Evaluation and Valuation of Open Source Software Companies: A Venture Capitalist' Perspective

Abstract

New business ideas are increasingly more knowledge intensive, driven in part by the application of ICT as an enabling technology across industrial sectors. As distinct from yesterday's industrial companies, today's knowledge intensive companies' value is not based on their real assets but on the contrary on their intangible assets like knowledge, networks, and the brand. In the case of Open Source Software (OSS) companies, the above is even truer; part of their business (and value) rely on Open Source (OS) communities where people contribute voluntarily their time and knowledge into projects Venture capitalists evaluate their investment opportunities based on certain criteria. It is widely accepted that the three key investment decision criteria are: - management team, - market projections and - product In the nineties, it was argued that revenues and earnings were neither sufficient nor relevant ways of putting value to emerging e-businesses or 'dotcoms' which had no revenues and actually no existing mechanisms of extracting payments from customers. Still the basic dilemma remains; while the Venture Capitalist is looking to become a shareholder as cheaply as possible, the entrepreneur is of course trying to retain as much ownership as possible. This would not be an issue if there were a transparent, objective way of estimating the value of the venture. Unfortunately, there are many unknown factors affecting the present value of a start- up that have to be estimated, and, of course, objectivity is easily missed at this point.