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Open Source Funds Dried Up?

The flow of money for open source and Linux-related vendors slowed up a bit in the third quarter compared to last year's figures, according to The 451 Group analyst Matthew Aslett. But the news isn't all bad.

Venture capital firms paid $77.8 million in the third quarter, which is 42 percent less than the $133 million they doled out during the same time last year. Ten deals this quarter averaged $7.8 million.

"It's no surprise to see that the level of funding is down on last year, given that 2006 was a record year for open source investment and the third quarter of 2006 was particularly strong," Aslett told InternetNews.com.

During the first nine months of 2007, investors paid $266.7 million to Linux and open source vendors, a decline of $72.9 million from the record $339.6 million total for the same period in 2006.

The 451 Group's funding figures are based on public announcements from vendors that the firm tracks, so the report does not include figures from angel investments or bootstrapped startups. Aslett said it's difficult to accurately measuring these categories given that so many vendors at that level are in stealth mode.

He added that the increasing percentage of seed and Series A funding deals during the past two quarters indicates that a new breed of open source vendors are emerging, so we may see increased VC activity further down the line.

The other key trend in open source financing, according to Aslett, is that many of the established open source software vendors raised significant amounts last year and are now looking toward M&A and IPO opportunities, rather than additional VC funding.

"The VC firms that have invested in open source like the model because it lowers barriers to entry and reduces development costs," Aslett said. "They still need to see a return on their investment, however."

The returns are there to be had for some, which the recent acquisitions of XenSource and Zimbra show. They will go some way to encouraging VCs that returns are there to be had, Aslett said.

Open source virtualization startup XenSource was acquired by Citrix for $500 million in mid August. And Yahoo a month later acquired open source e-mail collaboration vendor Zimbra for $350 million.

Overall merger and acquisition activity in the open source space was up in third quarter, with 13 reported deals involving open source software vendors. In stark contrast, The 451 Group only noted six mergers or acquisitions during the second quarter of 2007, while in the first quarter, there were only three.

"What I think is clear is that VCs are not going to invest simply because a company's product is open source," Aslett said. "Open source startups need to be focusing on getting the fundamentals right, just like any other business."