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.
Over the past year, the open-source business community has collectively donned a hair shirt over stumbles in venture funding, especially when venture funding in open-source companies took an apparent 12 percent slide in the third quarter of 2008.
However, while the second half of 2008 saw declines in open source-related venture funding, overall, funding levels were 35.5 percent higher than in 2007, according to The 451 Group.
Open Source Venture Funding 2008
(Credit: The 451 Group)This is pretty amazing, when you consider that overall U.S. venture capital investments plummeted 8 percent over 2007 funding levels, as TechCrunch reports.
U.S. Venture Funding 2008
(Credit: PricewaterhouseCoopers)And if you treat Washington state as a proxy for Microsoft-related funding (a poor proxy, to be sure, but...), well, TechFlash reports that venture funding there dropped 82 percent from 2007 levels.
True, the prospect of an exit for an open-source company is no better right now than for proprietary software companies, which will likely drag open-source investment declines into parity with their proprietary peers.
Still, for now, open source looks more and more like a safe haven in this battered economy, whether you're spending IT dollars or investing VC dollars.
The 451 Group's Matt Aslett believes that a perfect storm is brewing for serious mergers and acquisitions around open source in 2009. Having a (literally) vested interest in the matter, I'd like to see his prophecy come true.
Aslett provides a long list of reasons to suppose that 2009 is the year of the open-source buyout, among them:
- Proprietary vendors see open source as a means of entering adjacent markets.
- Proprietary vendors see open source as a means of expanding reach and a potential source of upsell opportunities.
I've written on this second reason before, arguing that open source provides a hugely efficient way to discover new customers. Call it the Poor Man's Oracle Strategy: instead of acquiring new customer territory through multibillion-dollar acquisitions, you do it for free through open-source downloads, and then upsell those prospects.
It's clear that there is much value that open source can bring proprietary vendors as a business strategy. But I find Aslett's reasons for open-source vendors selling to proprietary vendors much more intriguing, among them:
- Commercial-licensing strategies provide the opportunity for growth but are relatively expensive to develop.
- As proprietary vendors will be looking to open source to extend their reach into new potential customers, many open-source vendors will be looking to proprietary technology as a means of converting community interest into revenue.
In other words, while I've tended to focus on all the benefit the proprietary world can glean from open source, there's clearly also a lot of value that open-source vendors will find in the arms of proprietary vendors. There's a symbiosis forming in the software industry right now, one that marries the benefits of open source (for customers) and proprietary software (for vendors).
This may not be the year we see this symbiosis consummated through acquisitions, but it's definitely a trend and will play itself out over the next few years.
My question: Will Red Hat and Sun Microsystems get to the open-source start-ups before the proprietary vendors do? On the face of the evidence so far, the answer is no. Zimbra went to Yahoo, XenSource went to Citrix, etc.
Relatively few open-source companies have found themselves merged into the big open-source vendors, a fulfillment of Tim O'Reilly's suggestion that "virtually every open-source company (including Red Hat) will eventually be acquired by a big proprietary software company."
2009 should prove interesting for the software world. The only thing I can predict with certainty is a distinct lack of stasis. That, as well as the likelihood that Microsoft will acquire its first open-source company in 2009, probably Zend or another complementary technology vendor. The times, they are a' changin'.
Matt Aslett of The 451 Group and I met in London this morning, and discussed a range of issues. One thing that came up, which Aslett discusses on his blog, was the furor over CPAL, AGPL, and other open-source licensing designed for the Internet. I heavily contributed to that furor but, looking back, it would seem that the concerns were almost completely overblown.
Mea culpa.
A year and a half later, very few open-source projects use the CPAL license, which introduced a specific form of graphical attribution for open-source projects. There was sound around it, and there was fury, but the reality is the world didn't end when the OSI blessed CPAL, neither with a bang nor with a whimper. It simply ignored the licenses, even though a few prominent open-source companies like Zimbra still use CPAL licensing.
Affero General Public License (AGPL)? Fabrizio Capobianco cheered its progress recently, and I continue to believe it has a valuable role to fill, but the reality is that it powers 181 open-source projects out of more than 180,000, according to Palamida, and most of the projects that have adopted it are no-name projects.
Despite our efforts to tweak open-source licensing to fit the realities of Web-based "distribution" of software, the world still revolves around L/GPL, BSD/Apache, and MPL. I doubt this is going to change anytime soon.
Why? Because customers don't care about this issue. Just as they don't care about whether 100 percent of their code is open source, they also don't care about vendors protecting their code from other vendors. They just want software that works. If freedom comes with that, all the better, but they don't fetish licenses the way open-source vendors and communities do.
License proliferation, badgeware, and all the other "big" open-source licensing debates have turned out to be somewhat hollow in retrospect. Customers are voting for open-source software, not open-source licenses. There is a difference.
The 451 Group's latest venture capital report shows open source funding taking a 12-percent slide in Q3 2008.
Open Source Venture Funding - Q3 2008
(Credit: The 451 Group)The 451 Group's Matt Aslett offers several explanations, but here's one that he missed:
Perhaps the data was faulty.
The report leaves out a range of companies that are open source but don't appear to have made it into The 451 Group's calculations. Some of these investments simply haven't been announced yet (I know of several), while others (like CloudEra) have, but don't seem to have made it into the data.
It's hard to tell since the report doesn't list the deals, but it does mention that there were only two Seed or Series A-stage deals. This is simply not true, but it's not really The 451 Group's fault: it was simply relying on publicly available data.
I have no doubt that open-source funding is down, or will be, but until we have an accurate data set, it's hard to draw too many conclusions as to how deep it will be and for how long.
It's not surprising to see The 451 Group's findings that the small-to-medium-sized business market doesn't promise untold riches to open-source vendors. The SMB market is difficult to crack regardless of one's licensing and marketing approach. Several of open source's primary benefits - and particularly the ability to modify code to suit one's requirements - fit large companies well and SMBs almost not at all.
SAP is trying to penetrate the market with low-cost SaaS. Red Hat has knitted together open-source solutions in RHX to pave the way to open source applications for SMBs. But the reigning king of SMB - Microsoft - continues to dominate with low-cost, well-integrated, and easy to use software that a vast array of resellers knows how to implement.
Some key findings from the report, which surveyed 50+ open-source vendors:
... Read moreChris Keene reports from The 451 Group's conference on Raven Zachary's presentation. The net? Open-source projects may not be able to scale well because of some of the nuances attendant upon their success:
The hallmark of a successful open source project is that the lead contributors hit the trade show circuit while big players like IBM cherry pick key project contributors to bolster their own offerings.
The more successful a project, the more money is available to its contributors that takes them in different directions, making establishing a single commercial entity around it more difficult. While this could be a good thing for the project as a community institution, it's bad for any investors who may want to build a business around it.
I'm hoping that Raven will share the slides from his presentation as I'd love to dig into this more....
Matthew Aslett of The 451 Group quotes from Viviane Reding, European commissioner for information and society, on Europe's need to capitalize on its open-source assets:
As online software, or software as a service, replaces traditional packaged software, Europe has advantages that give it a "window of opportunity to develop a leadership position in software." These include a large home base of demand to build on, high levels of qualified talent, and the fact that 70% of open source developers worldwide are of European origin. However, "the window is small and it will soon be closed if we don't act," since 90% of the economic benefits of open source are being won by US companies.
Despite this, as Matthew goes on to say, Europe is a bit conflicted on open source. Its public policy statements tend to be affirmative of open source, but its purchasing policies tend to be neutral. I think it's just a matter of time before the rhetoric gives way to purchasing decisions.
... Read moreI'm very happy to have heard from Matthew Aslett that he's moving on from Computer Business Review. Not that CBR is a bad publication - quite the opposite. Rather, I'm excited for Matthew and for The 451 Group, as I love the quality of the open-source work that both produce. Matthew is consistently one of the out-performers in the crop of open-source business bloggers.
From Matthew's announcement:
I just wanted to let you all know that today is my last day at CBR/ComputerWire.
... Read more
Sourcefire just announced its acquisition of ClamAV. ClamAV is by most estimates the most commonly used open-source antivirus product on this planet, with over 10 million downloads (and a significant percentage). Great, great move by Sourcefire.
There's just no end in sight of this open-source M&A market, friends, and this time it was one open-source project buying another. I like that. Keep it in the family.
Nick Selby over at The 451 Group has a great analysis. He writes:
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