Open-source VC investments: Time for payback
Venture capitalists have poured $3.2 billion into open-source companies since 1997, according to a new report from The 451 Group. It's about time we started delivering a return on that investment.
(Credit:
The 451 Group)
In some ways, of course, this $3.2 billion investment has already been repaid several times over. The Linux Foundation, for example, estimates that that the Linux kernel is worth $10.8 billion in free research and development, and a compelling argument has been made that open-source vendors have already saved customers $60 billion in license fees they'd normally be paying.
Indeed, if you expand beyond just vendor-initiated open source, you quickly get well beyond a few billion dollars in value.
All of this is great, but VCs aren't known for the prettiness of the bows they place on their Christmas presents. They're investing to make a return for themselves, not enterprise IT or developing economies. With few exceptions--including Red Hat, Suse, XenSource, Zimbra, and JBoss--the open-source ecosystem hasn't been fattening the coffers of VCs.
This must change.
I believe we're on the cusp of that change. Here's why:
Alfresco Sales vs. DJIA
(Credit: Matt Asay/CNET)For my company's last management meeting, I tracked our sales against the Dow Jones Industrial Average since November 2005, when we first started selling our product. As can be seen above, while Alfresco followed the DJIA for the first two years, in the past year, as the DJIA has zigged, we've zagged.
The recession has been very good for open-source Alfresco.
But it's not just us. I've talked with a range of open-source companies that I advise (including SugarCRM, JasperSoft, Volantis, and Openbravo), as well as many that I don't advise (Sun's MySQL, Pentaho, OpenX), and almost universally, every open-source company reports the same thing: economy down, sales up.
This sounds like a perfect storm brewing for impressive VC exits on open-source companies, once valuations catch up with the sales numbers open-source companies are reporting. I would imagine that by late 2009 or early 2010, we'll start to see the economy recover a bit, boosting valuations for mergers and acquisitions. Once that happens, I believe that we'll see VCs start to reap a bountiful harvest on their open-source investments.
Disclosure: I am an employee of Alfresco, an open-source content management and collaboration company.
Follow me on Twitter @mjasay.
Matt Asay brings a decade of in-the-trenches open-source business and legal experience to The Open Road, with an emphasis on emerging open-source business strategies and opportunities. Matt is vice president of business development at Alfresco, a company that develops open-source software for content management. He is a member of the CNET Blog Network and is not an employee of CNET. Disclosure. You can follow Matt on Twitter @mjasay. 
In other words, they are without meaning or value.
Even as a software developer who has started a few companies, my goal is to produce a good that makes money. I would not waste my time on producing a good product that does not put money in my bank account.
A lot of great open source projects come out of people contributing massive amounts free time, but the projects with momentum and adoption usually have money and a business model behind them. We've seen a lot of open source projects with great potential fizzle or join a commercial entity after a couple of years because in the end a side-project is a side-project. Engineers need to pay the bills.
surely you are kidding. If you're not, I'll give you the benefit of doubt by saying you are uninformed. Here are a few tech companies that have accepted venture capital: Microsoft, Oracle, Sun, Intel, Amazon, Genentech, Intuit, NetFlix, MySQL, BusinessObjects, Google, Yahoo, Cisco, Juniper Networks, CNET, Citrix, Tivoli, Macromedia, Adobe, Sybase...
Ok, you get the idea.
BTW, I think MySQL had a pretty decent rate of return for its VC investors *and* built some products of lasting value. It was a ten year journey and it was not about "making a quick buck." But by having the capital available to us to fund our expansion, we were able to grow to a company of more than 400 employees with a revenue run rate of around $100 million annually.
--Zack
The Alfresco revenue line seems to be a straight line with no correlation with the DJIA. For "economy down, sales up" to be correlated your revenue should have turned upward (a la a hockey stick curve) at/near the point where the DJIA crashed. I don't see this in your chart. All I see is a pretty good and consistent revenue growth curve.
Were all the companies you talked privately held? Not that I don't trust internal corporate numbers...but being a big fan of Reagon, the phrase "trust but verify" seems as appropriate for corporate entities in this day and age as it did to relations with the USSR back in the day.
How many execs of privately held companies ever talk in less than glowing terms about the future of their company..even when the future is not actually all that glowing? I think you'll understand it if everyone takes these sort of statements with a grain of salt. Red Hat's success as a publicly traded company may or may not be a bell weather for other open source businesses, but without more audited financial data, assuming so would seem to be irrational. Audited financial statements do sort of matter.
Though if one of these privately held companies wants to put out a publicly archived, independently audited financial history for the past year or two comparable to the sort of reporting publicly traded companies are required to do...that would be very impressive as a measure of how far these privately held companies are willing to go to make the case that their boats are being lifted by the economic downturn.
Speaking of which, is there publicly archived, audited financial information that puts the Alfresco sales numbers in your graph into context? I find the Alfresco press release at the end of last month concerning financial performance perplexing in that regard as Alfresco is still privately held. Is the Alfresco financial report mentioned in the press release independently audited and is the report publicly available? http://www.alfresco.com/media/releases/2009/03/fy08/
Or was it a report only sent to Alfresco's venture capital investors?
I have to wonder if that press release was more about engineering an environment receptive to Alfresco going public in 2009 than it is about disclosure and transparency.
http://venturebeat.com/2008/01/22/alfresco-gets-9m-for-web-20-content-management/
Does the quote from the Alfresco CEO about targeting 2009 for going public still stand?
-jef
- by bmzurek April 14, 2009 6:03 AM PDT
- Visualization of data in comparison can be a great deal of fun as we have seen with Matts comparison in his blog entry. Try comparing the sales of beer to the sales of iPods. How one interprets the data makes the exercise even more interesting as we have seen in the comments.
- Like this Reply to this comment
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(7 Comments)There seems to be a constant dial-tone in the open source space lately about how the downturn in the economy has been good for open source. In fact, Jay Batson, co-founder of Acquia was quoted as saying "The economic downturn will be good for most open source companies". Now how do you interpret this quote? Could it mean that economic recovery will be bad for open source, therefore, the open source companies are hoping for continued doom and gloom in the economy? I don't think so, at least I hope this isn't the case.
It's pretty simple, tough economy times means cut back in IT expenditures. Work still has to get done and so therefore, if a solution is good enough, is lower in cost over time and provides a strong ROI and works, whether open source or not, why would anyone not want to consider this as a viable solution to help keep the IT expenditures in line with their budgets?
This deep recession is clearly causing IT to change their behavior and we don't see this as a short term situation, we think the behavior is now permanently changed and that open source and SaaS are top of mind for consideration when it comes to an IT software purchase. Combine this with the fact that the next generation of IT professional (currently entering college in 2009) are growing up on open source and SaaS and will in the next 10 years become leaders in IT organizations and you probably will see open source software continue to gain momentum regardless of how one presents a comparative visualization. All the best.