Saturday, October 01, 2005

Three criteria for selecting VC investments: MySQL's Rimer

Basis of investment is that of simple business. Startups have to hav these three points in order to succeed.

Translated: a) Large potential public/community support, b) Established production line, c) High price-to-cost ratio. Each of these points have many books written about them, so a summary paper is too easy to produce. Compare with the four points of Economics (Supply/Demand/Information/Service) and you can see specific applications forming.

Rimer's Rules for Open Source:

"Early on we had to come up with key criteria. It's not difficult to create a successful small business if you're an open-source vendor. But we're a VC firm looking to make returns [of 10 times our initial investment] for [our investors]. We're looking for $100 million in revenue potential.

A small business that's highly profitable, making $15 million a year, is not going to move the dial for us. We're looking to invest in major software vendors.

So what are those criteria?
I call them the three Cs. These are necessary from the onset to make it an attractive story. The first is community. There has to be a huge amount of interest in it. [MySQL, Zend, and TrollTech] were already incredibly popular [when we invested]. The community is your marketing and evangelism arm. They're going to contribute and make sure this piece of software truly becomes mainstream.

The second C is commodity. Open-source companies absolutely can't have a new, innovative technology. They have to be smarter approaches to existing technology. They have to be [technologies] that developers and buyers already understand.

In the case of MySQL, because of Oracle [ORCL ], everyone already knew the relational database. Open source is about coming up with an alternative that's cheaper, not going after a new area.

The third C is price cushion. There has to be a big enough difference between what proprietary vendors are charging and open source is charging, so that over time open-source companies can charge more and still have enough of a price cushion to make it interesting for customers.

Those three qualities are what help us evaluate companies."

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