Rimers Rules for Open Source Investing

Venture capitalist Danny Rimer has made investments in companies across the field. In this BusinessWeek interview, venture capitalist, Danny Rimer talks about the criteria he uses in making an investment in an open source software company, stating:

"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...

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."