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VC money for open source drying up? Not the smart money

Open source is exploding. VC money will follow the smart permutations of it.

Some who read the headline of this article on venture funding for open source is drying up. That would be the wrong conclusion to take from the article.

It's true that we've largely tapped out the obvious investment categories for open source: CRM, ECM, ERP, etc. But there's always good money for a good business, and increasingly open-source businesses look less and less like 20th Century software companies. Think Digium and OpenAds, companies that are charting new trails in new markets. Open source, in other words, is "scaling horizontally," moving into new territory. It's finding great investors there.

As for investments into the "easy" enterprise categories, there's still money there, too. But the good money understands that open-source investors shouldn't expect a quick exit. David Skok, a premium open-source investor, gets this:

The key, therefore, is to be able to give away a product but also show how you plan to "find some small, or large enough, subset of customers willing to pay for something else," such as support, updates or indemnity to go along with the software.

"This is a big problem with open source," he said. "It's free or low cost and that represents a huge cost for a VC because a VC is in business to make money."

An open source company's ability to reach profitability early on isn't necessarily essential, Skok said.

"I'm willing to work three or four years before that," he said. "I'm more interested to see if they can really grow revenues."

Bingo. I feel fortunate that my own company, Alfresco, has incredible investment firms in Accel and Mayfield, but also intelligent, patient investors in Kevin Comolli and Robin Vasan. Good businesses need good investors to help channel, inform, and encourage their growth. Dumb money need not apply.

There's no slowdown in open source. If anything, adoption continues to accelerate. The $1 billion investment decision, then, is not whether or not to invest in open source, but rather in what package to fund it? SaaS? Binary/support model (like Red Hat)? Or some other creative way that an entrepreneur is hatching right now.

The smart money will find these investments.