Venture capital (VC) has returned to open source software, writes Steven J. Vaughan-Nichols in an eWEEK editorial published today. However, VCs today are more discriminating than in the go-go 90s, limiting investments to companies with solid fundamentals, especially those in markets such as development and deployment tools, telecom, and embedded.

High-flying Linux stocks such as Red Hat and VA crashed in late 2000, leaving VC skeptical of businesses selling commodities such as hardware or open source operating systems. However, venture capitalists remain interested in open source, Vaughan-Nichols says, and today fund open source companies that include Black Duck Software ($12M), SpikeSource ($12M), and ActiveGrid ($10M). He might also have cited MontaVista ($75M), TimeSys ($29.5M), Jaluna ($12M), Trolltech ($6.7M), DeviceScape ($20M), Esfia ($2M), LVL7 Systems ($12.5M), LynuxWorks ($4M), and others in the embedded Linux OS and tools market.

Unlike Linux bandwagon days, venture capitalists today value “manageable levels of risk and short- to medium-term positive return,” according to IDC's Dan Kuznetzky, VP for system software, as quoted by Vaughan-Nichols. Kuznetzky adds that companies marketing development and deployment tools are especially attractive.

Telecom is another area of high VC interest, Vaughan-Nichols suggests, quoting Signal Lake Management Fund Manager Bart Stuck, who reportedly 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.”

Vaughan-Nichols says he expects a new crop of successful open source startups to breathe life into publicly traded open source stocks, such as Red Hat. He advises open source companies interested in attracting venture funding to devote their energies toward creating positive cash flow and solid business models, rather than working toward an exit strategy, or focusing solely on fundraising.

Read the full story for more about the second coming of open source venture capital.

 
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