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There's a lot of reasons, but I've had a chance to speak in confidence to a number of VCs who have been following the open source movement, and they cite the following reasons that they are looking at Open Source firms once again.

A feeling Linux is the future.

Projects like GNOME, and the funding of the Open Source Development Lab (OSDL) by Intel, HP, IBM, NEC and Dell, have begun to energize the VCs I spoke to. As one executive put it, "When these guys think it's worth spending millions on Open Source, you have to take a second look." That the lab will address the largest technical concern about Linux -- the platform's scalability, was particularly reassuring to several of the people I spoke to.

While Dell and Sun Microsystems have been of two minds about open source, other major computing firms seem to be as zealous as the Linux start-ups. IBM, in particular, has made it clear that it views Linux as a strategic technology platform.

IBM is doing more than talk. It has made a major investment in developing a Linux service business. In addition it is using its financial and marketing muscle to take Linux global. The company just announced it will be matching it's Linux investments in Europe by investing $200 million to fund Linux development centers across the Pacific rim, setting up centers in Australia, China, India, Japan, Korea and Taiwan.

Industry analysts are watching. Forrester Research, among others, thinks Linux could be IBM's chance to retake its old position as the "Infrastructure Gorilla" of the computing industry. And if IBM is betting much of its future on Linux, that's good enough for many in the venture community.

A belief that Linux is critical to winning key overseas markets

Thanks to initiatives like Li18nux, Linux is on its way to becoming a truly globalized platform. And in some regions of the world, it may be the only platform where vendors have a chance to make any money.

Linux promoters at IBM and elsewhere, have begun to win agreement that Open Source is the only practical way to address rampant software piracy throughout Southern and Eastern Asia, and to take advantage of widespread hostility towards Microsoft while at the same time creating a Linux "standard" in the region.

Many Linux specialty firms see Asia as a place where they could most easily sustain their growth rates. Established giants like IBM see the region as a place where their established distribution and service systems give them an advantage. National policymakers in many countries see Linux as a vehicle for developing their internal software capabilities.

A tilt towards Linux by the U.S. government

Asian governments aren't the only ones looking at Linux. Several people I spoke to believe that the US government is beginning to tilt towards Open Source.

A group of leading computer scientists and hi-tech executives, called the President's Information Technology Advisory Committee, announced they would formally recommend the federal government back "...open source software as an alternate path for software development."

Back in February, PITAC's panel on Open Source Software had already recommended using an Open Source approach to developing software needed in high performance computing environments. PITAC also recommends using the resources of the country's national supercomputing centers as incubators for much of the required new technology, in effect suggesting these centers take a leadership role in the open source movement.

Open Source allows companies to blow past barriers to rapid development raised by proprietary systems. PITAC's latest report is a tacit acknowledgement that only through an Open Source environment can software development begin to catch up with advances in hardware technology, particularly in high-performance computing environments.

According to PITAC members, Open Source is the fastest way to ensure that programmers can get quick access to key libraries, can build on each others' work, and can use the community of users to test and bullet-proof new products. The report hints that software firms need to refocus on service and systems integration. This has been the gist of the Open Source business case from the beginning.

Evidence that Linux firms are succeeding

Maybe it isn't charity after all. While none of the new Linux firms are in the black yet, as a group they're doing a lot better than many of the other dotcoms. Several firms, including Red Hat and VA Linux have continued their strong growth. Red Hat approached break-even point, even while doubling its revenues. VA Linux grew five fold, beat most industry estimates, and has been generating plenty of positive buzz from industry analysts. Even Linuxcare made it back from a near-death experience, thanks to large cash infusion this summer.

Successful new Linux ventures

Nothing stirs the interest of venture capitalists quite so much as evidence that other VC firms are investing in a particular market.

While the high profile VCs who invested in and hyped the Linux bubble last year haven't returned, a mix of other firms has filled their place.

These include smaller regional firms, like Cincinnati, Ohio's River Cities Capital Funds, which is actively soliciting Open Source ventures. Other investment teams are being led by Open Source pros like Bruce Perens. Perens recently started a fund/incubator called Linux Capital Group (LCG). LCG is funding Ian Murdoch, a leading developer of the Debian distribution. Murdoch's new firm, Progeny Linux Systems, plans to develop a commercial version of Debian, and is developing a system to enhance the administration of enterprise networks.

One venture firm that has attracted a lot of notice is Linux Global Partners; the New York-Based Venture Fund founded by William Roseman and Fred Berenstein.

Roseman and Berenstein have already impressed the investment community with strategic early investments in Helix Code, and Gnumatic -- both companies playing important roles in the GNOME project. LGP also invested in Heimdall Linux, who have generated a version of Linux with C2 certification -- the government's highest security rating -- something Windows 2000 sure doesn't have. Linux Global Partners hopes to go public sometime late this year, or in early 2001

So, while the Open source movement still has plenty of skeptics, the VC community is once again beginning to evaluate Open Source business models. And while the money may not be as plentiful as it was a year ago, good business plans should be able find funding.

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