Strategy applied to VC funded Free Software

[dachary]

As a Free Software developer, I need Free Software development tools that are developed in a sustainable way by people and organizations whose primary goal is to further the interest of the general public.

Such tools do no exist as of 2022 and there is a need to develop a strategy to mitigate the side effects they have on my daily work. For instance, GitLab is a publicly traded company whose primary goal is, by definition, to maximize the amount of money it generates for its share holders. Not the interest of the general public. It translates into the decision to remove some features from the Free Software version of GitLab CE such as bidirectional git mirroring. That makes the work of the Free Software developer more difficult. Another example is Penpot a VC funded project whose primary goal is to generate x10 more money than their receive within a minimum amount of time. Yet another example is Gitea which is led by individuals who derive a personal income from the project and make no promise to prioritize based on what best serves the interest of the general public. And finally Debian GNU/Linux, which is the closest one can find when it comes to serving the interest of the general public, is ruled by a centralized and democratic organization which has an opinionated view on the matter.

These examples are very different and listed to illustrate that:

• there is no tool developed by people and organizations whose primary goal is to serve the interest of the general public
• the goal of these people and organizations can be very close to achieve that (Debian GNU/Linux) or very far (GitLab)

This calls for different strategies and my focus now is on VC funded software, because Penpot recently switched from being self-funded to being VC funded. Quoting Wikipedia:

Strategy is important because the resources available to achieve goals are usually limited. Strategy generally involves setting goals and priorities, determining actions to achieve the goals, and mobilizing resources to execute the actions.A strategy describes how the ends (goals) will be achieved by the means (resources). Strategy can be intended or can emerge as a pattern of activity as the organization adapts to its environment or competes. It involves activities such as strategic planning and strategic thinking.

Since my goal is to have Free Software development tools that are developed in a sustainable way by people and organizations whose primary goal is to further the interest of the general public I need a strategy if I am to use / depend on a tool developed by a VC funded organization whose goal is different, otherwise it will conflict with my goal and cause me trouble, eventually.

• Goal use the Free Software produced by the organization and avoid dependency traps
• Action understand the organization business model because it directly leads to the dependency traps to avoid
• Action engage with the company in public spaces as a client, not as a community member because this is the frame set by the VC

It is too early to get an understanding of the business model that Penpot will have but it will clarify in a year from now. I suppose it would make sense for them to start a marketing campaign to pursue Figma customers unhappy about the acquisition. Their focus will therefore likely be to bridge whatever gap allows them to close deals, which is likely to translate into features these prospects want (or think they want because they already have them). A proposition that is also most likely miles away from what the general public wants.

The dialog in forums or other public spaces has very limited impact. Whatever is decided by the company for the next release of Penpot will only be superficially (if at all) driven by the community. For instance, pushing for prioritizing the development of an integrated experience for developers, UX designers, UI designers to work on the same tool is and will be for the company to decide and won’t be delegated or significantly influenced by the community. However, reporting bugs publicly and being vocal about how inconvenient something is and expecting the company developers to work on it is now a valid proposition, because of VC funding. With self-funding the company could push back and ask the community to do the work, it is less legitimate now.

[diacritica]

Hi @dachary ! I’ll share my personal “formula” for this question of yours “Strategy applied to VC funded Free Software”. It’s something I have thought about one way or another for the last 25 years.

It’s important to start by saying that ROI is not uni-dimensional and it doesn’t require a strict timeline. The open source “economy” has proven us that there is much value outside pure money. Actually, open source (including commercial open source) is very much about leaving a ton of money on the table and being OK with that.

Without going deep into FOSS game-theory models, my approach is to support extremely altruistic emerging patterns. For this I tend to use a rather simplistic metric for an actor in such environment;

Value created
--------------
Value captured

I expect that ratio to be at least 100. That is, I give away 100 times more value that what I keep for me. As I said, it’s rather simplistic.

Now, for me, value is an asset that can be transformative. It might be just $$$ but it’s not limited to that (time, skills, etc, are also transformative assets) but we can convert everything to $$$ for the sake of simplicity.

Are you ready? Here we go.

• How much value is the software creating or giving away for free by the core team (1)
• How much of the value created is owned or shared by the community in an efficient and sustainable way. (2)
• How many other tools and products, whether FOSS or not, are benefiting from this and how much net positive impact such a tool is creating. (3)
• How much is it helping to promote open standards, accessibility and interoperability. (4)
• How much of this value is an extremely fragile offer because of the governance model of the software. (5)
• How much of the value created has a conflict of interest with the community. (6)
• How much pre-existing created value has been used by the software in order to exist. (7)
• How much value is the software “capturing” or keeping to itself. (8)

That “capture” is not only monetary ROI, it could be innovation ROI, agenda ROI, competitiveness ROI, but even if we focused on monetary ROI alone, the question for me would be, what’s a FAIR ratio between value creation and value capture WHERE value creation is of certain resilience and devoid of conflict of interest FOR a product that could not exist in the first place without value created by pre-existing FOSS?

Again, to make things extremely simple I’d say this

Effective Value Created EVC by a FOSS product = [1 + 2 + 3 + 4] - [5 + 6 + 7].
Effective value capture EVCa = 8.
Ratio = EVC/EVCa > 100.

Different people will come up with a different FAIR judgement for that ratio. For some people, it could be something as simple as “I’m happy only if the ratio is not smaller than 10000” and some other people might say “compared to proprietary software were the ratio is between 5-10 I’d be fine with a ratio of 50”.

As I said, for me, in order to feel OK to capture $1M in value, I’d have to create (give away) $100M in value. As you can imagine, there are several ways you can get a ratio of 100.

• You can make value capture tiny and not be bothered by value creation that much. A lot of FOSS projects fall into this category.
• You can make value creation massive. This is wonderful but it’s really really tough, you basically need to lead some software category.

Let’s look at NGINX example, a well known FOSS project. This source says they made $15.2M in revenue (value capture). For me to feel comfortable using, supporting and hacking into NGINX, I would have to believe that their annual created value is $1.5B. Given the fact that NGINX is powering 34% of all websites/webservers, the overall value creation related to the existence of NGINX is probably worth $100T, way more than my OK ratio of 100.

This is irrespective of whether it’s VC money or not. What VC money usually does is hope that you will be able to create big value much faster. It’s all about value creation acceleration but it’s very risky and the vast majority of investments don’t achieve that at all.

The difference between a traditional VC/investor and a (real) open source VC/investor is basically that the former is happy with a ratio of 5 because that is already yielding nice revenue, while the latter absolutely needs a ratio of something between 1000 and 10000 and thus needs to create way more value than proprietary software.

And that @dachary is the sad reality with many open source projects that took VC money. They took it from traditional VCs, not open source VCs, and they are very quickly trapped into this “capturing value” scheme (I don’t need to tell you examples of this).

I’ve always worked to make sure I give away at least 100 times what I take for myself and tried to make other people and companies do the same. I don’t want zero-sum games.

Despite the textwall, this is a very simplistic approach and it doesn’t give you the means to quantify everything but I hope to have helped you understand how some of us “engage” with this sort of dilemma.

[aschrijver]

Welcome to Social Coding @diacritica and thank you for this thought-provoking post. We’ll take it easy as you mentioned as well on the Penpot community forum. This sure is input for some reflective thoughts

[dachary]

A blocker unfortunately invalidates this evaluation grid / calculation when VC money is involved.

The VC funded project is under the control of the VC

And, as you know, there are no exceptions.

I very much like how you’re thinking and created a new topic to elaborate on the criterion you listed I’m sad that you are no longer in control of the project but I’ve also made poor choices with good intentions in the past and I can relate.

[diacritica]

You say this

The VC funded project is under the control of the VC

And, as you know, there are no exceptions.

That’s an oversimplification with no evidence to support it, I’m afraid. That’s not axiom. Happy to discuss this in more detail over online beers!

[dachary]

@diacritica

You say this

The VC funded project is under the control of the VC

And, as you know, there are no exceptions.

That’s an oversimplification with no evidence to support it, I’m afraid.

Do you have a counter example? That’s all it would take for me to stand corrected.

[diacritica]

I’ll give you one example. Decibel owns ~20% of Kaleidos and has 1 seat on a 5-seat Board where 3 members are founders and represent founders+employees. Decibel made sure the founders and employees would have broad control over the company.

Kaleidos is no that special, there are millions of examples like us. This is actually quite common practice for a VC, to make sure the founders control the company and have all the incentive to work towards their vision, while the VC hopes their bet on them was right.

This is how a VC typically operates, particularly an early stage VC. I’ve made some numbers simple to make sure we don’t get distracted by them

• They are a team of 10 people.
• They have $100M and the need to return $1B (10x multiplier) after 10 years.
• They make 10 investments of $5M each and leave $50M to be able to continue to help those companies that show growth.
• They know their investments are extremely risky as 9 out of 10 will fail.
• They know they need to leave broad control of the company to the founders, otherwise, founders will immediately leave. After all, the VC fund doesn’t have the expertise to run 10 different companies, they are just “smart money”. The times when whoever had the money made the decisions are over, that’s super old school VC mindset.
• Their investment thesis is “great founders, great team, great vision, great execution, great market, great opportunity”.
• They do ask for some veto power over fiduciary responsibilities and they typically ask for the founders’ loyalty to the project for several years (3 or 4). They know that, without the founders and their motivation, they have a living carcass.

So, VC gives you money to accelerate YOUR vision, not to puppeteer you, that never works, you would just walk away and they would have lost $5M, reputation and the ability to attract money in the future.

Now, not all VCs are created equal and this is key. The same way you pick NGOs to support based on your values and interests and avoid some others that do not represent your worldview, yo do end up with some VCs and not others.

VCs will tell you they are here to help, and it’s your responsibility to decide whether you want that specific help. The most common error among founders is to accept money without asking the tough questions. So often people get excited about instant $$$ that they forget about everything else. Perhaps the VC’s thesis to invest was completely misaligned with your strategy as a team. You can picture this as a marriage proposal, you shouldn’t say yes just because you got excited about the fact that someone loves you, right?

As a founder you have the right to ask all sorts of uncomfortable questions. Where does the money come from? What is your track record? What do other invested company founders say about you? Why do you like us and what do you think we must do no matter what? For every answer, you have to be honest to yourself and the team and decide whether that’s a good match or just “money today, pain tomorrow”.

Remember, VC have NO intention of controlling the company at all, that’d be stupid of them and they know it. They can’t even invest in remotely similar companies, so they really want you to succeed.

What it’s true, though, is whenever a company raises more money at a higher (speculative) valuation, the new VC expect they will have their 10x return after 10 years, so all the tough questions just get more uncomfortable, but the golden rule is that founders keep controlling the company. In my experience, VCs are the most founder-friendly speculative money there is, while private investors tend to want more control over the company (I have personal experience with this and actually Kaleidos was born in 2011 out of rejecting that other type of deal).

I’m not here to defend Venture Capital, I’m not particularly excited about them because they represent a fundamentally wrong distribution of wealth. It’s true that at least they operate in the productive economy, in companies and tangible assets instead of pure speculation like Futures, but still represent an uneven share of concentrated power. The reverse to the “9 out of 10 investments will fail” also operates here, “9 out of 10 VCs are not for you and will upset you” (or in my personal experience, “29 out of 30 VCs are not for you”).

Hence, my “support framework” shown above.

[dachary]

The VC does not control Kaleidos via the percentage of shares they hold or the number of seats they have but via the contract that was signed. In your marriage metaphor, it is the prenup. A very secretive document that, if published, would show exactly how and when the VC have control over Kaleidos. Since it will not be published because NDA have been signed, external observers will have to wait until a side effect of that control manifest itself in the public space.

I’m sure you think you can beat the VCs at their own game and succeed where everyone else has failed. And part of me wants to believe that you will outsmart them and open a path to a bright new future where carefully selected VCs create a real platform for sustainable Free Software. But we are not in a fairy tale and in a few years from now you’ll explain in your own words how VCs ruined your dreams.

[Ryuno-Ki]

I wonder one thing, but don’t expect a response: was the team at Penpot / Kaleidos consulted before the VC contract was accepted?

In my experience, knowledge workers (designers, developers etc) are often left out when it comes to these subjects. Understandably, because they tend to have little business knowledge. That being said, the team is often affected the most by these decisions (speaking from personal experience).

VCs / investors feel like external to the company culture.

I’m keeping an eye on Penpot but expect a breakup in the mid future. Likely about the time when it comes to pay interest to the VC.

[aschrijver]

Great discussion (which still has a lot to parse more closely, for me). Some observations, because it seems that there might be some kind of ‘stalemate’ (the assumption of secret NDA deals cannot be disproven):

• The VC announcement has caused a great loss of Trust in the FOSS movement.
• There may be less community participation (contributions) and use of Penpot in FOSS circles.
• Penpot’s CEO @diacritica has just outlined a passion for FOSS and reasons to go with VC.

So now it is maybe time to turn the discussion and look from the opposite direction:

• If words cannot convince, which deeds can convince that Penpot is (once more) in FOSS camp?
• Open question: Is one’s “soul forever lost” after accepting VC in eyes of principled FOSS folks?

Which combination of mechanisms exist that might go towards giving sufficient assurances?

• Exit to Community?
• Radical Transparency? (inspiring example: @dachary )
• Open Startup? (referencing HN, site currently in maintenance)
• Steward Ownership?
• Non-profit Venture?
• … (what more do you know?)

[Ryuno-Ki]

• If words cannot convince, which deeds can convince that Penpot is (once more) in FOSS camp?

To me, that would be transparency. Like, filling issues (and ideally: submitting patches) to upstream projects. It’s part of the Open Source contract: using software libraries without a charge, but contributing experiences back. Perhaps even engaging in sponsorships if budget allows. Remember xkcd: Dependency

I also would like to read what monetarisation ideas exist. We have a thread about this somewhere here if I am not mistaken. Since there were some names dropped (like Taiga, Kaleidos) I could imagine, that hosting offers would be paid (but it will always be possible to self-host without paying anything). Like Matomo does. I would rather not see a direction towards Open Core like GitLab does.

I’m not sure, what commercial entity Kaleidos operates under (let alone am familar with Spanish law in this regard), but if it is common, annual performance reports could help gaining trust. After all, we have little won if @diacritica and team are facing another bankruptcy with this endeavour.

Since you focus on FOSS here, which is more philosophical focussed than OS, perhaps a move to another hosting platform might be an option. Codeberg appears to have a higher acceptance (see also https://giveupgithub.org/ ). Could start as a mirror to test the waters.

Another option could be sharing control. Could be tricky now with VC funding. I am imagining transferring ownership to a foundation here. Or something like Gitea has (a rotating stewardship model). Perhaps it’s even possible to invite some community members to the board as experts (with consulting influence, even if they can’t decide on questions).

Last random idea I have (in the context of „engineers lack business knowledge” I mentioned in my previous post): In what phase is PenPot? In context of startups these would be:

1. Problem-Solution-Fit
2. Product-Market-Fit
3. Product-Scale-Fit

Thank you for the links @aschrijver!

[dachary]

@aschrijver

Open question: Is one’s “soul forever lost” after accepting VC in eyes of principled FOSS folks?

The short answer is “yes” for a very simple reason: VC are in control. Whatever goals and dreams the company / the founders had are no longer relevant, they are ultimately subject to VC decisions. Another way to rephrase this question would be: “Is it possible to retain control of a project and accept VC money?”.

@aschrijver

…there might be some kind of ‘stalemate’ (the assumption of secret NDA deals cannot be disproven)…

I did not want to dive into this before to keep things simple. Because they are that simple: VCs are in control. Of course they do not puppeteer the company the way business angels sometime do, it would not only be a lot of work but also drive away the more promising founders. But there are much simpler ways to ensure control, via the terms of the contract that is signed as a condition for the money to be released.

Since the contract is under NDA, one can object: there was no such contract. The VC just bought 20% of the shares of Kaleidos and got one seat on the board, that’s all. They just made a bet, as explained above, there is nothing more to it. But if that was the case, why would it be so important that…

…not all VCs are created equal and this is key. The same way you pick NGOs to support based on your values and interests and avoid some others that do not represent your worldview, yo do end up with some VCs and not others.

How can a minority share holder be…

… “money today, pain tomorrow”.

if they only have a minority of shares and votes on the board? They could not and there would be no need to be careful about anything but the provenance of the funds (you don’t want the Sackler’s sneaking into your board ).

The only reason to follow the advice about establishing a good relationship with a VC is the existence of a contract that give them control over the company. For instance, if there is an opportunity of selling Kaleidos to Microsoft for 100 millions € next year, you can bet the VCs made sure that offer cannot be turned down. Even if they only have one vote at the board.

[hirunatan]

Blockquote I wonder one thing, but don’t expect a response: was the team at Penpot / Kaleidos consulted before the VC contract was accepted?

Hello. I’d like to answer this one.

I’m another one of the founding members of Kaleidos, the company behind Penpot. I haven’t any specific management role, only technical, but I can assure that in Kaleidos all employees participate in internal management.

This company is not 100% horizontal, but perhaps 99% . It started as a group of mates that decided to undertake that project together, and from start it was planned as an organization based on mutual consensus. Even the CEO, Pablo (@diacritica) has a technical background and he still codes when his other obligations allow it.

We decided to designate 4 persons to management tasks, in part time, but all trasdendental questions and decissions are handled via assemblies or working committees. And we try that all employees participate evenly in them.

So yes: the whole process of searching for VC, making deals and signing contracts was fully transparent. We had regular meetings with all people, where all sort of things were debated and any question was asked, and all documents were internally shared. The final decission was made with the support of 100% employees. Some more enthusiastic, others with some doubts, but none objected.

You are true in that some employees have more business knowledge than others. But a big effort was made to explain things as clearly as possible, and every person had the opportunity of involve until they wanted.

[diacritica]

Hi @dachary it’s tough for to counteract expressions like this

VC are in control. Whatever goals and dreams the company / the founders had are no longer relevant, they are ultimately subject to VC decisions. Another way to rephrase this question would be: “Is it possible to retain control of a project and accept VC money?”.

because they come from a particular worldview that I don’t think I even have the right to disapprove. I expressed what it is above, you can either:

• believe me
• believe me and yet think I’m foolish and it’s a matter of time I realise how wrong I was
• not believe me

I’m happy to go with either 1 or 2 because it allows to me work on something. Option 3 is sterile ground for me.

Kaleidos, the team and the company, has been met with skepticism since it was born in 2011. We are used to this. I’ve lost count of the times we’ve heard “your model just doesn’t work” from entrepreneurs and business people “you can’t be a viable company” or “you give too much power to employees” or “if you keep saying NO to contracts, you’ll regret it” or “pursuing gender-parity and diversity will bring you nothing but slow pace and friction” . Now, it’s the other way round to some extent. “You can’t get VC money and not become their slaves”, “You should do this, or do that, etc”.

TBH, we’ll do what we believe we need to do to make sure we build an inclusive, accessible open source/open standards design & prototype tool that makes designers and developers work together. And we will do this from a 25-year old perspective on how FOSS has evolved and what lied ahead. We will allow ourselves to experiment on every aspect of this and we’ll take many risks. One risk we won’t take, though; We won’t be shying away from our transparency responsibilities. But not because people demand it or we feel it’s “useful” but because it’s one of our six core values:

• Honesty (you think, say and act with no dissonance)
• Joy (we’re mortals, let’s try and enjoy all this)
• Work-life balance (we’re more than just knowledge workers)
• Generosity (no egos, share first)
• Feminism (equal opportunities for everyone, for real, trans-inclusive, anti-racist)
• Transparency (no hidden agendas, no information black-market)

We’re not going to rush to any “solution” proposed here, I’m sorry @aschrijver , we will come up with our own solution and this will take time. If, in the meantime, people have to endure extreme uncertainty or intellectual pain as well as fundamental mistrust, I will accept it as part of the journey.

[aschrijver]

Thanks once more for your responses and most welcome to @hirunatan on this forum

@diacritica

We’re not going to rush to any “solution” proposed here, I’m sorry @aschrijver

No need to be. I did not mean to convey “Let’s start this now for Penpot”, but more in general as an exercise that I am happy to ponder in the future. I don’t know if 99.9999998% of adventures with VC turn out bad, as someone on HN mentioned. Can’t say if one is “irredeemable” once such a deal is done. To me it seems that any one deal or contract isn’t the same as the next one, and there’s an infinite amount of arrangements one could make. In other words, I don’t think one’s “soul is lost” necessarily. But given the track record with VC, it is more like a ‘risk calculation’ people have to make before contributing. With so many FOSS in need of help a “better safe than sorry” is a valid option to weigh.

I am really happy you took the time to shared all this information out here, and those culture / core values are great.

In any case. finding all the ways that get designers and developers and other stakeholders to closely collaborate in Free Software / FSDL is what in Social Coding Movement we’d like to think about