About a week ago I was pondering the issue of VC overhang, and how a few interesting companies have been able to do without venture capital and still find ways to partner and/or exit. I attibuted more of the present course to deal saavy entrpreneurs than anything else, and now I am beginning to rethink that notion a bit more.

There was a recent Slashdot post that shed some additional light on the issue, a view that I hadn’t thought a lot about, but made an awful lot of sense (see How Open Source Drives Down Startup Costs).

Open source is great - it is what makes this weblog work, from top to bottom. The publishing platform, the database it sits on top of, and even the server it runs on, are all open source products. Now this is not by any means a revenue generator for me; I don’t even think there is a decent business model for blogging (which is likely why so many people try to game the system). But it brings up an interesting point - none of what you are reading would have been possible without open source (mostly because I am lazy, and would never have taken to posting my ideas unless it was easy to do).

So with that in mind, I took a step back, and looked at my own project list (meaning the things I am actually doing to feed myself and the dog).

I have Spamroll.com, which relies on the same platform, uses advertising to cover direct costs (again, blogging is not going to make anyone any real money). I have three other blogs I am working on with partners, but none based on advertising (which, again, is a good thing), but all use similar softwares. There is a niche e-commerce concept in the progress - it will run on LAMP (Linux, Apache, MySQL, and PHP). Outside of pure tech, I am helping someone with some business planning and financial analysis; the majority of that work is done in OpenOffice, as I have moved away from Windows and my Apple Powerbook’s screen is just too small for a six hour crank session on a spreadsheet. Same goes for the business plan, even though it will get moved over to the Mac for final formatting and printing. Even the ideas I am bouncing around (you know, the ones that never seem to get off the napkin) - they all wind up related to open source.

Why all this OS? Well, cost. I can get a lot further along, a lot quicker, and without writing a dozen checks, if I first look at what is out there, freely available to build services off of.

Now, none of my ideas are anywhere near the scope and magnitude of say, a Google (who I think keeps things a little TOO proprietary for their own good), but neither are a lot of other people’s. In fact, Yahoo! News noted this pretty clearly in Next Big Tech Ideas May Be Small Ones. I have no problem with building a few service widgets that make folks lives a little easier, and put a little money in my pocket in the meantime. And open source is built on a foundation of taking something, and being able to make it better. There are a lot of services on the internet (and otherwise), that could use this type of “improvement” philosophy.

Nowadays, a lot of entrepreneurs seem to think so too, and I am willing to bet the first place they turn won’t be for venture capital. As for whether that will result in even more overhang, well you decide.

I have often wondered what would happen when the two mentalities collided. On one hand you have the VCs, with rolodexes a mile deep, including direct lines to the best bankers. Any of the Sand Hill Road crowd will do. On the other, you have the scrappy entrepreneurial types, very creative and driven, and often with a little cashola of their own, garnered from previous deals. Guys like Mark Fletcher, founder of Bloglines, come to mind. Then you throw Google’s rejection of the status quo into the mix, with their dutch auction IPO, and you are left with an interesting dynamic.

Is the venture funded deal becoming a thing of the past? I wonder.

The Red Herring recently reported (via Thomson Venture Economics), that VC overhang presently stands at roughly 53.6 billion (see $53.6-billion overhang). For those new to this term, overhang is the amount of money venture capitalists have in commitments from limited partners, which is yet to be invested. That is a pretty big number. It means there is too much money chasing too few deals. But are there really too few deals?

Bloglines, a leading RSS aggregator recently purchased by AskJeeves (which was then subsequently purchased by Barry Diller’s InterActive) is a classic example of a great product built by a serial entrepreneur, without venture funding. Then, a few weeks later Topix, another bootstrapped company, gains a huge foothold in news delivery with the sale of a controlling interest to the CareerBuilder triumvirate of Gannett, Knight Ridder and Tribune Co.

Two interesting companies, with still gelling business models, get off the ground and running with no VC funding, and then find an exit. With many large tech companies looking far and wide for competitive advantages, and increasingly deal-saavy serial entrepreneurs starting up company after company, where does that leave VCs?

Venture capital pools will always have a place in the system, but they may not always steer it like they used to. The overhang will eventually shrink, either by raising less money going forward, or returning some commitment letters. Many VCs will also shift their investment philosophies, chasing more or less deals at particular stages, and/or migrate into leveraged buyouts, turnaround situations, and transactions outside their core industries.

Nonetheless, I believe there is going to be ample room for more Topix style startups down the road, and many of them will be built in the grand fashion of tech lore, in someone’s garage.