Pay to Play with the Mandrake 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 A quick survey of IPO Web sites feature mostly withdrawn offerings.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?

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