VC Funds Pour Into Commercial Open Source - InformationWeek

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VC Funds Pour Into Commercial Open Source

Investment in open source startups hits an all-time high, but questions remain over what's next.

Venture capital investment in open source companies reached a record $204 million in the first quarter of 2008, more than double the VC funding that went into open source companies during the same period a year ago, according to the 451 Group.

The money went toward 20 deals, of which 17 had a publicly disclosed value, resulting in an average deal size of $12 million. "The first quarter of 2008 was the most successful quarter in history in terms of open source vendors raising venture capital funding," writes 451 Group analyst Matthew Aslett. By comparison, 11 deals with disclosed value brought in $100 million in the first quarter of 2007.

The bulk of funding went to open source companies such as Automattic, Greenplum, SugarCRM, and Pentaho that have moved beyond early-stage funding. Last week, open source database vendor EnterpriseDB disclosed that it had secured $10 million in third round funding, with IBM joining existing investors Charles River Ventures, Fidelity Ventures, and Valhalla Partners in the round.

A mere $9 million, or 4.4% of first quarter VC open source funding, went to seed deals or series A deals, which Aslett interprets as a warning sign. "It's difficult to see where significant further funding will be raised in the coming months unless a few more startups emerge," he writes.

Among the newcomers that did get VC funding were RingSide Networks, maker of a social application server for business; Bluenog, a developer of application infrastructure software; and Engine Yard, which hosts and supports Ruby on Rails applications.

By many accounts, commercial open source companies are still trying to determine which business models work best in a market where the key assets -- the open source programs -- are generally available at no cost. Among the approaches they're employing: giving the software away and charging for professional support; generating revenue by embedding ads in the software; offering a basic version of their software for free while charging for a full-featured version; and combining open source components and proprietary software in a commercial package.

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