Investing in Open Source Software Companies: Deal Making from a Venture Capitalist's Perspective
Mikko Puhakka (Helsinki University of Technology, Finland), Hannu Jungman (Tamlink Ltd., Finland) and Marko Seppänen (Tampere University of Technology, Finland)
Copyright: © 2007
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 dealmaking. 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.
Key Terms in this Chapter
Proprietary: Belonging to or controlled by an individual or organization that has the ability to share that item (in this case, software code) with others.
Startup Company: Company in a product development stage requiring further funds to initiate commercial manufacturing and sales (FVCA Yearbook, 2004 AU13: The in-text citation "FVCA Yearbook, 2004" is not in the reference list. Please correct the citation, add the reference to the list, or delete the citation. ).
Evaluation: Subjective and qualitative assessment of an investment opportunity.
Valuation: Process of placing a monetary value on an investment opportunity ( Seppä, 2003 ).
Seed Company: Company in a stage of research, assessment, and development of an initial concept before reaching the start-up phase (FVCA Yearbook, 2004 AU12: The in-text citation "FVCA Yearbook, 2004" is not in the reference list. Please correct the citation, add the reference to the list, or delete the citation. ).