VCs back away from open source

Funding for companies working on open source projects has fallen by 12 per cent

Venture capital firms are pumping less money into open source companies, according to a recent report from analyst firm 451 Group.

Funding for companies working on open source projects has fallen by 12 per cent compared with last year, roughly twice the rate at which general funding has dropped, according to the report.

While the drop was no surprise given the harsh economic climate, 451 Group analyst Matthew Aslett suggested that there are several other contributing factors.

Venture capital funding for open source projects generally fluctuates at a higher rate than that for other areas, and the drop-off may be due to cash stockpiling efforts in the industry.

Funding during the first quarter of the year was the largest ever recorded by the analyst firm.

"There were some suggestions that the figures for the first half of the year were inflated by vendors choosing to raise money that they did not necessarily need in order to make sure they could survive the predicted economic meltdown," wrote Aslett. "This quarter's figures would appear to support that theory."

The average size of the deals remained the same, according to the report. Aslett credited this to a lack of funding for younger companies, leaving much of the venture capital to go to larger firms.

The report noted that just two deals for a total of $6.5m had been awarded this quarter, as opposed to seven deals and a total of $41m over the same period last year.

Aslett does not see the fourth quarter being much better for open source firms and, despite big numbers early in 2008, he predicts that total funding will fall short of the 2006 mark of $546.3m.