Open Source VC Funding Hits All-Time High

It’s a good time to be an open source startup looking for financing. According
to 451 Group analyst Matthew Aslett, open source vendors were able to raise
a record $203.75 million in the first quarter of 2008.

The 1Q08 figure is more than double the $100.40 million raised by open
source vendors during the first quarter of 2007. The previous record for open
source VC financing was set back in the fourth quarter of 2006
at $193.7 million.

Aslett said 20 open source deals took place during the first quarter of 2008, with an average size of nearly $12 million.

“Given the slowdown in funding in the second half of 2007, I don’t think anyone would have predicted the growth we saw in Q1,” Aslett told InternetNews.com. “But with the surge of activity in January it was quickly obvious that we were in for a good quarter.”

“There were a couple of deals that were held over from 2007, and it is also unusual to get so many big open source names all raising funding at the same time,” he added, pointing to financing won by companies including Greenplum, SugarCRM, Pentaho, Alfresco and Zenoss.

VCs interest in open source isn’t necessarily limited to particular product or service areas, Aslett said. However, he added that vendors combining the open source development model with SaaS delivery model have become doubly attractive to investors.

“Given the interest in Web 2.0, Rich Internet Applications and social networking, those are likely to be big areas in the future, and there is significant interest in companies like Appcelerator and Ringside Networks,” Aslett said. “Maximizing revenue from community use and Web visits is of significant interest to VCs, so it is no surprise to see LoopFuse attracting interest.”

Appcelerator is a developer of Rich Internet Application (RIA) tools, Ringside is a social media play and LoopFuse markets a sales and marketing automation service.

While Sun’s spectacular $1 billion
buyout of the open source MySQL database may have captured the attention of the open source community, Aslett said that deal won’t have an immediate effect on VC interest in open source.

“However, the $1 billion price tag is sure to encourage not only the VCs that have already invested in open source, but also those that have previously shied away from it,” he added.

Despite the encouraging news, Aslett does not expect the quarter’s record-setting levels of financing to continue in the short term — mainly because many of the well-known names in open source have already met their funding goals.

“There are still opportunities for existing vendors to raise more funds this year, but given that so many of the established vendors raised Series C and D funding in the quarter, I would not expect to see a repeat of the amount raised in Q1,” he said.

“While total funding in Q1 was at its highest level ever, the amount of funding invested in Seed and Series A rounds in the first quarter was at its lowest level ever, so the pipeline for future later-stage deals is not great.”