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Bad economy may lead to good IPOs in open source

Open-source companies are doing very well in the recession, but this probably means they'll need to wait for IPOs rather than acquisitions.

Initially, it appeared that every successful open-source company would be swallowed up through acquisition. That may still happen, but as the mergers and acquisitions route dries up, it's increasingly likely that the best open-source companies could find themselves growing toward an initial public offering.

After all, they may not have any other choice.

JBoss, Zimbra, XenSource, and other companies rode an initial surge in interest in open source as a business and development strategy, each selling for hundreds of millions of dollars. Since that time the pace of acquisitions has slowed as would-be buyers hunker down and ride out the recession.

At the same time, open-source companies are reporting record revenue. My own company, Alfresco, has recorded 17 straight growth quarters since the company was founded in 2005, and we're joined by Funambol, Jaspersoft, and others that are reporting upward of 100 percent growth quarter over quarter.

Where does such sales momentum lead? Probably not to acquisitions. Not for many of these companies.

It's likely that within the next few years, the M&A market will open up again. But by that time many of these open-source companies will likely have attained a size that makes it easier for them to go public than to be acquired.

MySQL, which was topping $94 million in sales at the time of its $1 billion acquisition by Sun, is the exception to this rule. There simply aren't very many companies that can afford to spend $1 billion on an acquisition, which means that open-source companies will need to focus on being built to last, not built to flip.

Perhaps this won't sound appealing to the employees of Reductive Labs, Funambol, Pentaho, and other open-source companies. Like their Web 2.0 peers, they almost certainly would love to see a quick exit so that they can buy a cabin up in Tahoe.

But though it may not be ideal for such employees, it's arguably a very good thing for the industry, and for IT buyers. The industry could use another Red Hat. IT buyers, for their parts, would probably love to be able to buy from someone other than Oracle, IBM, and Microsoft.

So settle in for the mid-term march to profitable $100 million open-source companies. At current growth rates, we should start to see IPO action as early as 2012, and perhaps sooner.