Open Source changes the game for software

Open source is no longer just Linux operating systems. Venture capital investment into a new breed of open source software companies with a diverse range of offerings up and down the application stack is growing rapidly. This has potentially profound implications for a wide range of companies which rely on selling expensive licenses for their proprietary software.

FirstCapital research shows the international venture capital community has invested over $1.25bn into Open Source software companies since 1999. Furthermore the interest is accelerating. In 2004 there were 10 first round investments into new open source companies, which represents a level of activity in an early stage market not seen since the tech boom of 1999 – 2000.

Technology corporate finance specialist FirstCapital hosted a breakfast seminar on investing in Open Source software on 23rd February 2005, which attracted more than 100 venture capitalists and industry executives to discuss the opportunities in the sector and evaluate if recent trends really did "change the game" for VCs.

"In 1999 and 2000 much of the activity was in Linux based-businesses like Red Hat, SUSE Linux and Ximian" says Jason Purcell CEO of FirstCapital. "Now we are seeing a new diverse and exciting range of companies up and down the application stack: from CRM provider Sugar CRM through to server virtualization company XenSource."

This heralds not only a new appetite amongst venture capitalists for open source companies but fires a warning shot across the bows for more traditional software models.

Danny Rimer, Venture Partner at Index Ventures, which has invested in a number of open source companies, said "The rate of growth of customer deployments of open source projects is astounding".

"Using open source code lowers the barriers to entry for new companies, reducing R&D spend. It allows emergent businesses to focus on building value for their customers in a shorter time frame." said Damian Reeves, CTO and founder of Zeus Technology, a venture backed software company based in Cambridge.

As well as the new opportunities, however VCs need to be alert to the potential impact of Open Source on their portfolio companies. Not all will be negatively impacted. Deborah Magid, Director of Strategic Alliances at IBM, said "There is still a bright future for traditional software companies addressing difficult problems in vertical industries. Some applications will never be appropriate for the open source model."

While many software sectors are dominated by the US, Europe is a leader in open source software according to Rimer. Purcell points out "The most famous open source visionary is Linus Torvalds, founder of Linux who is Finnish. The open source phenomenon presents an incredible opportunity for European VCs to seize the initiative and take the lead in open source."

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