Interest of Venture Capital Companies in Open Source-Based New Ventures: The Case of Turkey

Interest of Venture Capital Companies in Open Source-Based New Ventures: The Case of Turkey

Stefan Koch (Department of Management, Bogazici University, Bebek, Turkey) and Mürvet Ozan Özgür (Department of Management, Bogazici University, Bebek, Turkey)
Copyright: © 2012 |Pages: 16
DOI: 10.4018/jeei.2012100101
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This study focuses on the attitudes of venture capital companies with regard to investments into open source software-based start-ups in Turkey, with a special focus on their preference for different possible business models which these start-ups could be based on. A series of in-depth qualitative interviews has been done with managers of venture capital firms with an IT focus operating in Turkey. Currently, no investments proposal have been received, and an analysis of barriers has resulted in showing lack of support from institutions (especially universities) and insufficient community support, which blocks the development of related expertise. On the other hand, interest exists based on perceptions of open source software-based new ventures as more innovative with higher probability of returns when compared to their proprietary counterparts. This confirms prior theories. For future applications, venture capital firms would prefer dual or hosted business models when investing. Another major outcome is that researchers should step back and focus attention on reasons related with the immaturity of open source-based projects in Turkey.
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In the last years, free and open source software (OSS), i.e. software defined as being under a license that grants several rights like free redistribution to the user (Perens, 1999; Stallman, 2002) and is developed mostly by volunteers, has become more and more important, both in adoption and as a research topic. While proprietary software is keeping its position on desktop applications, open source software projects are strengthening their position at the server side. According to an IDC study worldwide revenue from open source software grows at a 22.4% compound annual growth rate (CAGR) to reach $8.1 billion by 2013 (Fauscette, 2009). This again draws attention to the business side of this phenomenon, and strategies for generating revenue in this context of freely available software. While there is a plethora of taxonomies of open source-related business models (Raymond, 1999; Koenig, 2004; West & Gallagher, 2006; Watson et al., 2008; Daffara, 2009), the research on the connection to start-ups and especially venture capital is lacking (Gruber & Henkel, 2006). While a number of companies specializing in commercializing Linux, such as RedHat, which has also received corporate venture capital from Intel and IBM (Knyphausen-Aufseß, 2005), and VA Linux (now VA Software), have completed initial public offerings, and other open source companies such as Cobalt Networks, Collab.Net, Scriptics, Sendmail or JBoss have received venture capital financing (Lerner & Tirole, 2002; Cusumano, 2004; Goth, 2005), totalling a sum of $1 billion only up to 2004 for 121 investments (Dahlander, 2007), there is a scarcity of research into the early start-up phases and the viewpoint of venture capital companies. This is especially true for Turkey or emerging markets in general (Bruton et al., 2008), as most attention is centered on developed regions like the U.S. or Europe. The focus of this paper therefore is on a combination of emerging markets and emerging technologies. Also Thukral et al. (2008) describe such a combination as a tremendous opportunity. Venture capital funding has been found to be a major factor in growth for new ventures, both in number of employees and equity value of start-ups (Davila et al., 2003), so this topic can be considered as an important issue also from a macro-economic viewpoint.

In this paper, the focus is on the question of why venture capital firms in Turkey would accept to invest in open source software-based ventures, and which business models are more attractive for them. Prior theories hint at some special factors that might act as drivers for this interest, and their relevance in the local context was to be explored. The literature review will briefly introduce the main definitions of OSS, and then detail categories of related business models, concluding with prior work on venture capital and new ventures in that area. Then the empirical study of venture capital companies in Turkey using a set of interviews is described, giving the results as well as conclusions and recommendations for future research.

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