This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Venture Dollars Flow to Open Source

The difficult part of all this is the "for free" phrase. No investor is willing to fork up money for a company that has no intention of ever being profitable. "There's always a portion of the open-source audience that is anticapitalist," says Stephen O'Grady, principal analyst with a research firm ironically named Red Monk. "But there is a substantial and growing number who are more pragmatic," he says.

Andi Gutmans, Zend's Swiss-born founder, has no compunctions about the profit motive. His company, which grew revenue this year by 100%, should be in the black by late 2007. How much revenue that represents, though, is still a secret. Gutmans will only say that it's in the "double digits."

Even so, Zend illustrates an important point. If all goes well, it will reach profitability after having raised $37 million over seven years. One reason the burn rate isn't higher: It doesn't cost much to distribute software over the Web, and sales and marketing expenses are low as well.

Interestingly, though, at least half of Zend's revenue is derived from proprietary software, which adds a layer of complexity to the business model but also gives management that much more flexibility.

Medsphere, on the other hand, bases its products on open-source software developed originally by the Department of Veterans Affairs and is therefore required to remain strictly open source, says founder Ken Kizer, who not coincidentally is a former head of the VA.

The open-source business model raises other issues as well. Conventional software companies are paid when the software is delivered.

Open-source companies generally don't get money until the software is actually used and the customer likes it enough to sign up for support, says Bernard Golden, CEO of Navica, a systems integrator and publisher of an open-source-oriented newsletter. "Venture money needs to have more patience," he says.

3 of 4

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,086.63 -26.91 -0.16%
S&P 500 1,987.01 +3.48 0.18%
NASDAQ 4,473.6970 +17.6810 0.40%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs