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Red Hat creates investment unit

The Linux software company continues to reshape its business plan to fit a rapidly evolving open-source market, creating a division to fund start-ups.

Red Hat continues to reshape its business plan to fit a rapidly evolving open-source market.

Red Hat, which sells software and technical support for Linux, a Unix-like operating system, today unveiled an investment unit aimed at funding open source-related start-ups.

The company said the Red Hat Ventures division will take $500,000 to $2 million stakes in new companies specializing in open-source software and Internet infrastructure technology. Red Hat said it hopes to identify new business opportunities through the funding of start-ups.

In recent months, the company has undergone a high-level management shuffle and has struggled with a strategy to diversify its revenues streams. The company has scaled back plans for a Linux and open-source news Web site, Wide Open News, which launched last year.

Doug Lynn, an analyst at Meta Group, said Red Hat's latest move supports its decision to pare its portal plans, as a portal strategy isn't necessarily a cash cow and a venture fund program is a "safer and smarter" move.

Last Friday, the company said it laid off three of the four Wide Open employees and transferred the fourth to another position. The site was supposed to serve as more than a public service for open-source software; it was also aiming to be a destination for all things Linux and to help Red Hat earn revenues through ad sales, software sales and leads on service contracts. Instead, the site has been scaled back to provide stories from a handful of syndicated news partners.

"(Red Hat) had to start realizing they needed to make investments in areas where they're going to make money back," said Lynn. "The investment community is looking for technology providers that can consistently grow. If you're going to put a portal up and make money through advertising here and there, there's really not a lot of growth there in terms of revenues streams."

CNET TV: Red Hat's Hal Covert
CNET TV: Red Hat's Hal Covert

Red Hat's CFO discusses the recent Linux stock slump.
Lynn said Red Hat has been looking for ways to bolster its revenue opportunities because a company "can only make so much money for selling or giving away cheap technology."

"In order to have money for future investments, (Red Hat) has to have another engine in place," he said, adding that the division will probably act like a start-up incubator program.

The ventures division will be managed by Red Hat chief executive Matthew Szulik, chief financial officer Harold Covert, and Howard Jacobson, the director of corporate development, the company said in a statement.

Through the unit, Red Hat said it plans to not only finance Linux and open source-related start-ups but also to create long-term customers.

"For Red Hat, these investments will enhance revenue streams, expand our customer base and increase the variety of products and services offered through," Covert said in a statement.

Investing in start-ups is an increasingly popular strategy that has made companies such as Sun Microsystems, Hewlett-Packard, Intel, Compaq Computer, Dell Computer and IBM look like venture capitalists.

Red Hat has already taken stakes in several open source-related start-ups, including Sendmail, and