Dana Blankenhorn has speculated that open source remains stuck in a niche based on the fact that GroundWork Open Source has raised only $5m in series D funding.

I haven’t spoken to GroundWork in a while (although Jay has) so I don’t have any particular insight into its financial performance, but I would make the following observations:

1/ I would be more concerned if GroundWork was raising tens of millions in series D funding.

2/ I don’t know if anyone’s noticed but we are in the middle of an economic crisis.

With regards to the first point, in our CAOS 11 report, Open to Investment, we noted that the biggest benefits of open source software, according to investors are: lower development costs (78.7% of respondents), followed by lower distribution costs (60.7%), reduced sales cycle (34.4%), and better-quality software (32.8%). Given that, we should expect to see open source-related vendors raising less funding than proprietary counterparts (particularly those like GroundWork that are partially based on community developed software).

For example, figures from ChubbyBrain indicate that $6.1bn in venture capital funding was invested in 680 deals in Q3, giving an average deal size of just under $9m. Our figures for open source-related vendors showed an average deal size of $7.7m in Q3.

With this in mind, I would actually be concerned if we saw a company like GroundWork – which had already raised $24m in its previous rounds – raising a significant later-stage round. That, to me, would be a warning sign that something was not necessarily working.

Bear in mind that the more money a company raises the more the shareholding of its founders and executives is diluted, and any company looking to raise a large sum in the current climate is likely to have to give up a lot in return. Sometimes a significant late stage deal just smacks of a last throw of the dice.

Consider, for example, Virtual Iron, which raised a $13m series D round in November 2007 followed by a $20m in equity capital in January 2008. Unfortunately the company only generated revenue of $3.4m in 2008 and was acquired by Oracle in May 2009. We don’t know how much Oracle paid for Virtual Iron, but we assume its investors were not retiring on multiples of its $64.5m total funding.

With regards to the second point, the reduction in average deal sizes for VC deals tracked by CAOS this year has been entirely predictable. Venture funding is available for both early and later stage deals if the business opportunities are right, but we have seen a number of vendors being acquired for cents on the dollar where we would have expected them to be in a position to raise more funding in more favourable economic conditions.

Additionally, we’ve seen a number of examples of modest later stage deals being done by vendors to see them through the current economic malaise with a view to considering their options once the economic situation calms down.

Which is not to say that vendors raising small later-stage rounds right now are guaranteed success, or those raising larger later-stage rounds are throwing good money after bad – but sometimes there is more (or less) to these deals than meets the eye.