Linux VC coming back?

After a summer-long drought, the venture capital community is beginning
to sprinkle dollars at new (or at least plausible) start-ups. And while
the money is flowing in a lot of different directions, there’s finally
some money heading back toward Linux firms.
Why?

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.