Interesting session on how to price the exit of open source companies. Alfresco is a few years from having to worry about this, but it was interesting to get into the minds of the investment bankers and VCs to see how they value open source vendors. First off, David Skok (General Partner, Matrix Partners) suggested that the typical valuation metric he hears a lot is to take a multiple of next year's cash flow (I Interesting session on how to price the exit of open source companies. Alfresco is a few years from having to worry about this, but it was interesting to get into the minds of the investment bankers and VCs to see how they value open source vendors. First off, David Skok (General Partner, Matrix Partners) suggested that the typical valuation metric he hears a lot is to take a multiple of next year’s cash flow (I think JBoss’ was roughly 6x 2007 revenues when bought in 2006). In other words, $350M for ~$60M in 2007 revenues. (One question I have – were those revenues or bookings? Not sure.)As for the right multiple, it was suggested that looking at other subscription-based businesses provides insight. So, Salesforce.com, RightNow, etc. Dewey Awad (Bain Capital) and Katherine Egbert (Jefferies) stressed that one of the most important drivers of valuation is growth (whether in proprietary software companies or open source software companies). Downloads are a factor of growth, and perhaps a leading indicator. But conversion of downloads into dollars is paramount.Several panelists suggested that the open source financial ecosystem depends on Red Hat. If Red Hat stumbles, MySQL’s chances to IPO will also stumble. This is what I’ve been trying to get people to understand when they chide me for covering Red Hat as closely as I do: we need Red Hat to succeed. Even its top open source competitors need this. Once we have a strong ecosystem of public open source companies, Red Hat’s singular importance will be, well, less singular. But we’re not there yet. We need Red Hat to do well.And, btw, for anyone interested in being acquired by Red Hat, keep this in mind: Red Hat cannot afford to acquire a dilutive company (in other words, it has to be profitable, or accretive). It also can hardly afford to acquire a proprietary company, because it pays proprietary multiples but transitioning the product to open source will likely lower the proprietary value of the deal (it diminishes the Windows-based revenue, and a subscription model stretches out the monetization time horizon for the formerly proprietary product). So, if you are hoping to be “Googled” then you need to be open source and profitable. Of course, if you’re open source and profitable (and growing nicely), then why not IPO? Open Source