Open source software represents a better bet for venture capital firms than traditionally licensed software, according to representatives of three VC firms gathered at the recent Open Source Business Conference in London.
While all three firms had invested in open source before they insisted their likelihood to do so again was not based on favoritism, but rather an economic decision based on market realities.
We fundamentally believe that open source is a new distribution model, but it is also a new software development model that is here to stay, said Bernard Dalle, general partner with Index Ventures. We anticipate it’s going to be very hard going forward to invest in closed source, because we don’t think it’s a good development model.
Dalle said the company believes open source delivers better code, due to a broader level of QA testing, faster innovation, due to broader requests for new features, and a cheaper development model.
Index is already a strong supporter of open source, having invested in open source business intelligence vendor Pentaho, services firm SourceLabs, PHP products provider Zend, database vendor MySQL, and embedded Linux specialist Trolltech.
It is far from the only VC firm to get involved in open source software however. Computer Business Review recently noted that it had tracked over $500m invested in 40 open source vendors in recent years.
Another funding firm at the OSBC event in London was the Mayfield Fund, which has investments in open source systems management vendor GroundWork Open Source Inc and content management provider Alfresco Software Inc.
We don’t see this as a space, we’re not calling this a category. We think this is an integral part of the industry today, agreed Robin Vasan, managing director at the Mayfield Fund, explaining that the decision is based on the experience of customer purchasing demands for software. Customers are saying ‘I’m going to try it before I buy it, I’ll try it and if it does what you say it should do, then we’ll think about having a conversation about paying for it’, he said.
Wellington Partners has already invested in the likes of Linux server vendor Collax Inc and security appliance and software vendor Astaro Corp, and is also convinced that open source will become pervasive for different reasons.
We expect to invest in open source, but not because it is open source but because we expect it to be part of every software company in the future, said Frank Bohnke, general partner at Wellington.
Bohnke sees the open source model being used by every company somewhere in their development process to save costs on common components. An example would be the consumer electronics industry, which currently has to rewrite the software for every device every time anew hardware version is introduced, he said.
Just by open sourcing and reusing models, it makes the process more efficient, Bohnke said. He also had a word of warning for anyone expecting to be able to set up an open source company and be showered in VC cash, however.
Ultimately these open source companies have to prove that they can build brands, they can sell, and they can build profitable companies. I don’t think there are many companies yet who can do that and prove the theoretical benefits of open source, he said.
Vasan also maintained that just being an open source vendor would not be enough to get funds and attract investor attention. Your valuation is not going to be based on the size of your community and the number of downloads you have, he said, indicating VCs had learnt the lessons of the dot-com boom. We’re back to solid business basics.