Open Source Financiers Favor Hybrid FOSS/Proprietary Strategies

Market Researchers at The 451 Group are out with a report on the history of venture capital funding in commercial open source companies between 1997 and 2008. Based on the group's database of more than 370 funding deals over that time period, the report concludes that "since the first venture investment in an open source vendor in 1997, $3.2 billion has been raised by 163 open source vendors through 378 separate funding deals." The report also turned up some interesting findings on how VC investments in open source may fare going forward.

Overall, The 451 Group finds that the environment is reasonably good for VC investments in open source firms, and the group identifies 57 open source firms that are likely to be considering pursuing further funding based on their last rounds of financing. VCs also report that they foresee healthy open source adoption over the next two years.

However, the report notes that "a 100 percent open source software licensing strategy is incompatible with the demands and requirements of private investors." Specifically, researchers found this:

"We also asked investors to choose from between five different licensing strategies for an imaginary startup (hybrid open source/proprietary, hybrid open source/SaaS, hybrid proprietary/SaaS, 100% proprietary, and 100% open source). Not one investor was more likely to invest in a vendor with 100% open source licensing."

In other words, there is a preference among VCs for hybrid licensing strategies, where companies are open to both open source and proprietary software strategies. Of course, many open source companies have such strategies. DimDim offers a free open source version of its conferencing application, but charges for a Pro version. SpringSource offers a mix of open source and proprietary solutions, and the list goes on.

If you look at the chart below, open source has done quite well in terms of private funding up until now. Matt Asay looked at the findings from The 451 Group, and notes that open source companies may soon start to pay their investors back at healthier rates. That would be good all around.