Entries Tagged 'Funding' ↓

The future of commercial open source business strategies

The reason we are confident that the comparative decline in the use of the GNU GPL family of licenses and the increasing significance of complementary vendors in relation to funding for open source software-related vendors will continue is due to the analysis of our database of more than 400 open source software-related vendors, past and present.

We previously used the database to analyze the engagement of vendors with open source projects for our Control and Community report, plotting the strategies used by the vendors against the year in which they first began to engage with open source projects to get an approximate view of open source-related strategy changes over time.

For example, we found that the engagement of vendors with projects that used strong copyleft licenses peaked in 2006, while the engagement of vendors with projects using non-copyleft licenses had been rising steadily since 2002.

Analysis of our updated database shows that the the number of new vendors engaging with open source projects in each year has risen steadily in recent years, from 26 in 2008 to 44 in 2011. However, as noted last week, we have also seen a shift towards ‘complementary vendors’ – those that are dependent on open source software to build their products and services, even though those products and services may not themselves be open source.

2010 was the first year in which we saw more complementary vendors engage with open source projects than open source specialist, and that trend accelerated in 2011.

As previously explained, complementary vendors were responsible for over 30% of open source software-related funding raised in 2011, and we should expect that proportion to remain high given that over 57% of the vendors engaging with open source in 2011 were complementary vendors.

We have also seen that complementary vendors are more likely to engage with projects with non-copyleft licenses (38% of complementary vendors have engaged with projects with non-copyleft licenses, compared to 24% that have engaged with projects with strong copyleft licenses).

If we look at all 400+ vendors in our database in terms of open source software license preference, the trend towards new vendors engaging with non-copyleft licenses is clear.

There has been a strong shift from vendors towards non-copyleft licenses in recent years, accelerated in 2011 by the likes of Apache Hadoop and OpenStack in particular. This does not mean that the number of projects using strong copyleft licensing has decreased (although as we previously saw the proportion of projects using the GPL family of licenses has declined).

It is indicative, we believe, of the shift away from specialist open source vendors using vendor-led projects and strong copyleft licenses towards multi-vendor collaborative projects and proprietary implementations of open source code, however.

This trend should not really surprise anyone. For some time we have seen open source becoming part of the fabric of modern software development and licensing strategies, rather than a competitive differentiator. Back in 2009 we predicted the increased importance of business strategies that relied on vendor-led development communities, rather than projects dominated by a single vendor.

We called this “open source 4.0” and later suggested that it might be considered the golden age of open source, based on our belief that vendors had learned that they stand to gain more from collaborating on open source projects and differentiating at another stage in the software stack than they do from attempting to control open source projects.

Updating the results of our analysis to the end of 2011 and 400+ vendors indicates that, from the perspective of the commercial adoption of open source business strategies at least, we were not far off.

Some might not consider the proliferation of multi-vendor open source communities and proprietary distributions of open source software as the peak of achievement for open source. Each is of course entitled to come to their own conclusions about the implications.

Our perspective, as always, is that open source methodologies present a potentially disruptive, and also valuable, asset that complements the way both vendors and enterprise IT organizations conduct their businesses.

Our analysis indicates, however, that open source methodologies are increasingly being employed by ‘complementary vendors’ with a leaning towards more permissive licensing.

VC funding for OSS hits new high. Or does it?

One of the favourite blog topics on CAOS Theory blog over the years has been our quarterly and annual updates on venture capital funding for open source-related businesses, based on our database of over 600 funding deals since January 1997 involving nearly 250 companies, and over $4.8bn.

There are still a few days left for funding deals to be announced in 2011 but it is already clear that 2011 will be a record year. $672.8m has been invested in open source-related vendors in 2011, according to our preliminary figures, an increase of over 48% on 2010, and the highest total amount invested in any year, beating the previous best of $623.6m, raised in 2006.

Following the largest single quarter for funding for open source-related vendors ever in Q3, Q4 was the second largest single quarter for funding for open source-related vendors ever, as $230.4m was invested in companies including Cloudera, Hortonworks, and Rapid7.

As with Q3, however, the list of vendors presents us with something of an existential dilemma, as we see an increasing amount of activity by what we have referred to as ‘complementary vendors’ – those that are dependent on open source software to build their products and services, even though those products and services may not themselves be open source – as opposed to open source specialists.

The list of complementary vendors has grown rapidly in 2011, particularly around projects such as OpenStack and Apache Hadoop. If we examine the figures in more detail we find that over 30% of the funding raised in 2011 was raised by complementary vendors, compared to just 4% in 2006.

In fact, as the chart below indicates, VC funding for specialist open source vendors in 2011 was actually less than that in 2006 and 2008, and only marginally up on 2010, when again just 4% of funding went to complementary vendors.

The low amount of funding for complementary vendors in 2010 shows that the significance of complementary vendors is not growing at a constant rate, although for reasons that will become clear when we publish a follow-up post on the latest trends regarding the engagement of vendors with open source projects, we do expect that the proportion of funding related to complementary vendors is more likely to increase in the future, rather than decline.

This has implications for the ongoing trends related to open source software licensing, as covered yesterday. Examining our database of over 400 open source-related vendors – funded and unfunded, complementary and specialist – indicates that specialist vendors are much more likely to engage with projects using strong copyleft licenses than complementary vendors.

Specifically, our data indicates that 55% of open source specialists have engaged with projects that use strong copyleft licenses, while just 20% have engaged with projects with non-copyleft licenses. In comparison, 38% of complementary vendors have engaged with projects with non-copyleft licenses, compared to 24% that have engaged with projects with strong copyleft licenses.

Will will take a more detailed look at the trends related to the engagement of vendors with open source projects in the concluding part of this series of posts.

VC funding for Hadoop and NoSQL tops $350m

451 Research has today published a report looking at the funding being invested in Apache Hadoop- and NoSQL database-related vendors. The full report is available to clients, but non-clients can find a snapshot of the report, along with a graphic representation of the recent up-tick in funding, over at our Too Much Information blog.

VC funding for open source – existential question time

I tweeted last week that VC funding for open source related vendors was up 95% in Q3, driving by significant investment in ‘big data’ related vendors.

In calculating that percentage I had overlooked an important deal, however: one that re-writes the record books and raises existential questions about investment in ‘open source related vendors’.

There has always been a question mark over the term ‘open source vendor’. That is why I started using the term ‘open source-related vendors’ as more accurate term to describe the collective group of vendors that we see depending on open source software to drive revenue.

In particular, ‘open source-related vendors’ reflects the fact that many vendors are dependent on open source software to build their products and services, even though those products and services may not themselves be open source.

One such vendor is Opera Solutions, http://operasolutions.com/ which has based its data analytics platform on a number of open source components including Talend,. Kettle, memcached and Apache Hadoop. Opera’s software is not itself open source, however, which led by to initially omit the company’s series A funding round from my calculations for Q3.

How significant an omission was this? Pretty significant, given that Opera raised no less than $84m. Include that deal, and funding for open source-related vendors increased not by 95% to $159.2m, but by 197% to $243.2m, which is the largest single quarter for funding for open source-related vendors ever.

We have previously included funding rounds for vendors that depend on open source software despite producing closed software – Karmasphere, which raised $6m in Q3 is another – but it is the size of Opera’s funding round that highlights the existential problem in defining a vendor as ‘open source related’.

Whereas it was previously pretty easy to identify open source-related vendors, as we see more and more closed source vendors and service providers building on open source foundations, it becomes increasingly clear that the bounds of ‘open source-related’ are almost limitless.

It is not so much a matter of when do you start counting, but when do you stop.

VC funding for OSS-related vendors in Q2

Venture capital funding for open source software-related vendors declined 32% in the first quarter. According to our preliminary figures, OSS-related vendors raised $96.9m in Q2, compared to $141.5m a year ago.

There were 15 deals in the quarter, 14 with a disclosed deal size, resulting in an average deal size of $6.9m. That compared with 22 in total and 21 disclosed in 2Q10, and an average deal size of $6.7m.

Early stage deals announced in the quarter included $3m for MongoLab and Typesafe, as well as $5m for cfEngine, $5.5m for Bacula Systems, and $6m for SQLStream. Later stage deals included $6.5m for WS02, $9.25m for Datameer, and $20m for OpenX.

The biggest round announced in the quarter was Rockmelt’s $30m round led by Accel Partners, Khosla Ventures and existing investor Andreessen Horowitz. Without that deal, funding in the quarter would have been down considerably on the same quarter last year.

As for the year to date, $176.7m was raised in the first half of 2011, compared to $226.1 in the first half of 2010.

VC funding for OSS-related vendors in Q1

Venture capital funding for open source software-related vendors declined 14% in the first quarter. According to our preliminary figures, OSS-related vendors raised $79.8m in Q1, compared to $92.5m a year ago.

There were 13 deals in the quarter, 12 with a disclosed deal size, resulting in an average deal size of $6.6m. That compared with 20 in total and 18 disclosed in 1Q10, and an average deal size of $5.1m.

Early stage deals announced in the quarter included $3.6m for Acunu and $3m for Clustercorp. Later stage deals included$16.5m for Boxee, $7.5m for Basho Technologies, $7m for Zend, and $6.1m for EnterpriseDB.

The biggest round announced in the quarter was Kaltura’s $20m round from new investors Nexus Venture Partners and Intel Capital, as well as existing investors .406 Ventures, Avalon Ventures, and technology lender Silicon Valley Bank.

Funding for OSS-related vendors surpasses $4bn following stellar Q4

When the figures for Q3 showed venture capital funding for open source software-related vendors declined 38% in the third quarter I all-but abandoned my prediction that venture funding in 2010 would match the levels seen in 2009.

At that stage it looked like we would have to see a rapid increase in funding in the fourth quarter to get anything near the $394m raised in 2009. That is precisely what transpired, however.

According to preliminary figures collated by The 451 Group, $151.9m was invested in open source software-related vendors in Q4, a 74% increase on the $87.3m raised in the fourth quarter of 2009.

In fact, the fourth quarter of 2010 was the largest single quarter for investment in open-source-related vendors since the second quarter of 2008, and the fifth largest quarter ever.

There were 16 deals in the quarter and 14 with a disclosed deal size, resulting in an average deal size of $10.8m in 4Q10. That compared with 19 deals in the quarter and 18 with a disclosed deal size, resulting in an average deal size of just $4.9m in 4Q09.

Significant early stage deals announced in the quarter included $4m for CloudBees, while the largest later-stage deals included $34m for Talend, and $25m for Cloudera.

For the year as a whole private investment for open source software-related vendors grew 18% to $466m in 2010 – the third largest annual total ever – following a 37% decline to $394m in 2009.

The fourth quarter total also means that total private investment in open-source-related vendors has surpassed $4bn since 1997 – from 543 deals and 216 different vendors.

451 Group clients can read our full assessment of venture funding for open source software-related vendors in 2010, including details of the investment pipeline, and an explanation as to why we are predicting funding to be in the region of $500m in 2011. Non-clients can apply for trial access using the same link.

VC funding for OSS-related vendors down 38% in Q3

Venture capital funding for open source software-related vendors fell 38% in the third quarter, following three consecutive quarters of positive growth.

UPDATE – To put this is some sort of perspective, Venture Beat reports that Q3 was the lowest quarter for VC investments in any field since 2Q09 – UPDATE

According to our preliminary figures, OSS-related vendors raised $65.8m in Q3, compared to $105.9m a year ago. There were 10 deals in the quarter, all with a disclosed deal size, down from 19 total and 18 disclosed in 2Q09, resulting in an average deal size of $6.6m in 3Q10, compared with $5.9m in 3Q09.

Early stage deals announced in the quarter included $10m for Whamcloud and $5m for VoltDB. Later stage deals included $11.6m for Sonatype, $7.5m for EnterpriseDB, $5.5m for Morph Labs, and $5m for Puppet Labs.

The biggest round announced in the quarter was Joyent’s $15m series C round, Intel Capital, with additional support from existing investor Greycroft Partners and new investor Liberty Global.

Total funding for the first three quarters of the year stands at $292, compared to $297.6m in the first three quarters of 2009. It now seems likely that our prediction of flat growth for the full year was optimistic.

VC funding for OSS-related vendors up 11.5% in Q2

Venture capital funding for open source software-related vendors increased 11.5% in the second quarter, the third consecutive quarter of positive growth following a 6% rise in 4Q09 and a 38% increase in 1Q10.

According to our preliminary figures, OSS-related vendors raise $141.7m in Q2, compared to $127.1m a year ago. There were 21 deals in the quarter and 20 with a disclosed deal size, the same as 2Q09, resulting in an average deal size of $7.1m in 2Q10, compared with $6.4m in 2Q09.

Early stage deals announced in the quarter included $5m for Karmasphere and $2.5m for Datameer, both building businesses around Hadoop, as well as $7.15m for Moodlerooms, $14m for Sencha, $4m for AlienVault and an additional $3.3m for Nuxeo.

Later stage deals included $11m each for Cloud.com and Opscode, $10m each for Heroku, DeviceVM and Northscale, $9m for Zend, and $8m for Talend.

The biggest round announced in the quarter was Eucalyptus’s $20m series B round, which was reported just hours before the end of the quarter, tipping the total into positive growth.

Total funding for the first half of the year stands at $231.2m, up from $191.7m in the first half of 2009. While it seems likely that we could see an overall improvement for the full year compared to 2010 we are sticking to our prediction of flat growth for the full year.

Why there are no billion-dollar open source companies

Last week Glyn Moody advised open source specialist start-ups to give up on the idea of ever hitting the $1bn revenue barrier.

Basing his argument on an observation made by Red Hat CEO Jim Whitehurst, Glyn argued that:

“all other open source companies really need to stop chasing that $1 billion dream – the idea that if they try hard enough they will break through the magic nine zero barrier. It isn’t going to happen, for the very reason that open source will take over from proprietary software at most levels of the enterprise stack: because it strips away the traditionally high profit margins and leaves the money with the customer.”

My initial response was to ponder what impact that this will have on the valuation of open source specialists. It stands to reason that potential investors will be discouraged from investing in open source vendors if they consider that their software licensing strategies place a ceiling to their potential for revenue generation.

It later occurred to me however that the situation Glyn is describing is not a potential future for open source specialists but a description of the market forces that have led many of them to adopt hybrid licensing strategies that mix open source and proprietary software.

Rather than stop chasing the $1bn dream, many open source specialist vendors instead stopped chasing the idea that they could get there with open source software alone.

Recognising that, as Whitehurst put it, “selling free software is hard” many vendors looked for others methods to generate revenue from open source software and (rightly or wrongly) decided that selling complementary proprietary software products and extensions was an easier route to generating revenue.

At the same time proprietary software vendors also recognised that they could use open source software to disrupt competitors and also lower the development costs of their proprietary packages – leaving some money with the customers while maintaining some of their profit margins.

Which is not to say that all open source specialists will end up selling proprietary software – the likes of OpenNMS, Sourcesense, Sirius and many others prove that it is perfectly possible to run a successful, profitable business and remain true to open source software licensing.

I would argue, however, that all these companies have long-ago made the decision not to chase $1bn and have structured their businesses – without venture capital funding – accordingly.

In fact, as we discussed in last year’s Open to Investment report, a number of open source vendors take the view that by avoiding institutional investors, they have a better chance of achieving their business goals. (Or, as Simon Phipps put it: “some of us don’t believe in VCs…”).

Glyn’s post suggests, and in the comments section he makes clear, that what he is describing is “open source as leading the way… to understanding that we don’t need to be growth junkies to create viable companies/industries”.

This is a suggestion that has come up before – Dave Neary’s post from 2008 springs to mind. As he stated: “Free software doesn’t get developed like proprietary software, why should the free software industry look like the proprietary software industry?”

He, and Glyn, are quite right: the free/open source software industry shouldn’t look like the proprietary software industry. It is perfectly possible to run successful and profitable open source software businesses that don’t have VC funding are therefore won’t adopt proprietary licensing in order to chase revenue and profitability targets.

It is also clear, however, that proprietary software vendors are increasingly using open source as a means of maintaining their profits and disrupting competitors and that, given the option, many (former) open source specialists are more than happy to compromise their commitment to open source software licensing in order to compete.

Perhaps this is a short-term approach and Glyn is right that “open source will take over from proprietary software at most levels of the enterprise stack” but in the meantime a lot of proprietary and hybrid software vendors are going to make $1bn (and many of them a lot more than that) with the help of open source software.

See also our previous post discussing how Christensen’s law of Conservation of Attractive Profits can be used to explain why open source vendors are increasingly turning to hybrid development and licensing strategies to generate revenue from open source.

Webinar on VC funding for OSS-related vendors

On Thursday, June 3 at 12pm ET we will be holding a webinar to share some of the findings from our recent report ‘Open to Investment, 2010.’ The report is available here, while a summary of the statistics is here.

The webinar will contain analysis of venture funding in open-source-related vendors in 2009 based on The 451 Group’s database of more than 450 funding deals, beginning with the investment in Cygnus Systems from Greylock Partners and August Capital in 1997.

We will also include the results of a snapshot survey of private investors, designed to complement our previous survey of the sentiment of private investors toward open source, and the likely impact of economic conditions on investment in open-source-related vendors.

The webinar will also take in analysis of venture-backed mergers and acquisitions in 2009 involving OSS-related vendors, an overview of the potential impact of current economic conditions on OSS adoption and investment in OSS-related vendors, and analysis of the vendors we believe are most likely to be considering further funding in the next two years.

We hope you can make the session. Registration is now open.

VC funding for OSS-related vendors up 38% in Q1

We reported last week that VC funding for OSS-related vendors fell 37% in 2009 to $375.4m. We noted at the time that the decline was not actually as steep as I or others had predicted.

Another reason we weren’t overly negative about the 2009 figure was that we knew the figures for the first quarter of 2010 were much more positive. According to our preliminary figures, funding grew 37.9% in the quarter to $89.1m.

1Q10 was the second consecutive quarter of growth, following the more modest 6% rise in the fourth quarter of 2009, providing another reason to think positively about investment and OSS in 2010, although as the chart above indicates, funding levels are still well down on 2008.

Another note of caution surrounds the fact that a significant proportion of the funding in Q1 was was the result of Magento’s $22.5m equity funding round.

Other early-stage deals announced in the first quarter included a $6m series A round for eXo Platform; $5.1m for Abiquo; a $5m series A round for NorthScale; and a $4m series A round for OpenERP.

Later stage deals included $12m series C funding for MuleSoft; $10m series B funding for
Lucid Imagination; and an $8m series B round for DotNetNuke.

There were 16 announced funding deals in the first quarter, compared to 12 in the whole of the first quarter of 2009. Fifteen of the deals in the first quarter of 2010 had a disclosed size, resulting in an average deal size of $5.9m. In the same quarter of 2009, there were 11 deals with a disclosed size, resulting in the same average deal size of $5.9m.

Based on the increased number of funding deals in 2010, it is clear that venture funding is available for both early- and later-stage deals if the business opportunities are right, although the fact that the average deal size remained the same indicates continued pressure on funding levels. Taking all these factors into account, the level of funding in 2010 can be expected to be flat at best compared to 2009.

A full discussion of VC funding in the first quarter of 2010 and the whole of 2009 is included in our latest CAOS report, Open to Investment, 2010, along with analysis of venture-backed mergers and acquisitions in 2009 involving OSS-related vendors, an overview of the potential impact of current economic conditions on OSS adoption and investment in OSS-related vendors, and a list of the 74 vendors we believe are most likely to be considering further funding in the next two years.

451 Group clients with an interest in OSS and venture capital may also be interested in our recent Sector IQ report: Open source M&A in 2010: Will scarcity of later-stage funding lead to more scrap sales?

VC funding for OSS-related vendors in 2009

The latest report from the 451 Group’s CAOS (commercial adoption of open source) practice is now available, presenting an analysis of venture capital funding for open source software-related vendors in 2009. Some of the key statistics are as follows:

As you can see, VC funding for OSS-related vendors was down considerably in 2009, as predicted. However, the decline was not actually as steep as I or others had predicted, and figures from the National Venture Capital Association and PricewaterhouseCoopers indicate OSS-related vendors fared better in terms of investment compared to software as a whole.

As well as an overview of the statistics from 2009, the reports also includes an update on the trends seen in investment for open source-related vendors since the investment in Cygnus Systems from Greylock Partners and August Capital in 1997.

There’s much more to the report than statistics, of course. It also includes comparison with funding levels from 1997 to 2008, analysis of venture-backed mergers and acquisitions in 2009 involving OSS-related vendors, as well as analysis of the ten largest OSS-related exits to date and the investors that have profited from them.

Also included is an overview of the potential impact of current economic conditions on OSS adoption and investment in OSS-related vendors, and a list of the 74 vendors we believe are most likely to be considering further funding in the next two years.

The report concludes with a look at the current prospects for OSS-related IPOs and (more likely) M&A in 2010, as well as a preview of venture investments in OSS-related vendors in the first quarter of 2010 (look out for a follow-up post about that in the coming days). Stay tuned also for details of the forthcoming webinar.

The latest CAOS report, Open to Investment, 2010 is available here. 451 Group clients with an interest in OSS and venture capital may also be interested in our recent Sector IQ report: Open source M&A in 2010: Will scarcity of later-stage funding lead to more scrap sales?

The rejuvenation of community-controlled open source

Jay recently speculated, and I agreed, that we may be starting to see a return to support and other services, rather than commercial code and licensing, as the preferred mode to monetize open source.

The shift is related to, although not dependent upon, a predicted move away from vendor-dominated open source projects towards vendor-dominated open source communities.

I wondered if we might have some data at hand that proves or disproves the theory that the balance has shifted back towards open source communities rather than vendor-controlled projects and turned to our database of investments in open source-related vendors.

The results are pretty interesting. Below is a chart showing the proportion of series A investment deals in each year for open source-related vendors depending on whether the underlying open source development project is controlled by a community or a vendor.

What the chart indicates is that while vendor-controlled projects remain the preferred approach for VC-backed open source-related vendors, the vendor-controlled approach has declined in the past two years.

Meanwhile following the early dominance of community-controlled projects (a result of the early Linux start-ups), the popularity of community-controlled projects has been rejuvenated in the last couple of years.

Of course, those communities are now dominated by vendors, but they are built on a foundation of collaboration and (there’s no other word for it) community – that is often lacking in many vendor-dominated projects.

Of course, this chart only includes VC-backed open source related vendors so two major constituents of the commercial open source ecosystem are missing: previously proprietary vendors using and contributing open source code, and bootstrapped start-ups.

I’ll return to this subject to take a look at those projects in another post.

VC funding for open source: sometimes less is more

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.

VC funding for open source in Q3

Venture capital funding for open source vendors fell 31% in the third quarter compared to the same period last year, as was to be expected in the ongoing economic climate, but was up compared to the previous quarter.

According to our preliminary figures, there were 13 announced funding deals in the third quarter of 2009 worth $99.9m, compared to 16 in the third quarter of 2008, worth $144.8m.

All 13 deals announced in the third quarter of 2009 had a disclosed size, resulting in an average deal size of $7.7m. In the same quarter of 2008 there were 15 deals with a disclosed size and an average deal size of $9.7m.

(For more on the history and future of venture capital investment in open source vendors, see our recent CAOS report, and look out for a follow-up report in 2010).

The one early stage deals disclosed in the first quarter was Jolicloud’s $4.2m series A, while Gear6 raised $4m following its evolution from a storage caching vendor to a Memcached support and product provider.

Later stage deals included $17.4m series B for Borqs, Medsphere’s $12m series D and Acquia’s $8m series B.

The right and best way to make money from open source

Eric Barroca, CEO of Nuxeo, has published an interesting take on commercial open source business strategies, highlighting that vendors that treat community edition products like a free demo are failing to make the most of open source.

The key themes of Eric’s post have been discussed before (although his analysis is no less valuable or interesting for that). To me, they are attempts to find solutions to two core questions:

1/ What is the best way to generate revenue from open source software?
2/ What is the right way to generate revenue from open source software?

There is a subtle difference between the two but I would suggest that 1/ is a practical question related to business strategy, while 2/ is a theoretical question related to community strategy.

There are those those that believe that the answers to those two questions are likely to be contradictory, but I think that many more would agree that not only are they complementary but also mutualistic.

That is to say that while there are good theoretical reasons for finding the right way to generate revenue from open source (i.e. one that does not damage the open source brand, or disrupt community projects, or result in disgruntled community users) these go hand in hand with good practical reason for finding the best way to generate revenue from open source (i.e. one that does not damage the company’s brand, or disrupt commercial relationships, or result in unhappy customers).

When it comes to finding answers to best way to generate revenue from open source you could do a lot worse than listening to Peter Fenton, who, as the WSJ reports, has made investments in JBoss (sold to Red Hat for $350m), Zimbra (acquired by Yahoo for $350m), and XenSource (bought by Citrix for $500m), not to mention SpringSource (sold to VMware for $420m).

Fenton tells the WSJ that the real advantage of open source is the distribution model. “Rather than ‘expensive sales efforts and negotiations with the upper management to get the most money possible,’ the people that will be using the software can easily download and try the product,” notes the WSJ.

As Eric pointed out in his post, however, the same effect can be achieved with a free demo. And if done badly, the approach does not result in any more customers, whether the software is open source or not.

The difference, as Peter Fenton explains, is that “if you don’t have the best product, you’re not going to make it in open-source.” There is no point trying to compel community users to become customers by providing them with substandard software and waving an enterprise version at them. It won’t build a community, and it won’t build brand. That is neither the best, nor the right way to generate revenue from open source.

As I previously stated the right way and best way involves being honest and transparent about licensing, avoiding marketing the benefits of open source while selling proprietary licenses, separating proprietary features attractive to paying customers from the requirements of community users, and looking after and understanding the needs of the community.

That guest post on Brian Gentile’s blog was specifically related to the Open Core model, although the general advice applies to any of the commercial open source business models.

As Eric writes, “There is nothing wrong selling proprietary software, especially when you’re contributing a lot of open source code (I’m a great fan of Atlassian and Day, in this respect). It is nothing to be ashamed of. Just be clear and focus on your software’s competitive advantage rather than its open source ‘nature’.”

Interestingly a similar statement was recently made to me by Open Source Initiative board member Andrew Oliver. While he is concerned about what he sees as the misuse of the term “open source” and the potential resulting damage for the open source movement, he accepts that proprietary software has its uses.

With that in mind Andrew has called for vendors to be more honest about the way in which they use the term “open source” with regards to business strategies and development projects, as opposed to licenses. I have previously noted that the Open Source Definition is somewhat limited in policing the use of the term. It seems steps are being taken to address that. But that’s a subject for another post entirely.

VMware-SpringSource about cloud, competition, open source in that order

Just when you thought it was safe to go back in the water … another blockbuster open source software acquisition, this time virtualization leader VMware looking to the future, and seeing itself in need of a more integrated, application-centric position. That position, according to more than $420 million in cash and stock from VMware, apparently comes from acquisition of SpringSource. SpringSource itself has grown by acquisition, first for Apache support vendor Covalent in January 2008, then Spring-like Groovy and Grails supporter G2One in November 2008 and most recently in May 2009, systems and application monitoring and management vendor Hyperic, which also focused heavily on cloud computing.

VMware is clearly in need of a story beyond virtualization, even if we are still relatively early on in enterprise adoption. Still, looking into the future, it sees clear skies, and that does not fit with the multi-billion dollar opportunity shaping up in cloud computing. Thus, VMware is willing to invest a significant amount in SpringSource, which does represent a crossover in customers without much, if any, crossover in competition.

VMware is working to address its increasing competition from all sides. While it may seem somewhat odd for VMware to want to get involved in enterprise Java application development and deployment, it may want to take advantage of SpringSource’s relatively quick climb in the enterprise Java development and support business. VMware may also be looking to offset any gain in enterprise Java influence and control by Oracle, which may do so with its more than $7 billion acquisition of Sun Microsystems.

VMware is also facing increasing competition from OS vendors, including Microsoft, Novell and Red Hat, which is among SpringSource’s biggest competitors with its JBoss business. Again, SpringSource may not seem the most likely suitor for Java application development, but VMware may see this as an area where it can most effectively integrate its own technology and talent to differentiate in virtualization and cloud computing.

Although SpringSource’s open source nature has been critical to its developer reach and success, this is likely not as important to VMware, which may view SpringSource more as a subscription software company than as an open source software company. Either way, it seems VMware, similar to Oracle, may have somewhat limited vision when it comes to open source software, seeing it for its development and time-to-market advantages, but missing other community benefits — including user and customer communities, feedback and contributions — that help make things work. This is not to say VMware is doomed with its plans and integration for SpringSource. It made it quite clear on a conference call today it plans to keep the SpringSource team in place as much as possible. Still, it will face the difficult and recurring challenge of a proprietary software vendor taking over an open source software vendor.

Open source and cloud computing – a match made in heaven?

Next Wednesday The 451 Group will be taking part in Red Hat’s Open Source Cloud Computing Forum, the line-up for which has been finalized this week.

Starting at 9.30am ET the event is designed to is to foster discussion across a broad range of technical topics related to cloud computing, including: virtualization, security, management, open standards, hybrid public-private clouds, and data formats.

We are pleased to be able to take part in the event, presenting an independent overview of the confluence of open source and cloud computing. The overview of our session is as follows:

    Open source software has been a fundamental building block for cloud computing, enabling cloud platform providers to quickly and cheaply assemble the infrastructure required to provide cloud computing services. The 451 Group examines the key open source projects and vendors that are enabling cloud computing, as well as how the principles of open source software are being extended to cover open APIs and open data formats that reduce the dangers of lock-in.

The rest of the day includes presentations from Red Hat on core cloud services, Cobbler, Condor, KVM, Libvert and Thincrust, as well as representatives from Eucalyptus, Cloudera, Compiere and Zmanda.

It promises to be an interesting day. More details are available here, while you can register for the event itself here.

In the meantime, we’ve got a fair idea of how we see open source and cloud computing coming together, but if you have any thoughts, we always welcome feedback.

VC funding for open source up and down in Q2

Venture capital funding for open source vendors was down 50% in the second quarter compared to the same period last year. No great surprise there, but there was some good news as that figures was an increase on $45.4m raised in Q1.

According to our preliminary figures, there were 13 announced funding deals in the second quarter of 2009 worth $80.1m , compared to 20 in the second quarter of 2008, worth $160.8m.

Twelve of the deals announced in the second quarter of 2009 had a disclosed size, resulting in a combined total of $80.1m, and an average deal size of $6.7m. In the same quarter of 2008 there were 20 deals with a disclosed size resulting in a combined total of $160.8m, and an average deal size of $8m.

Total funding for the first half of the year stands at $125.5m, compared to $270.5m in 1H08, although as we pointed previously, the first half of last year was a record, as were Q1 and Q2 of 2008 individually.

(For more on the history and future of venture capital investment in open source vendors, see our recent CAOS report).

Early stage deals announced in the first quarter included a $15m round for Schooner, $5.5m for Eucalyptus, $2.5m for Opscode and $2m for Reductive Labs.

Later stage deals included $10m each for Likewise, OpenX and Vyatta, and $6m for Cloudera.

Larry Augustin previously predicted (PDF) $250m in 2009 from 30 deals, while I guessed there might be a few more deals and a lower average deal size.

At the halfway stage, the running total is $125.5m from 22 deals, so we’re both looking good to be half right.