VCs backing off of open source

Analyst firm 451 Group said in a recent report that venture funding for companies who work on open source projects is down by some 12 per cent over last year, twice the rate in which funding in general has dropped.

While the drop in funding was no surprise due to the harsh economic climate as of late, analyst Matthew Aslett suggested that there were several other factors which contribute to the drop and say a bit more about what it could mean.

Aslett noted that, in general, venture capital funding for open source funding can fluctuate at a higher rate than that for other arenas.

The analyst also suggested that the drop-off in funding may be due to cash stockpiling efforts in the industry. Funding the first quarter of the year was largest ever recorded by the company.

"There were some suggestions that the figures for the first half of the year were inflated by vendors choosing to raise money tht they didn’t necessarily need (yet) 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 credits 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 US$6.5 million had been awarded this quarter, as opposed to seven deals and a total of US$41 million over the same period last year.

Aslett doesn't 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 2006's mark of US$546.3 million.

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