Are valuations out of whack for open source?

While reading an article today in the Financial Times based on an interview with Oracle CEO Larry Ellison, I ran across an interesting quote from the Oracle head honcho:

“You can build a sustainable business [in open source], you just can’t charge a lot for it. There’s brand value – there’s real brand – there’s people, and that’s it.”

Which caused me to question whether the recent valuations of open source companies are aligned with their actual values. Mr. Ellison continued with,

“I believe JBoss is a $16m company breaking even, MySQL is a $30m company breaking even,”

I actually agree with Larry here, although I would put JBoss at $20m. So does that mean that I think RedHat got a raw deal and overpaid grossly for JBoss? Actually no I don't think that at all. I just think that with the excitement surrounding open source companies there is a tendency to forget that it takes time to build a successful company and even more time to build value and infrastructure for a company worth over $100 million. Not saying that the folks over at JBoss haven't worked hard and not hinting that this is the first time a company has been bought for more than it was projected being worth. However, I think the price RedHat agreed to pay was inflated due to the fact that open source is "hot" right now.

The danger lies in using the prices being paid for open source companies at the current moment as a barometer for gauging how big the open source industry is (monetarily). So while I am glad that two leading open source companies have agreed to come together, I would like to see more realistic prices being paid for them. Otherwise, with every overpriced acquisition and VC round there is increased risk for a bubble to form and inevitably burst, hurting everyone within/involved with the community. Bubbles are, in part, created when too much money is chasing too few viable ventures. Mostly the conditions that cause them are an unavoidable, inevitable outgrowth of economic law and policy, still they are far from "totally out of human control" a la hurricanes, tornadoes and the like.

During a bubble people lose their perspective on things and the "Gold Rush" mentality comes into vogue. This mentality is useful nowhere except in a literal gold rush where limited physical resources are at stake. They have no place within the modern day technology and business worlds. While I'm in no way a harbinger, I am an analyst and as such I am indebted to objectively analyze trends and issues regardless of how likely/unlikely a possible outcome is. In this case, I don't see anything necessarily positive about JBoss being bought for so much money and at the same time I think that it could set off a negative trend that might lead to more damage than good being done in the near future.

That is why it is my perspective that solid, grounded valuations and venture funding rounds are in line with creating a stable foundation for the open source software industry and bode well for both the short term and the long term. Hopefully, the craze of catching "the Next BIG Thing" won't cloud the minds of everyone involved and instead the focus will remain on consistently building for the long haul. Not the coolest or immediately gratifying sentiment, but one that has proven itself time and time again...