Open Source Startups Spark Investor Interest, Incubator

As tech companies are increasingly feeling threatened that they’ll be sued for improperly using open source code, a market is developing for tools that detect the presence of such code within application development environments.

First to market: Black Duck Software, which today is expected to announce that it has received $12 million in Series B funding led by Fidelity Investments, which enlisted heavy hitters Intel Capital and SAP Ventures, along with previous investors Red Hat, Flagship Ventures and General Catalyst Partners.

Waltham, Mass.-based Black Duck, which raised a $5 million Series A round of funding a year ago, isn’t alone. Its primary competitor is San Francisco-based Palamida, which received its first round of funding, also $5 million, in December from WaldenVC, Hummer Winblad Venture Partners and Stanford University.

Both companies develop tools that compare intellectual property against open source code to help companies catalog applications.

The market for Linux alone, which is just one piece of the open-source universe, is enormous. Last year, it accounted for 23% of all server-operating environments worldwide, according to market researcher IDC, which is anticipating that the overall market for Linux hardware and software and related applications will hit $35 billion by 2008. “People are very interested in tapping that market,” says IDC analyst Dan Kusnetzky.

In addition to Black Duck and Palamida, another open source startup to receive funding this year is SpikeSource, which closed a $12 million Series A two weeks ago led by Fidelity Investments and Kleiner Perkins Caufield & Byers, where the company was incubated. (Spikesource tests and certifies open-source software, then helps companies implement and support it.)

Also, Sugar CRM, which makes an open-source customer relationship management application, raised $7.75 million over two rounds late last year from Walden International and Draper Fisher Jurvetson.

And last week, an incubator called Simula Labs, backed by Redpoint Ventures and Mission Ventures, was formed in Southern California to identify six to eight open source development projects and transform them into profitable startups. Among the areas Simula is looking are directories and identity management. Redpoint and Mission have reportedly given the venture between $10 million and $15 million.