Matthew Aslett reports that VC funding to open source startups rose more than 33% in 2Q07 vs. 2Q06. A decline in funding in 1Q07 resulted in an overall decline of 6.4% to $198.85M in 1H07 vs. 1H06. Matthew estimates that a total of $2.05B has been invested in open source startups since 2000.
I found this report from the National Bureau of Economic Research (NBER). Founded in 1920, the NBER is a private, nonprofit, nonpartisan research organization that has hosted 16 of 31 American Nobel prize winners in Economics. (i.e. NBER appears 2legit2quit). The research paper indicates that VCs, on average, get a 57% return on their investments. This is based on an analysis of 17,000 financing rounds in 8,000 companies, representing $114 billion of VC dollars, between 1987 and 2000.
Using: F=P*(1+i)^n where
F = Today’s value of the VC dollars invested in OSS
P = Initial Investment; in this case $2.05B invested in OSS by VCs
i = Rate of return; in this case 57%
n = # of years invested; in this case 6 (we should use 7 b/c Matthew’s data is from 2000 to 2007, but 2007 isn’t over and more was likely invested in 2007 than in 2000)
Bingo, bango, for VC investments in OSS to track with the historical 57%, the $2.05B invested would have to be worth $30.7B. Wow. Is there any way that OSS vendors are worth that much today?
You’ll argue that the complete $2.05B wasn’t invested for 6 years. Valid point. So, if you run the numbers with different input for # of years you get:
@ 6 years F = $30.7B
@ 5 years F = $19.6B
@ 4 years F = $12.5B
@ 3 years F = $ 7.9B
If Matthew could provide the yearly or quarterly splits on VC funding to OSS, we could get a better sense of whether $7.9B or $30.7B is the correct target. My gut says it’s closer to the $12.5B to $19.6B.
Maybe the VCs are doing the same math and realizing that their OSS investments aren’t driving returns in line with historical norms? If so, this would be a 3rd factor in why VC funding to series ‘B’ and above is increasing while series ‘A’ seems to be drying up for OSS vendors, as Gianugo Rabellino, CEO of Sourcesense has posted?
Or maybe I just suck at math?