New $425 Million Wave in Open Source VC Funding

Reports began surfacing in recent months about rekindled interest by venture capital firms (VC) in open source software companies. The first wave of VC interest in 1999-2000 or so resulted in $714 million in venture funding.[1] Most of these open source companies were based in one manner or another around the Linux operating system. Of the reported 71 open source companies that received VC financing at that time, most failed ($150 M in VC financing alone for Linuxcare and TurboLinux), though Red Hat among some other notables succeeded quite well.

Matt Asay, the organizer of the Open Source Business Conference (OSBC), among other open source advocacies, was the first to note the renewed interest by VCs in next-generation open source companies. In April of this year, he provided a rough tally of about $150 million in VC funding had come into open source companies in 2004. This story was picked up by Gary Rivlin of the New York Times in late April. Using estimates from the VentureOne database, Gary estimated 20 open source companies had received $149 million in VC funding in 2004. On this Monday Aug. 8 the Wall Street Journal updated a retrieval from the Dow Jones VentureOne database suggesting $290 million was invested by VCs in new open source start-ups in 2004.[2]

New and more mature business models, plus the growing acceptance of open source and the need for related services by business, as others and I have documented elsewhere, are fueling this rekindled interest. In fact, this new interest began more approximately in 2003, though it is accelerating today.

With Matt Asay’s assistance, I have assembled a listing of about 45 firms that have received more than $425 million in VC financing over the past 18-24 months. The trigger point or date appears to be the last financing round into MySQL of $20 million in 2003. Some of these firms, such as JasperSoft, are already in their third round (Series C) of financing.

The table below lists these firms and financing received since 2003. The companies were broadly clustered as either professional services firms (installation, training, support, services, custom programming, or commercial software add-ons), subscription (hosted applications usually provided under per user fees), or dual license where there is a mix of open source and commercial licenses.

This information likely has omissions and other errors. Data has been collected from standard venture databases, plus news releases and open reporting. Corrections and updates are welcomed. Though Matt’s assistance is greatly appreciated, any errors are my own.

Dual licensing opportunities have received the largest share of the funding, though recent trends have tended to support the professional services and subscription models. Very few of the most recent wave of financings are a straight Linux play, and then mostly only for large clustered applications. Services around certification and interoperability have been especially attractive to the VC community.

Though there is always a high failure rate for VC-backed software companies, the more mature and sophisticated business models surrounding the new crop of open source start-ups suggests some cause for optimism. Clearly, both the market and the vendor community are beginning to discover new roles and new needs surrounding open source use in the enterprise. Open-source based companies appear to be moving into the mainstream from the standpoint of venture capitalists.

[2] Robert A. Guth and Don Clark, “Linux Feels Growing Pains as Users Demand More Features,” Wall Street Journal, p. B1, August 8, 2005.