“I believe last year was actually the peak year of open source fundraising… This year is down slightly, but not down in such a dramatic way to indicate anything else but a good appetite for funding of open source,” Matrix Partners general manager David Skok told LinuxInsider in late 2007.

The raw data indicates open source funding fell more than slightly in 2007. Disclosed funding deals were down 40.7% to $323.87m for the full year, compared to $546.3m in 2006. While a reduction in funding had been expected after the huge levels seen in 2006, a dramatic reduction in funding during the fourth quarter meant that total funding for 2007 was also lower than the $334.82m raised in 2005.

Disclosed deals in the fourth quarter came in at just $50.2m, down 74.1% from $193.7m in the fourth quarter of 2006. There were just nine deals in total in the fourth quarter of 2007. Eight of those had a disclosed value, giving an average deal size of $6.3m. In comparison, there were a total of 17 deals in the fourth quarter of 2006, 14 of which had a disclosed value, giving average deal size of $13.8m.

There was also bad news when it comes to the proportion of funding invested in Seed and Series A deals, which represents the pipeline for further investment. Following two consecutive quarters of improvement, the percentage of early funding rounds fell to 37.5% by deal count and 26.7% by value.

But enough with the pretty pictures, what does it all mean?

In response to the LinuxInsider article noted above, Matt Asay argued that it would be wrong to conclude that VC funding for open source is drying up. Once again we return to Larry Augustin’s prediction that the value and number of deals would decrease this year and would be unlikely to increase until we see more evidence of successful exits.

On the subject of exit strategies, we previously noted that the big money for established open source vendors went on M&A activity rather than venture funding in the third quarter. While there were fewer M&A deals in the fourth quarter, and none of the big money deals (Citrix/XenSource, Yahoo/Zimbra) we saw in Q3, there has been a noticeable shift towards open source M&A activity as open source funding has fallen.

Meanwhile Gianugo Rabellino, CEO of Sourcesense previously questioned whether the VC industry might have “filled the checkerboard and… moved to something else”. While it is certainly true that many of the investment opportunities in the obvious application categories have been filled, there are still emerging opportunities in new markets.

Examples from the fourth quarter include Acquia raising $7m in Series A funding to support the commercialization of Drupal, while open source-based home appliance vendor Axentra raised $6m in October. Meanwhile, as Asay states “as for investments into the ‘easy’ enterprise categories, there’s still money there, too”. We are aware of one significant funding round for an established open source vendor that is set to be announced soon, and there are rumors of others to follow in the first quarter.

Clearly, open source funding hit a peak in 2006, and while funding levels are unlikely to increase substantially in 2008 there is no reason to believe that the rate of decline seen in 2007 will be repeated this year.

Incidentally, for those that like to follow the running total, open source funding to date now stands at $2.38bn.

Click here for the latest update on VC funding figures.