VC funding for open source software is down, not out

It's no shock that VC funding across the board was down last year, but for OSS, the news wasn't all bad.

Despite an unsteady worldwide economy, venture capital investment in open source software projects did better than expected last year — and seed funding even grew year over year in the fourth quarter.

That's not to say it was all unicorns and rainbows. An analysis by The 451 Group showed that OSS VC funding dropped 37 percent overall, to $375.4 million. VC funding of all software projects - open source or proprietary - declined 40 percent, according to a PricewaterhouseCoopers report cited by 451.

But, interestingly, investment in Series A/seed projects increased in 2009, particularly in the second half of the year. In fact, The 451 Group found that the amount of funding in the fourth quarter of 2009 actually grew over the same quarter in 2008 - the first such growth in several quarters, said Matthew Aslett, senior analyst in enterprise software for the company, which conducts independent technology-industry analysis.

That's good news for innovators in the open source software field — their work is being recognized.

"There are some new areas where, actually, open source is the default way of entering the market now," Aslett said, particularly in the cloud and, to a lesser extent, the database arena. That's a big change from the past, where perceptions were that open source was created as an inexpensive (if not free) alternative to existing proprietary solutions. Because of the uptick in the fourth quarter of last year and the further movement of OSS into the mainstream, it's quite possible VC funding will be more robust this year, he said.

Governments around the world have been pushing more into the open source solutions: was rebuilt on a Drupal platform, Jordan's looking to become an OS hub in the Mideast, the U.K. government has been pushing agencies to "avoid being 'locked into proprietary software'." That mainstream acceptance (face it, when the government starts using something, it's beyond mainstream) could mean that some of the more conservative VCs that have tended not to put money into OSS might begin looking at it.

And the next few years, Aslett said, may be a strong year for mergers and acquisitions, which also is addressed in the group's research report, as well as what vendors are likely to be seeking funding this year and next.

As only seven open source firms have gone public since 451 began tracking in 1997 and the economy seems far from a full recovery, it's unlikely more firms will issue IPOs next year, Aslett said.

Given a little more time? Expect to see more firms that develop OSS to be publicly traded.

The only question is when will the revolt against that occur from those in the open source community who believe in the free flow of information, code and software? C'mon, you know it's only a matter of time.

(Note: All graphics are copyright and courtesy of The 451 Group.)

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