Linux model inspires Apache Web server business

Covalent, dedicated to the Apache Web server software, receives $5 million in venture funding that it plans to use to emulate red-hot Linux outfit Red Hat.

Stephen Shankland principal writer
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Will Apache, popular "open-source" server software for running Web sites, become the next Linux?

Covalent Technology certainly hopes so. The 12-person Lincoln, Neb., company has received $5 million in venture funding that it plans to use to emulate red-hot Red Hat, which operates in a related market.

Flush with funds, Covalent will move to San Francisco, hire a new chief executive and increase its headcount to 60 by June, said Randy Terbush, Covalent's current CEO and one of the eight founders of the Apache project.

Covalent sells technical support and enhancements for the Apache Web server, much like Red Hat provides services based around the Linux operating system. Both are distributed through the open-source model, which means the software can be used for free and modified at will. A Web server is the software layer that delivers pages to viewers, and Apache is the market's most popular product, despite competition from well-financed behemoths like Microsoft.

With Linux a proven technology to win the attention of Wall Street, Covalent is one of several companies hoping that business plans built around other open-source technologies popular among programmers will be their ticket to glory.

Leading the investment round was H&Q Venture Associates, which will get two seats on Covalent's board. Adobe and Texas Instruments also contributed funding. Eventually, Covalent's goal is an initial public offering, Terbush said.

"This is the second wave of the open-source thing," Terbush said in an interview. "Linux has taken off and is in the news, but Apache has gone unnoticed in that area."

But Covalent will have to stave off some better-established competition. Red Hat, beneficiary of an $84 million initial public offering, began offering Apache technical support in November. And Linuxcare, which just raised $32.5 million, said yesterday it will provide support for Apache as well as several other open-source programs.

Covalent has more to offer than just technical support and consulting services, however. The company also sells an add-on to Apache that enables use of "the secure sockets layer" encryption technology, essential to private transactions such as credit card payments.

In the future, the company will add more proprietary modules for authenticating credit cards and scanning for viruses, Terbush said. "We're currently discussing licensing of this technology from other companies," he said. The company also will fund work on the open-source, nonproprietary additions.

Apache could well benefit from the Linux boom, said Giga Information Group analyst Stacey Quandt. "One trend is for Linux to be the next-generation e-business platform. If that happens, it's clear more organizations will be using Apache, because it's often paired with Linux as a Web server," Quandt said.

Terbush said the funding will help Covalent snap up some developer talent. "It should really enable us to bring on some core Apache people," he said.

Still, hiring big-name open-source programmers near Silicon Valley could be difficult. One of Linuxcare's three goals for its newfound millions is to hire its own open-source programmers, and VA Linux Systems likewise hopes to hire some big names with the $132 million it raised in its recent initial public offering.

"There are only so many names that are superstar status," Quandt said. "There's a lot of competition for open-source expertise."

Apache is used on 55 percent of Web sites, more than twice the number of the second-place finisher, Microsoft's Internet Information Server (IIS), according to consulting firm Netcraft. Apache ships as part of IBM's WebSphere e-commerce software.

"Apache obviously challenges IIS," Quandt said. Apache, unlike IIS, works on many different operating systems besides Linux, and therefore makes sense for companies that use several different types of computers, she said.

Covalent's technical support services are in keeping with a popular business model for open-source software, which can be obtained for free but isn't necessarily simple to install and use. Covalent also sells copies of Apache itself for $25, $10 of which the company donates to the Apache Software Foundation.

The technical support operation will stay located in Nebraska, Terbush said.