Open-source companies grab VC cash

The 451 Group reports investments in open source companies during the first quarter outpaced previous year

Venture capitalists have showered open source companies with cash so far this year, marking a record high of US$203.75 million in funding for vendors developing flexible, low-cost wares.

The 451 Group reported this week that 20 open source funding deals inked this quarter surpassed the US$100.4 million raised in the same quarter last year. And this year's take so far also exceeded the all-time high of US$193.7 million raised in the fourth quarter of 2006. According to The 451 Group, total funding for open source companies stands at US$2.64 billion.

The good news, according to The 451 Group enterprise software analyst Matthew Aslett's blog post, is that the first quarter's funding immediately followed a plunge in open source investment in late 2007.

"Yes, it is April 1, and no I'm not joking. Following the plunge in the fourth quarter of 2007, [venture capital] funding started 2008 on a high," Aslett wrote.

The drop-off in funding last year had many speculating that open source investment peaked in 2006, with a total of US$546.3 million reported then. Last year, The 451 Group saw a more than 40 per cent drop down to US$323.87 million for the full year. The research firm bases its statistics on disclosed numbers, and Aslett reports that of the 20 total funding deals, 17 disclosed value, putting the size of the average deal close to US$12 million.

"That is the second highest average deal size ever, behind the US$13.84 million recorded in [fourth quarter of 2006], when there were 14 deals with a disclosed deal value," Aslett reported.

Even the sheer number of open source funding deals also sets records. There were 20 such transactions in the first quarter, beating the previous record of 17 total deals set in both the first quarter of 2005 and that last quarter of 2006. When compared with the same quarter last year -- 11 deals with a disclosed value that averaged little more than US$9 million -- Aslett expects 2008 is shaping up to exceed last year's total, but most likely not to top 2006's numbers.

"Despite the incredible growth in the first quarter in total, it is based on that statistic that I'm predicting that that total funding in 2008 will be higher that the US$323.87 million raised in full year 2007 but still well below the US$546.3 million raised in 2006," he wrote.

On the down side, the majority of the investment went to existing open source players such as Automattic, Greenplum, SugarCRM and Pentaho, the research firm reports. While newcomers Ringside Networks, Bluenog and Engine Yard did garner cash, start-ups didn't fare as well as their established open source counterparts.

According to The 451 Group CAOS Theory blog, "There were just three Seed or Series A deals with a disclosed value announced in the quarter, totaling US$9 million, meaning disclosed Seed/Series A deals represented just 17.65 per cent of the deals and 4.42 per cent of the funds raised in the quarter, both record lows."

The majority of funding also happened in January, which also raised a flag for Aslett.

"In total, 10 deals with a disclosed value totaling US$142.9 million were announced in January (a record, suffice to say), followed by five deals totaling US$49.35 million in February, and two deals totaling US$11.5 million in March. The downward trajectory is evident," he wrote

Aslett pointed out in the blog that with all the cash going to established players early in the year, it will be difficult to peg which start-ups might rake in the dough in the coming months.

"So many of the old names raised funding in the first quarter, it's difficult to see where significant further funding will be raised in the coming months unless a few more start-ups emerge," Aslett wrote.

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