Open source software continues its torrid pace. In fact, according to a report from the 451 Group, the sector saw its biggest quarter for venture funding -- hitting $203.75 million, which is up from $100.4 million in the same period a year ago.
Why the interest? Well, I had a chance to interview Matthew Aslett, who is an analyst of enterprise software at the 451 Group:
Your take on the focus on open source?
VCs are interested in open source vendors because the open source development and distribution models reduce start-up costs and lower the barriers to entry. Some VCs have also cited increased code quality as a reason for investing in open source as the model enables a broader range of product testing and rapid innovation. There are a number of VCs that are sold on the open source model, and some have even stated that they would only consider investing in a software vendor if it was using and producing open source. Open source vendor revenues are lower than more established traditional rivals today, but most vendors are still in their infancy. Recent mergers and acquisitions involving open source vendors such as Zimbra, JBoss and MySQL have proved that the returns are there and are likely to encourage more VCs to look favorably on open source.
What are VCs looking at, in terms of sectors and trends?
The early open source success stories have involved vendors disrupting existing markets, such as Red Hat (NYSE: RHT) in operating systems, JBoss in middleware, and MySQL in databases. Interest has now moved up the stack to applications, such as SugarCRM and Compiere, and also into new markets where the new open source vendors have the ability to set the agenda. The other disruptive software model at the moment is software-as-a-service, and VCs are understandably attracted to vendors that combine the lower development costs of open source with the ease of adoption of the SaaS model.
What are some of the exciting companies on your radar screen?
I believe we will see further investment in open source enterprise applications this year, as that is still an emerging opportunity for disruption. Some of the most interesting companies are those that are targeting entirely new opportunities and markets, however. Ringside Networks is focused on bringing social networking to corporate environments with open source software and a team of experienced open source executives (ex-JBoss). It has already an undisclosed seed round from Matrix Partners and is likely to attract serious interest in a Series A round. LoopFuse is also staffed by JBoss veterans and is attracting a lot of attention thanks to its focus on open source sales and marketing automation. Meanwhile Acquia was founded in December by the creator of the Drupal content management system and has a great opportunity to build on broad adoption and a large community of developers.
Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.