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.