OSBC: 'Open source 2.0' emerges with start-ups

Remember a year or so ago when you could probably name most of the open-source companies in the market? Try doing that now when the number of start-ups has skyrocketed to several hundred. While this massive growth appears reminiscent of the dot-com boom before the bubble burst, experts in the field stress that the second wave of the open-source revolution, Open Source 2.0 if you like, is unlikely to play out in quite the same way. However, that's not to say there won't be some upsets along the way.

"There are absolutely too many [open-source] companies," Jo Tango, a general partner at VC Highland Capital Partners, wrote in an e-mail response to questions. "I predict a venture capital backlash against open source. There are simply too many companies right now raising money with the approach: 'We'll give it away for free and make it up in the back end with high volume services/support revenue.'" For example, with three open-source database companies emerging this summer, there just isn't room in the market for a fourth, he added.

The organizers of the Open Source Business Conference (OSBC) East taking place in Newton, Mass., next week have also had first-hand experience of the huge uptick in the number of open-source companies over the past 18 months. When they were planning the first OSBC in San Francisco in March 2004, the organizers found it hard going to come up with enough companies for a showcase of 15 to 20 open-source start-ups, according to Matt Asay, the conference director and director of open-source strategy at Novell. "It was a lot of work just to find the companies, they were all over the map," he said. "It was slim pickings."

Fast forward to the preparation for OSBC West in April this year in San Francisco, and again in the run-up to the upcoming OSBC East, and Asay and his colleagues were looking at over 150 companies for the showcase for each event. "We're getting really good quality and not just quantity," Asay said.

Bryce Roberts of venture capital company O'Reilly AlphaTech Ventures has worked on whittling down the 150-plus companies to the 16 that will be exhibiting at OSBC East in the conference's Emerging Elite Showcase, according to Asay.

They include service-oriented architecture (SOA) integrator Active Endpoints Inc., enterprise content management firm Alfresco Software, software-compliance assessment service provider Black Duck Software, Linux server management firm Centeris, database vendor EnterpriseDB, mobile application server company Funambol, customer relationship management vendor SugarCRM and enterprise collaboration software firm Zimbra.

"There's a real flowering of open source emerging at the application level," Asay said, pointing to the likes of Alfresco and SugarCRM.

"I've watched the seeds of the transition happen over the last two years," he said. "I met with SugarCRM six months before they'd written a line of code. I thought they were full of it and high on something." However, with the favorable reception the company went on to receive and SugarCRM's recent raising of over $18 million in Series C funding, open-source companies started to feel like a very real career option to Asay, he said. In fact, as Asay opens OSBC East on Nov. 1, it will be in his new role as vice president of business development at Alfresco.

At OSBC East, the 16 companies will present their open-source stories to a panel of three venture capitalists (VC) and a chief information officer (CIO). The panel will come up with a couple of winners they dub the most promising start-ups to watch. At OSBC West in April, the winners were BitTorrent, Groundwork Open Source Solutions, Realm Systems and SugarCRM, all of which have attracted venture capital funding. "We're batting one thousand," Asay quipped.

It's hard for VCs to get a handle on the open-source market, Asay believes, especially since only one open-source company, Linux distribution company Red Hat, has gone public, and that was way back in 1999. Certainly, he feels that VCs are rapidly becoming much better educated about the open-source arena and more savvy at differentiating between true open-source start-ups and those that are just jumping on the open-source bandwagon.

However, some VCs still have the tendency to rush to crown one start-up or another as the Red Hat of the CRM or business intelligence world, Asay said. "VCs have sometimes been a little too easy on themselves in terms of cheap analogies," he added. Highland's Tango mentions a friend actively involved in open-source investing who claims there's something of a herd mentality, with VCs following each other into investing in what technology areas appear to be hot.

The IDG News Service is a Network World affiliate.