Can Mandrake raise money by being your team?

The dust is still settling over at MandrakeSoft. The company
dumped its CEO, dismissed rumors of financial troubles, assured
NewsForge’s Robin Miller that the company was “on course to break even within a few
months” and continuing to plan for a future IPO. That may sound like
brave talk and little else, but co-founder Jacques Le Marois may have little
choice but to try, and MandrakeSoft may actually have a shot at a
successful IPO if it does what Linux companies do routinely — break the rules.This is a tough time to go public, especially for a Linux company.
The larger tech market remains in the tank, as firms like Cognos, Lucent,
Sun and Texas Instruments continue to warn the public to expect ugly
surprises in the near future. The IPO market has been dismal. A quick survey of
IPO Web sites feature mostly withdrawn
offerings. Linux businesses continue to look particularly
unpromising. Some of the most recent news involved William Kaiser,
a venture capitalist with Greylock and a director at Red Hat. Kaiser
made news as one of the biggest casualties of the dot-com implosion.
Thanks to the crash of Red Hat’s stock price,
Kaiser went over the falls this past year, suffering a paper loss of
$2.49 billion. That’s not the kind of market news that attracts traditional
investors.

Yet the pressure has to be building to find some way to float
MandrakeSoft. During the height of Open Source fever, the VC arms of European
financial giants like AXA, ABN Amro and Vivendi wrote solid checks to underwrite
the company, in the expectation that an IPO was imminent. Those
investments must be rewarded, somehow.

However, it isn’t going to be easy. The company may have tripled
its sales between 1999 and 2000, becoming the most popular desktop
distribution. It’s true that Linux-Mandrake 8.0 has received solid reviews at Ziff
Davis and elsewhere, and Le Marois said he expects to see “hundreds of thousands” of
downloads of the distro during coming weeks. None of this means the company is
likely to make money, however. A Linux supporter named Mark Zaugg wrote to one Web site to dismiss reports of financial troubles at MandrakeSoft,
and proclaim, “I’m voting with my dollars … One copy of 8.0 sold and
will be VERY well used, indeed. I will continue my policy of charging
$0.01 per install to help recoup my costs. With any luck I will make my
money back…” While Le Marois insists the company can and has made money
retailing its distro, its financial prospects continue to be severely limited by
such enthusiastic proponents.

That doesn’t necessarily mean that a Linux company can’t have a
successful stock offering. In fact, smaller U.S. Linux companies don’t need
lots of lawyers, or even a terribly convincing bottom line to offer
stock. They simply need a community that rabidly supports them, pure financial
considerations aside. The best fund-raising vehicle for such companies
looking to raise $3 million to $5 million is called a Regulation A offering.

In the caffeine-crazed Pacific Northwest, one of the most successful
Reg A filings in recent memory was for Tully’s Coffee, a cult-like
business that sold common stock back in 1997 at $2.25 a share. Unlike a
traditional IPO, Regulation A allows companies to promote their stock offering to
their enthusiasts, through radio, direct mail, or other devices. Tully’s
employees wore buttons that said, “Ask me about our stock,” and the company
promoted the offering on its coffee cups. Reg A offering tend to work best for
companies with an affinity group — a set of customers who are so loyal they’ll
buy stock as well as product, essentially underwriting their financial
investment by their continued patronage. Regulation A is tailor made for the Linux
community. For those companies whose evangelists vastly outnumber their
paying customers, this might be a reasonable way to raise needed cash.

The downside of Reg A offerings is that
companies can only raise $5 million at a time — not a problem for
really small firms, but a big limitation for a firm with global ambitions and
anxious corporate investors. Even Tully’s effectively ran out of cash
earlier this year, and had to borrow $3 million in emergency funds from its
board of directors while it sought an overseas partner.

In the case of MandrakeSoft, the company is certain to need the kind
of big money that comes out of a traditional IPO. But does the
company really need to prove itself as an investment vehicle in order to sell
its stock? Can companies go public in spite of marginal financial
prospects? Certainly, if those investors constitute a massive affinity
group, a straight IPO can work if investors care so much about the company
that financial wins or losses aren’t important compared to other
considerations.

Two of the best examples of going public in spite of the bottom line
come out of professional sports. The Green Bay Packers of the NFL are
in the smallest marketplace of any “major league” franchise. By normal
measures, the team should have moved to someplace like Los Angeles decades ago.
But when the team went “public,” it sold shares to local sports
enthusiasts. Shareholders do not share in team earnings or receive dividends, and
today the corporation is explicitly structured as a non-profit, but by
offering “shares,” fans have managed to keep the team in their small city
overlooking Lake Michigan. The most recent sale of “stock” in 1997,
generated $24 million in cash and expanded its “investor” base to 110,000
stockholders.

Likewise, when the Boston Celtics of the NBA went partially public back in
1986, most investors understood that it was a device to make sure the team
never left Boston. Although the Celtics LP trades on the New York Stock
Exchange, it was never supposed to be a major revenue opportunity, and so far it
hasn’t been. Most sports teams regularly lose money. But investor
interest remains high among fans, who worry about a different bottom line than just the financial standings. Other sports teams with a passionate fan base have looked at the are considering looking at similar offerings.

Can the Linux community support a fan-based IPO? Will Linux-Mandrake
fans become MandrakeSoft investors? If loyalty counts for anything,
perhaps. A recent poll by the Linux fanatic site Freezer
Burn ranked Mandrake far, far ahead of SuSE or Red Hat, or
any other Linux company in terms of the enthusiasm and support of its user
base. The poll was unscientific, but the numbers were overwhelming. The
support may well be there. But the key to a such an IPO requires that
everyone understand that such investments may not be competitive, in terms of
their rate of return, and that profits may be thin at best. During the last
round of Linux IPOs, people confused support for Linux-as-an-idea with
Linux-as-a-business. The result has been lawsuits and two years of bad press.

Can you support MandrakeSoft the way some people support the Boston
Red Sox or the Manchester United soccer
club? If MandrakeSoft limped along as a business but continued to be an
important source of Linux innovation, would you support it anyway?