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Open Source Weblog
Larry Augustin on the state of open source funding
May 08, 2007
The amount of open source funding can go down as well as up.
Serial open source investor and all-round open source guru Larry Augustin has taken a look at the recent state of open source investments, using the data I collected earlier this year. As you can see from this chart (PDF) the general trend is up, with more money flowing into more open source vendors.
However, Augustin expects the number of investments per quarter to stay flat or decline between now and the end of next year.
I previously predicted that the larger deals would be weighted towards the end of 2007 or even into 2008 due to the significant amount raised in 2006.
In his blog posting, Augustin suggests the hangover could last even longer, and explains his reasons for coming to this conclusion:
1. “The venture business is a portfolio business”
“Once a venture firm has a few Open Source investments they’re not as likely to do another one lest they risk over-weighting their portfolio too much to one sector,” he writes. “A lot of firms already have their handful of open source deals. This creates an interesting dilemma for entrepreneurs. It becomes more difficult to get funding from the experienced Open Source investors because their portfolios already have several Open Source investments.”
2. “The ability to make a large return on an investment in an open source company is still largely unproven”
"Yes, we have a few success stories: Red Hat, JBoss, TrollTech, and SourceFire. But that’s a pretty thin list,” he writes. “Based on the maturity of the existing private Open Source companies, I don’t think we’re likely to see another large proof point until 2008, and multiple proof points until 2009.”
3. We are looking at the wrong companies
“The companies tracked in Matthew’s data are those that identify themselves as primarily Open Source. Where we will see an increase is in the number of companies using Open Source as an element of their strategy. These companies won’t identify themselves as Open Source companies, but they will use a number of Open Source elements in their strategy.”
As Augustin notes, this is where things start to get a bit tricky. As the use of open source and the number of business models increases it becomes increasingly difficult to define whether an investment has been made in open source software itself (for an explanation of which companies I included and why, see here).
“In many ways that’s not bad. It means Open Source may be becoming more common. Rather than being an unusual strategy, it’s becoming something that virtually every software company will adopt at some level,” he concludes.
Comments
Matt, this is a great piece of work. This type of chart is something that could become referenced in a number of places. Have you considered extending your data back to June of 1999? I would suggest putting significant events on the timeline as well. For example, I would chart Red Hat's IPO in August of 1999 and mark VA Linux's IPO in December of 1999. There are several other significant events that may have strongly influenced the flow of VC deals.
If you don't want to pursue this, can I use your data to create a financial history of open source? Basically, I'm thinking of using your timeline with other financial events attached to it.
That is a great suggestion - I'll look into it when I have time.
To be clear, the chart is Larry Augustin's but the data is mine. I am happy to share whatever data you need, but as for the chart, I guess you'd have to ask Larry if you can build on that.
I do actually have data stretching back to Red Hat's Series A funding in August 1997, but I don't believe I can claim it to be complete so I haven't done anything with that. I'd be happy to share that with anyone if they wanted it.
Matt, thanks for the offer of making your data available to the public. If you have a moment, can you send the data to coda@pageonepr.com ? I'll reference you in any charts I make from it. I'm interested in this angle since I was actively involved with the first investment wave when the open source Linux company I was working at eventually went on to raise $95M. At the time, I was tracking events that influenced open source financial activity pretty closely.
There's only been a few blips of excitement since the heady days of Linux. The JBoss acquisition was exciting. The initial SourceFire news events were also interesting. I also watched the Gluecode aquisition by IBM and Oracle's acquisition of Sleepycat closely.
There are a lot of rumors about what MySQL may do in the public markets in 2008. It'll be interesting to see what impact this will have on financial activity in the open source space.
If anyone else has opinions on significant events to plot on a "Money and Open Source" historical timeline, kick me an email. If I produce any charts or reports, I'll make them freely available to the general public.
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