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VCs Open Wallets for Open Source - InternetNews.
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VCs Open Wallets for Open Source

Gluecode, a Los Angeles software firm delivering "managed open source" products, landed $5 million in financing today from Rustic Canyon Partners and Palomar Ventures.

The firm specializes in portal and server software based on open source Apache Jetspeed. Gluecode offers a free downloadable version of its software as well as two licensed offerings, one for businesses and another for original equipment manufacturers.

While the products are based on open source code, the company adds proprietary code and updates for the licensed versions, an approach it calls "managed open source."

"We bridge the gap between what open source provides for free and what customers require for it to be functionally competitive with closed source software," Gluecode founder and CEO Winston Damarillo said.

That doesn't mean he believes open source isn't good enough for the enterprise. The reliability and standards compliance are there, but open source developers aren't accountable for delivering specific features that customers might want and need, Damarillo said.

Gluecode sees that as an opportunity, said Matt Asay, director of Novell's Linux business office and founder of the Open Source Business Conference 2004, which runs today and tomorrow in San Francisco. "Gluecode provides a middleware layer for service-oriented architectures," Asay said. "They make a little money there, but the real money comes from the (intellectual property) they put on top, and the service they provide of letting people add their own code."

Damarillo said that his company's software remains cheaper to purchase, because customers in essence pay only for Gluecode's additions to the underlying free code. Gluecode was founded in 2000, and Damarillo says it has been profitable for 11 months, lining up customers like Nascar.com, prepaid phone card provider Debisys and Children's Hospital of Los Angeles.

Damarillo said that in today's market, startups can't compete against Microsoft and Oracle with a traditional software business model.

The $5 million investment, though relatively small, is a sign that VCs have begun to look with favor on open source companies.

Renee LaBran, Rustic Canyon partner, said Gluecode is the firm's first open source investment. Rustic Canyon has worked with the company since October 2003, and she's seen an increase in market chatter lately. "Just in the last few weeks leading up to closing, the amount of publicity coming out about open source has been remarkable," she said.

"There's obviously a fair amount of uncertainty around the business model," LaBran added. "There are not a lot of companies you can point to, other than Red Hat , that are large commercial successes."

She said Gluecode's business model was attractive "because it wasn't based solely on maintenance revenues." Because Gluecode adds proprietary code, it can charge more for its managed service.