News: VCs Pour On Investments For Open-Source Leaders -- By VCs Pour On Investments For Open-Source Leaders
Makers of open-source software received more venture funding last quarter than ever, according to a new report, but the youngest open-source startups also set a record -- for their dearth of funding.
The 451 Group says open-source VC investments totaled $204 million in the first quarter, more than double the year-earlier figure and above the previous record haul of $194 million, set in the fourth quarter of 2006.
But companies getting first-round or initial funding garnered a mere $9 million, less than 5% of the total and a record low, says the research firm.
"It is a cyclical market," said Matthew Aslett, a 451 Group analyst.
His firm says 20 funding deals were completed in the quarter, up from 13 a year earlier and a record high. But only three of those deals were for the earliest-stage startups.
Aslett says the 451 Group expects open-source VC funding this year to exceed last year's $324 million, but not the $546 million raised in 2006.
Open-source software -- unlike traditional commercial software -- is built cooperatively and is freely available for anyone to use, improve and pass on to others. Companies, though, still can make money on the software by selling related services and support.
The new funding report comes at a time of promise for the field. Several open-source companies have sold for hefty price tags, providing nice returns for venture investors.
Sun Microsystems (NasdaqGS: JAVA - News ) in February bought open-source database company MySQL for $1 billion, a record amount for an open-source acquisition. And last year, Citrix Systems (NasdaqGS: CTXS - News ) spent $500 million on open-source virtualization company XenSource.
Aslett says open-source companies like MySQL were able to find big market opportunities earlier this decade. It's now getting harder to find such openings, he says.
"Some of the early success in open source was in disrupting mature markets," Aslett said. "There are a handful of new vendors, but not as many as there were. It's going to take a while before we start to see the next generation emerge."
One issue for open-source vendors is that the software is maturing, says Yefim Natis, an analyst at research firm Gartner. That means corporate customers are using it more in tandem with other software, which can make it harder for customers to see open source's immediate cost savings.
But Peter Fenton , a partner at venture firm Benchmark Capital, sees a bright future for open-source companies. He says the trend toward open-source software is irreversible and young companies will tend to employ open-source principles. Benchmark has funded open-source firms MySQL, Pentaho, Qlusters and Linux leader Red HatRHT.
"It's a fundamental shift," Fenton said. "We're not going to go back."
Open-source software's lower costs make it attractive in a downturn, he says.
"I don't think the macroeconomic issues are negatively affecting open source," Fenton said.
Aslett says open-source companies will look to create their own markets instead of just responding to traditional software plays.
"There is clearly a need for more startups to emerge if the investing is going to continue," Aslett said.
He points to new open-source startups such as Ringside Networks, which helps clients tap into the growth in social networking sites such as Facebook . Then there's LoopFuse, whose software helps companies track the success of marketing campaigns, among other things.
For now, though, it's the more established open-source outfits that are getting the money.
Greenplum, an open-source provider of data-warehousing software , in January announced a $27million funding round, bringing its total investments to more than $60 million.
The company's growth -- and even the growth of its key rivals -- helped it close that round, says Greenplum Chief Executive Bill Cook . But he says things could get tougher as the economy and markets stumble.
"It's turbulent times," Cook said. "Investors are probably more cautious."
