Open Source is Wide Open to Investment

By Irina Guseva (@irina_guseva) Apr 22, 2009

The 451 Group's Commercial Adoption of Open Source (CAOS) Research Service has recently released a report entitled "Open to Investment." Mainly, it looks at the growing open source market and OS venture funding trends since 1997.

The premise is that the market is as viable as the amount of funding it gets from private investors. The outlook is optimistic, almost fairy tale-like. But not without a mention of dark forces.

Open Source and Venture Funding: 1997 – 2008

Authored by 451’s Enterprise Software Analyst Matt Aslett, the report contains analysis of the history of venture funding in open source from 1997 and 2008.

The data is based on The 451 Group’s database of more than 370 funding deals, starting with the investment in Cygnus Systems by Greylock Partners and August Capital.

This database was built on top of a list of 150 deals made between 2000 and 2005, originally published by Matt Asay of Alfresco Software and Robin Vasan of Mayfield Fund in February 2006.

Part of the data that went in to the report came from a survey of investors from 54 private investment firms.

Research Findings and Implications for the OS Market

Some of the most interesting findings of this study include:

The first VC investment in an open source vendor took place in 1997. Since then, US$ 3.2B has been raised by 163 open source vendors.

cumulative investment os.JPG
Source: The 451 Group

The adoption of open source and further investment is likely to increase in the next two years. Current economic conditions are favorable for open source adoption, as we've said before.

A 100% open source software-licensing strategy does not meet the demands of private investors.

The 451 Group also highlights some of the implications, as they see them:

Open source will continue to attract investors, but overall venture funding in 2009 is likely to decline. However, the long-term prospects remain encouraging.
Investors seem to be attracted by lower development and distribution costs, reduced sales cycles and better-quality software.
Some investors see open source vendors as risky investment options due to difficulty generating revenue and lack of intellectual property controls, as well as of barriers to direct competition.
It is likely that OS vendors will become acquisition targets for proprietary vendors. If it’s not an acquisition per se, we see at least the “open source embracing trend.” Hey, even Microsoft is on that xoxo path: with smooches, hugs and looking in the eyes.

The full report is available here. It is expected to become an annual repeatable service from The 451 Group. Check out the 451 CAOS Theory blog for more frequent updates.

Open Source Tales

As we’ve discussed before; pure, non-hybrid open source may not be a viable business model. Quite a few vendors have figured this out, and so far, it’s been pretty much a fairy tale: open source companies need funding, and private investors see them as attractive targets.

With open source code already being worth about US$ 387B, we suspect the funding trend will continue.

However, merely being open source vendor doesn’t guarantee you an entry pass to the VC funding wonderland. What attracts investors is the strategies open source vendors employ to generate revenue. And it can be magical, when those interests align.

On the content management front, fairy tales can happen as well. Just look at eZ Systems. It took eight years and more than $US 10 million of investments, but the company is now profitable.