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April - 2006 - issue > Cover Feature
Open-source-VC-Who's-giving-money?
Sanjeev Jain
Saturday, April 1, 2006
Oracle chief Larry Ellison loves acquisitions. But not for the reason you think. Sure, he is a terrific acquirer of companies that complement Oracle but this time his targets are open source software database companies- Innobase Oy, based in Finland and Lincoln, MA based Sleepycat Software. Oracle is in talks to purchase JBoss, an open-source company that makes middleware. Oracle’s acquisition is the opening of a shopping spree by top players like the IBM and Sun Microsystems who have become major backers of open source software, utterly changing the way software is marketed.

Credit for the success of open source goes to ubiquitous Linux, which has spread to more than 25 percent of the world’s servers and has become a legitimate rival to Microsoft Corp.’s Windows. Linux not only brought to life an industry long considered a poor cousin to Windows, but also to various companies working on making open source a industry standard both for the developers and the users.

This big bang approach has attracted VC attention to this industry that has seen revival of sorts. “Good VCs listen to customers. What they are listening and hearing from customers is that conventional areas of enterprise software overtime and up through the bubble became very loaded with features, costly and expensive. In response many IT departments consider open source solution as a response to packaged, closed solutions and because of that they were willing to try open source,” says Stephen J. Harrick, Managing Director and General Partner, International Venture Partners.

He says, “The open space has attracted a lot of attention from the VC community. It is one segment where companies have been launched. There are a huge number of projects in the open space that are currently on.” Venture Capitalists invested $191 million in 51 companies in this space in 2005, the highest in five years, according to Pricewaterhouse Coopers Money Tree survey. The VC community will continue to invest in this area this year as more companies try to get into space largely due to massive demands from the IT companies and the government. Faced with the dilemma of paying huge license fees to buy a proprietary software that can neither be upgraded nor tuned to user’s specific needs, companies have moved towards open source. “Companies will take more interest as they are seeing how fast open source software has grown. Add to this the desire among customers to buy open source, good pricing, no lock in, transparency are compelling reasons. They are causing more customers to buy open source products,” says Kevin Harvey of Benchmark Capital, based in Menlo Park, CA.

There has been a realization that if companies are not using open source, then they aren’t managing their business properly. Reason? Open Source lets companies to do what they want. Just download a specific software with the source code, hire a few coders to change the source code the way you want it and there you are-a good company with up to date technology.

Though the software is freely downloadable, open-source companies typically charge for a more functional version or charge for ongoing support services. This is where the open source companies are making money. Over the past two years, a number of companies have chosen variations on that business model to try to unseat incumbent software providers. The pace of investment in those start-ups has also picked up.

Potential companies can look at two major areas-specific applications catering to specific business needs like business intelligence and services around open source. Besides that they can browse through the entire OEM business model, service based business model, Red Hat model and MySQL service model.

The government’s interest in open source seems to be intensifying as many governments turn to freely available software in the belief that it is quick and inexpensive to implement, and that it can be tailored to their needs. Some see it as a shortcut to their technological independence and as a basis for their future IT capabilities.

Indian President Dr. A P J Abdul Kalam, one of the biggest backers of Open Source software says a developing country like India cannot depend on proprietary software due to security reasons. “The most unfortunate thing is that India still seems to believe in proprietary solutions. Further spread of IT, which is influencing the daily life of individuals, would have a devastating effect on the lives of society due to any small shift in the business practice involving these proprietary solutions. It is precisely for these reasons open source software needs to be built which would be cost effective for the entire society,” Kalam said.

Doesn’t that sound good to you? Well, then, go out there and get it. The money is out there. As Harrick says, VCs follow the customers and customers choose their open source wisely.
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