Open-Source Investment Begins to Pay

By Steven Vaughan-Nichols  |  Posted 2005-07-21

Open-Source Investment Begins to Pay

Theres more than one way to make money from free software.

In the last couple of weeks, Ive talked about how to make moolah from making the right business plan decisions about open-source software and how its all too possible to lose your shirt. Ive also written about how to make money working with Linux software with the right certification.

What I havent done, though, is write about making money from open-source investments. Theres a reason for that: For the most part, people have lost money investing in open-source companies.

Take VA Software, for instance. The company started life as a hardware vendor, left that business in June 2001 when it became clear that wasnt going to work, and now its best known as the publishing company behind Slashdot and other open-source-friendly sites.

When VAs IPO (initial public offering) opened up in December 1999, its stock price rose on the first day to close at $300 a share.

There was a brief time when its investors were talking about being Linux millionaires. That talk didnt last as long as most dot-com fortunes. In the first half of 2000, Linux stocks crashed.

Many Linux businesses lost over 90 percent of their value. Today, Red Hat trades in the mid-teens, a far cry from the day when it traded around $150 a share. VA hovers below $2 a share.

They were the lucky ones. Some companies simply ceased to exist. The Linux business had been caught in the great tech crash at the end of the 20th century.

Now, however, VCs (venture capitalists) are beginning to seriously invest in Linux and open-source companies and startups. When I say seriously, I mean seven and eight figures worth of serious.

Thats not chicken feed.

Linux trounces the Windows Mobile OS in smart-phone shipments. Click here to read more.

Still, most of you probably havent heard of these deals, so let me spell out some of them.

Theres Black Duck Software, with its open-source licensing compliance software, getting $12 million from Fidelity Ventures.

Then, theres SpikeSource, an open-source IT services company, which just got $12 million from Fidelity Ventures and Kleiner Perkins Caufield & Byers.

And theres ActiveGrid, with its LAMP (Linux, Apache, MySQL and PHP/Python/Perl)-based application server, which landed a cool 10 million from Worldview Technology Partners.

I could name a half dozen other open-source companies that have hit the financing jackpot. So, whats going on here?

"It appears to me that VCs are looking for investment opportunities that offer manageable levels of risk and short- to medium-term positive return on the investment theyre making," said Dan Kusnetzky, IDCs program vice president for system software.

Theyre not looking for Linux businesses per se, though, he said.

Instead, Kusnetzky said, he sees the venture capitalists as usually interested in "open-source applications with some focus on development and deployment tools. It seems that the VC community believes, although use of Linux and BSD is growing, that these technologies are increasingly seen as commodities."

Next Page: Investors are regaining faith in open source.

Investors Regain Faith in

Open Source">

"Open source is leading to new business opportunities and new business models," said Bart Stuck, a managing director of Signal Lake Management LLC, an early-stage telecom venture capital fund.

Specifically, Stuck said, "The convergence of communications and computers is suggesting that open source is going to play a much bigger role than at present in embedded computing and in wireless applications."

The VC excitement isnt just about system-level software though. Stuck noted that end-user applications are gaining popularity. "OpenOffice is becoming more and more credible with every passing day, leading to new legacy and modern business opportunities."

What I think is that the people with big-time investment money have shaken off the terrors of the dot-com crash and are seeing that theres real value in open-source businesses.

I strongly suspect that stock investors are going to wake up soon to this trend and theyre going to follow those people to the existing Linux and open-source stocks.

After all, with open-source businesses like Red Hat seeing year-over-year total revenue increases of 46 percent, the fundamental demand is clearly there.

Read more here about Red Hats positive revenue news.

If youre on the other side of the fence and you want that investment money, you should make it clear to investors that you have a solid, active business plan for reaching positive cash flow and building your business rather than spending time fundraising or looking for an exit strategy.

Yes, thats a very old-fashioned plan, a business that really does business! What a notion after the go-go 90s. But, once burned and twice shy, VCs want real businesses rather than business leaders heading towards the door as soon as they have money in their pockets.

Does that sound good to you? Well, then, go out there and get it. The money is out there again. Senior Editor Steven J. Vaughan-Nichols has been using and writing about operating systems since the late 80s and thinks he may just have learned something about them along the way. He can be reached at

Check out eWEEK.coms for the latest open-source news, reviews and analysis.

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