Does building upon open source software affect company valuation positively?
Most startups and quick-risers promoted publicly are building intellectual property on top of open source software stacks. Aside from avoiding upfront investments towards license, is there any positive impact in doing so?
Several posts on the Internet that I found (http://wrlawfirm.com/BlogWP/featured_business_legal_articles/open-source-can-impact-a-company-valuation/ and http://timreview.ca/article/324 ) seem to agree that using open source software stack has adverse impact on company valuation due to the higher risk in licensing infringement, etc.
What provides a better company valuation:
- building intellectual property on free open source software stack
- owning capital investment in the form of licenses to "enterprise" grade software stack
If I rephrase my question in the following way: if I had x amount of money to spend, from the angle of company valuation, would I be better off spending it on building internal intellectual property on top of open source software, or
spend the same amount of money for licenses and services (and customization/IP) on proprietary software?
which one values more: OSS + proprietary IP, or
license ownership + proprietary IP
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Is your priority to create intellectual property and sell it/value it, or are you in the business to meet customer needs and get to market as soon as you can? – Tim J 11 years ago
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the latter - however I'm interested to hear the repercussion on ones decision to decide on OSS dev vs proprietary licensed software. – Ronaldwidha 11 years ago
4 Answers
Start-ups and quick-risers are building upon open-source software for a number of reasons:
- The amount of capital they have is constrained/limited.
- There is a large, free, support community for open-source products
- There is a large community of developers who can work using open-source software
I would argue that it is more important to choose the correct tools so that products/services that will generate revenue can be developed within the shortest available time-scales.
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assuming both options (OSS + custom development and proprietary software + services) require the same amount of time-scale to implement, approx. cost the same - which one would be more of value (in the eye of valuation)? a working software on OSS or license ownership? – Ronaldwidha 11 years ago
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I would argue that the value in the company is not the software on which your product/solution is built but the solution itself and the people who continue who continue to add value by building, marketing and selling the product. – Faster Solutions 11 years ago
I would characterize the first article as FUD. The gist of the article is that if you violate an open source license, you could be sued. That is true, but it is straightforward to use open source software and comply with the licenses. If you want to be really cautious, limit your self to BSD/MIT style licenses, which are very permissive and very easy to comply with.
The second article is TL;DR.
I worked at a small startup that got acquired by a very large company. During the acquisition, the acquiring company took a very close look at our use of OSS (and we used a lot). Our use of OSS had no effect on the valuation.
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thanks. can I clarify that you are saying the use of OSS had no effect, but also no positive effect? – Ronaldwidha 11 years ago
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Well, I would say that it had no direct positive effect in that the acquiror did not increase valuation based on that. I would say that it indirectly increased our valuation in that our company was more efficient and saved money through use of OSS. – Kekito 11 years ago
It affects your valuation positively and negatively.
First, negatively. Using open source software will decrease your valuation (from the perspective of the ones doing the valuation), because it's not an asset that belongs to you, and it's not an asset that you control. Had the same software been owned by you, your company would be worth more.
Now, positively. My company developed a product where we used two large, open source software libraries. Had we developed those libraries ourselves, we'd be two years behind where we are today, and worth a lot less.
So, it just depends on how you look at it.
This is honestly too difficult of a question to answer in generalities because in the end, the answer is "it depends."
As Brian said, building upon OSS helps bring your product to market quicker, but at the same time, it's not something that you can control.
In the short term, if you're looking for funding, I would say it devalues your company because it's not an asset you can control.
But once you have a product to market, and you've made tweaks to the OSS to fit your individual requirements as you've gone, and you're finally at the point where it's your product, and you're making money from it, it can possibly increase your value.
If you're looking at being acquired by a company though, it all falls down to how much someone is willing to pay for you.
