VC's Open Their Wallets For Open Source Startups!!

(Via NYTimes) Marc Fleury cold not succeed in raising money in 2000 for his idea based on opensource, as his business idea was based on open source - but four years later, his business, still based on the same idea, invited competition amongst VC's for financing. NYTimes writes, Venture capitalists are again embracing open-source technology companies. JBoss, was one of 20 such businesses that raised $149 million in venture money in 2004. At least three open-source start-ups raised $20 million last month alone. But given some spectacular open-source failures in the late 1990's, a natural question may be whether some of these venture capitalists have perhaps lost their minds. In 1999 and 2000, according to VentureOne, venture capitalists invested $714 million in 71 open-source companies. Most of those projects collapsed.
A big difference between then and now is the increased adoption of open-source software by corporate users. Another is the relative success of Red Hat. Red Hat has become something of an inspiration to open-source businesses and their investors as it shows that it is possible to base a lucrative services business on giveaway software. Red Hat also gives its customers a guarantee that a long list of popular applications will work on its edition of Linux. The company had $125 million in revenue in 2004 and now has a market capitalization around $2 billion. Red Hat's success in selling support services has created the business model for virtually every open-source entrepreneur. Venture capital firms have become so enthusiastic about this approach that they seem eager to support practically any open-source company just to have a stake in this hot area. But broad distribution, which is critical to the service model, is still quite rare.
My Take: Very surprising. VC's cant be funding a movement. Any investment would demand reasonable results and VC's are there to fund promising ideas which funded well can reap very high returns. Well differentiated strategies, value propositions, strength of the ideas, capability of the management team, marketforces by and large determine the suceess of any investment and certianly not whether it is opensource or otherwise - sectoral investments are for central policy planners - VC and high tech investments are for sharply defined ideas, focus and execution abilities. With the software market consolidation happening faster, lot more forces thatc can complicate investment decisions come into interplay..
Category : Open Source, Venture Capital