Investing in Open Source Software Companies: Deal Making from a Venture Capitalist’s Perspective

This chapter studies how venture capitalists invest in open source-based companies. Evaluation and valuation of knowledge-intensive companies is a challenge to investors, and while many methods exist for evaluating traditional knowledge-intensive companies, the rise of open source companies with new hard-to-measure value propositions such as developer communities brings new complexity to deal-making. The chapter highlights some experiences that venture capitalists have had with open source companies. The authors hope that the overview of venture capital process and methodology as well as two case examples will provide both researchers and entrepreneurs new insights into how venture capitalists work and make investments. IntroductIon In the traditional view, the evolution of a technology-based new company is seen through separate consecutive stages. Business is based on creating tangible real assets; and in the end, the value of a company is also based on real assets. First, the technology is developed, which is followed by setting up the organization. Once the organization has reached a sufficient scale, internationalization is started. Finally, the value of the company is estimated with potential venture investment or through realization either through an initial public offering (IPO) or a trade sale. However, due to the increased complexity of products and services, time-to-market tends to lengthen. In order to maintain sufficient resources until the company reaches profitability, external financing is needed. The time needed to turn a