstances, and is therefore one of the better ways of
} protecting the investment.

I generally agree with this. We're in the final throes of
due diligence on our own first outside equity placement
and we found that the formula they have is that they want
to see a credible management team, plus a credible set of
plans and processes. Thus, for example they want to see a
financial model, pro forma budgets and revenue
projections, etc, as well as such things as a marketing
document with details of size of market, target percentage
market share, etc, all spelled out in great detail.

They will want all of this, even though everyone knows (as
you mentioned above) that the plan rarely survives
exposure to the market unchanged. I gather the theory is
that if you can build the plan, then you can modify it in
response to changes, as well.

Bottom line is still that they're investing in the people
behind the plan, since technologies can be blind-sided but
a good team will presumably be able to catch it and
recover...


} >These alice-in-wonderland financing rules ... have been very expensive
} > for the rest of society who has paid a premium for the software tools
} > that have been financed this way.  The premium results from not only
} > having to pay the VC's and the entrepreneurs who won at this game,
} > but the VC's have to finance the losers out of their proceeds on the
} > winners as well.
} 
} Utter nonsense.
} 
} The premium results from the fact that these investments carry more risk
} than society was willing to undertake.  The distribution of a pool into a
} range of investments, some of which fail, *reduces* the aggregate risk,
} which *lowers* the premium.  If you could pick the winners going in it
} wouldn't be a risk investment.


I agree. Yes, the VCs fund the losers from the winners,
but "quelle surprise?" That's the nature of any industry.
You survive and grow on profits and in the VC business
profits come from successful investments.

Although I'd read about it, I was still personally a
little surprised to find that the vast majority of the VCs
we talked to actually *wanted* to share the risk with other
VCs.  Especially since we're in a high-risk field and they
had generally no experience with Internet companies (there
are just not that many of us in Montreal. :-( those who
indicated an interest in us all wanted someone else to
take the lead. It's only after we found the first company
willing to put something in writing that our syndicate
started to fall into place. And we're a long-established
company with proven track record and revenue streams.
Otherwise, they're back to the people themselves...

As for the assertion that somehow "society" is paying a
premium for the failures, I don't see it that way at all.
In fact, love it or hate it, the concept of permitting
failure is fundamental to the free market system. You
can't have Darwinian selection without something culling
the herd and you can have a healthy herd even if
individual zebras aren't crazy about the outcome of any
one day on the plains...



					- peterd


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     Peter Deutsch,                                   (514) 875-8611  (phone)
  Bunyip Information Systems Inc.                     (514) 875-8134  (fax)
    <peterd@bunyip.com>                               http://www.bunyip.com

"... When beetles fight these battles in a bottle with their paddles and the
bottle's on a poodle and the poodle's eating noodles... they call this a
muddle puddle tweedle poodle beetle noodle bottle paddle battle..."

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