September 2007

Q. What is the state of open source in public administration?

A. Public administrations across the globe are increasingly turning to Free/Libre Open Source Software (F/LOSS). Vendor lock-in, cost control and an overall quest to gain back the control of their Information Technology (IT) are just a few of the reasons attracting them to open source operating systems and thousands of open source applications. We know about flagship projects such as the city of Munich in Germany and the Spanish state of Extremadura. However, many more projects are happening. France is very active with the Finance Ministry and National Police leading the way.

More or less every country today is slowly integrating F/LOSS. In fact, the European Union produced a very complete 287 page report last November, stating that open source is beneficial to European businesses and that its usage increases productivity. Another interesting fact is that in Europe the number of feasibility studies has decreased, a sign that the time for studies is over and implementations are under way. We can see the same trend with the Government of the Province of Quebec here in Canada, a few years behind Europe but with the same types of projects taking place.

So the next step should be full adoption of open source in all government departments with mandatory requirements in all request for offers? Not exactly. This paradigm transition is a major one as the computer industry is reaching adulthood. Like the construction industry a century ago, Information Technology will now have to provide its users with standard interoperable components with full ownership and transparency. And, like any major change, it will take some time to take place. No organization would want to upset its current suppliers; these suppliers, today's computer industry, are also living this major paradigm switch and some are only starting to realize the major impact that it will have on them. With the number of legacy software in use in government today, it would be unwise for a public administration to upset the vendors supporting the vast majority of their install base. Not to mention the fact that many projects are just as much linked to the people as the software used. Many of these people are business process experts and the value of their knowhow exceeds the value of the tools used. So care must be taken to ensure continuity.

Providers of F/LOSS services should also not wish to have too quick of a transition. Imagine a large government department with thousands of users wanting to switch everything to free software tomorrow. Can we deliver? Do we have a solution for everything? How will change management and user acceptance affect the success of our projects? It is best to go slowly and start migrating one part at a time. Also, let's not forget, the paradigm has changed: increasingly, clients will migrate themselves without the need for outside help. In fact, I predict that the most used method will be to call on temporary help to increase their IT team and do knowledge transfer. So governments are switching, they will not and should not do it quickly, and they will do it differently by looking for temporary help and knowledge transfer instead of old style contracts. We know what is coming, we have the luck to be behind here in Canada so we can learn from other parts of the world and prepare service offerings to meet the demand of governments. In the words of Andrew Clunis of the One Laptop Per Child Project: "Our lagging adoption of free software provides us with the opportunity to learn from the other nations' experience."

Q. Are there venture capital investments in open source companies?

A. While sources in the US who closely track venture capital (VC) investment in open source companies mostly agree that the number of deals and funding is tracking up, the same can not be said of Canada. What does this mean for Ontario and Canadian open source start-ups and established vendors looking to adopt open source to compete? What does the lack in VC funding in domestic open source companies tell us? Should we be concerned?

Many things can be interpreted by looking at the raw numbers. Estimates of post-bubble VC investment in US open source vendors since 2001 vary, but the number $1.9 billion is often quoted. The definition of what constitutes an open source company complicates the meaning of the numbers somewhat. For instance, do the numbers include pure-play open source companies or do they incorporate traditional vendors that have released some proprietary code to open source communities?

The upward tracking of VC investments in open source companies contrasts with the general downward slide of venture funding of traditional software vendors over the same period. Robin Vasan, Managing Director with top-tier US-based Mayfield Fund and investor in open source businesses, was quoted in the Computer Business Review Online earlier this year on the topic. "VCs are not too excited about traditional enterprise software companies anymore: people don't want to buy business enterprise software the way they bought enterprise software anymore". He further adds: "Open source is not a market, it is a new form of development and distribution. When you look at it that way then the rationale as to why so much money has gone into open source makes more sense".

Matt Asay, open source industry veteran and founder of the Open Source Business Conference observes that savvy VCs who get the power of open source are placing bets on promising new ventures as well as established traditional companies migrating towards OS offerings.

There have been several notable VC investments in U.S. open source companies. These include Alfresco ($10M), JasperSoft ($23.5M), Pentaho ($13M), Vyatta ($18.5M), and Zimbra ($30.5M). Unlike recent bubble-like VC activity in Web2.0 companies, investors funding open source ventures appear to be paying more attention to the realism of the underpinning business models in addition to keeping a close eye on the prospects for a successful exit.And the good news is that exits are happening. Some of the notable and recent open source initial public offerings (IPOs) and mergers and acquisitions (M&As) include Sourcefire which raised $71.8M in 2007, GlueCode Software which represented IBM's first acquisition of an open source company, and JotSpot which was acquired by Google.

So what is happening in Canada? To say that locating comparable data on venture funding in Canada or Ontario of open source companies is difficult is an understatement. There is virtually little information on the state of Canadian VC investment in open source software companies. Further, portfolio holdings of Canadian-based VC firms reveal no readily identifiable investments in open source companies. A number of interpretations could be gleaned from this dearth of data:

  1. There are too few open source companies in Canada period.
  2. Regardless of the actual number of open source companies operating in Canada, none or few of them are attracting or wish to attract VC funding.
  3. Domestic VCs have little appetite for open source plays.

It would be difficult to imagine Canadian software entrepreneurs not taking notice of open source technology as a means to innovate and compete. The August 2007 issue of the Open Source Business Resource with its focus on open source business models reveals that in fact there are an impressive number of entrepreneurs leveraging the power of open source in Ottawa alone. It would not be a stretch to imagine the same phenomenon occurring in other major Canadian cities. Thus, point one above, though difficult to quantify, is probably unlikely.Point two, on the other hand, is relatively easy to verify. Diverse sources which track venture investments in a broad range of industry sectors make it apparent that there is virtually no VC funding of open source companies in Canada. Further research based on US sources again produces no information on venture deals of Canadian-based open source ventures.

Is it fair to assume that Canadian VCs shun investing in software companies that have chosen to grow their businesses via open source as in point three? Or is it more plausible that Canadian VCs are just more cautious and are taking a wait-and-see approach relative to their US counterparts? Perhaps there are simply not enough investment-grade open source ventures that merit VC attention in this country? Whichever is correct, will this lack of VC funding in Canada matter in the long run for domestic open source software companies? Only time will tell.

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