Statement made on 25 Feb 2009

Dear All,

I represent the European Private Equity and Venture Capital Association and I would like to make a comment regarding Section 7.1 "Intellectual Property Protection" in the main document.

We all know that certain positions of IPR and software are highly disputed and most likely will remain so. Thus, in all fairness to the process, these different positions should be clearly noted/stated in order to prevent confusing the reader of the document. This concerns the following statements:

1) "...uniquely in within the patenting field, software is an intangible..." (last bullet on page 14)

2) "In software, companies need to share knowledge to innovate, leading to a high degree of collaboration...." (1st para page 15)

3) "...innovation is generally incremental, rather than through big breakthroughs..." (1st para page 15)

4) "The current IPR system is out of tune with this fast-moving, collaborative, incremental innovation model." (1st para page 15)

5) "The software industry has specific requirements in relation to IPR..." (5th para on page 15)

Venture capital investors invest in all software business models depending on the uniqueness of the business. Those investment cases where the uniqueness is based upon the technical innovativeness of the software rely on an IPR framework that is as close as possible to other strong economic regions in the world (i.e., US, Asia) in order to protect the intellectual and financial investment made. In our opinion, the statements enumerated above lead to a different economic and legal framework that exclude existing economic mechanisms (in particular venture capital investments), and should be marked as such.

Statement made on 27 Feb 2009

Please let me first share a few statistics* on the coverage of VC investments** into OSS*** companies over the last 5 years:


  1. US: 3.4% (232 OSS out of 6801 total; trend from 1.2% to 5.5% in 08)
  2. EU: 1.1% (39 OSS out of 3435 total; trend from 0.7% to 1.0% in 08)

You may change the statistic approach but it would not get you in the double digit range for OSS companies having received venture capital.


Second, some general remarks about the nature of VC investors: VCs want to invest in something unique which leverages their investments over time - almost always through entrepreneurial activities. The multitude of "unique things" to invest in and "entrepreneurial approaches" already show that there are many different strategies for making VC investments. There is one common denominator among all approaches: the unique thing VCs want to invest in. VCs are extremely keen that it stays unique and does not dissipate (because that's what VCs put their money in - it MAY also explain why the "classical" business model is prevailing). Taking into account that the VC process consists of these two components of "uniqueness" and "entrepreneurial activity", it also becomes clear that there is no single divide between classical and non-classical business models - rather, the success of a venture depends on a combination of different contributing business components.


What does that mean in practice? In the deal sourcing process VCs look for these unique things and, depending on their strategy, the search might be focused or very open (opportunistic).  An example: A provider of special information services has pitched to a VC who's investment strategy is general IT. The information service hasn't been seen before (the "unique thing"), the information can be produced cheaply (e.g., by the use of various OSS components), and the VC invests so that the service improves, attracts and serves more customers. The ultimate goal eventually is to be acquired by a much larger company who wasn't aware of such a service until the startup made it apparent through the ever-increasing user community. These strategies, however, have some immanent disadvantages (though the VCs take them into account because of the extraordinary expected gains). After some time, the entrepreneurial component battles with the dissipation effect (e.g., key people leaving to start a clone, etc.). One good example of this effect is Facebook and all its competitors. Subsequently, the stochastic leads to the winner-takes-all effect. A prominent example here is eBay - which also shows that the winner-takes-all effect may not last but that by that point the VC typically cashed out long before (as they are builders, not maintainers). On the way to the tip of the pyramid, smart VCs (who won't make it) typically sell to the expected "winner-takes-all" (e.g., Alando); investments made by the not-so-smart VC go bust.

Ironically enough, most of the heavily disputed patents evolve out of the aforementioned strategy in order to prevent too easy dissipation, unique or not, so unique business models with a less technical basis are patented to increase the chance becoming the winner-takes-all.

I'm stating the obvious when I say that internet communication increases the potential number of new business models enormously. But the days of easy exploitation of unique business models seem to be over. Innovative, intelligent (non-commodity) software that bears some uniqueness is necessary to offer added value in almost all "non-classical" business models in order to be unique enough to be attractive to VCs.


There are many other non-classical business models, e.g., those who provide services instead of proprietary software packages. The problem inherent in non-automated services is that they are not scalable (not to be confused with SaaS which has more of an architectural character). Thus, VCs typically avoid them, as their entrepreneurial activity cannot be leveraged.

Sometimes the uniqueness is a perceived trend, where VCs do not yet fully understand the economics behind it, but believe in the avalanche effect or hype. The sheer belief of all the participants in the hype moves enough money so that there will always be some winners (and many losers).


For all the non-classical business models holds, the entrepreneurial component in the VC process is more important than for classical business models (again, because the unique component does dissipate easily). Europe, with all its regulation and state interventions, is not the most fertile ground for growing entrepreneurs. If an OSS-based company struggles with an unjustified granted patent (in its opinion) then this is a cost issue (to find a different solution). No VC would bother with it because when in doubt, the entrepreneurial process drives the success (the "engine" behind it - the software might be replaceable; that also goes along with VCs conventional wisdom that execution and thus management is the key to success). A sufficiently large number of entrepreneurs to select from and the right environmental conditions without too many restrictions to conduct the business will determine whether a good idea flies or crawls. In other words, to increase the number of "gazelle"-type companies, the political imperative must be tuned towards an entrepreneurial society.

* DowJones VentureSource Database

**number of companies which received at least one VC invest in the particular year

***number of companies which refer in their self-portrayal to OSS