Linux start-ups could fuel new IPO craze
By Therese Poletti
SAN FRANCISCO, June 23 (Reuters) - Almost 400 software programmers, dressed T-shirt casual, lined up on a recent balmy evening outside the Four Seas Restaurant, in the heart of San Francisco's Chinatown district.
One shopkeeper left her souvenir shop and crossed the street to ask what was going on, laughing when she learned it was a computer industry event. No one bothered to explain that they were lined up to hear the software industry's latest wonder boy, Linus Torvalds, the 29-year-old creator of Linux.
Linux, the renegade version of the Unix operating system -- given away over the Internet and maintained by a group of far-flung programmers -- has such a following that its creator Torvalds is as idolized as some rock stars. Now, some Linux start-up firms hope the growing Linux momentum will translate into capital and investors will line up to buy their stock.
Earlier this month, Red Hat Software Inc., the biggest distributor of Linux, filed a registration statement with the U.S. Securities and Exchange Commission, for an initial public offering of its stock and a few other Linux start-ups are considering the possibility of an IPO.
Red Hat, based in Durham, N.C., is probably the best-known Linux company. It pioneered the concept of selling packaged Linux software which is available for free on the Net.
Red Hat sells a package for about $50 with about 400 free Linux programs, and plans to make money from support and training. The company generated $10.8 million in revenues for the fiscal year ended in February, with a loss of $130,000.
RED HAT SEEN AS A LEADER IN LINUX MARKET
But against the backdrop of many hot, though money-losing Internet IPOs, analysts said Red Hat was likely to generate considerable interest, as the leader in the Linux market.
''People link Red Hat to Linux, they don't own any aspect of Linux, but it is a way to play that market,'' said Ken Fleming, an analyst at Renaissance Capital, in Greenwich, Conn., which follows IPOs. ''A lot of companies want to see other competitors to Microsoft and to reduce the dependence on Microsoft.''
Indeed, according to International Data Corp., Linux is the fastest growing operating system to run network servers and in 1998, Linux grew faster than Microsoft Corp.'s (Nasdaq:MSFT - news) Windows NT. For its part, Microsoft has admitted that it is nervous about Linux.
Last month, the Redmond, Wash.-based giant charged a team of engineers to keep an eye on Linux and to learn more about the so-called Open Source software movement, where the source code is published and free to programmers, who make changes and improvements to the software.
There are other open source software programs, such as the Apache Web server, but the Linux operating system has received the most attention in the past year as computer and software giants, ranging from International Business Machines Corp. (NYSE:IBM - news) to Dell Computer Corp. (NYSE:DELL - news) and Oracle Corp. (Nasdaq:ORCL - news), to embrace Linux.
LINUX SPARKING SPATE OF START-UPS
Many new companies, too, are starting up, focusing on Linux. One of the oldest Linux start-ups, called VA Linux Systems Inc., is also considering going public. VA Linux Systems of Sunnyvale, Calif., formerly known as VA Research, is now considering going public, CEO Larry Augustin said.
VA Linux Systems, founded in 1993 by Augustin while he was a Stanford University graduate student, was the first company to sell computers, workstations and servers running Linux and other Linux applications.
Augustin says his biggest claim to fame was that he started a Linux company, building Linux workstations in his living room, instead of joining his fellow Stanford students David Filo and Jerry Yang when they started up Yahoo! Inc.
''I thought about going to Yahoo, but they don't do anything there,'' he joked. ''I am an engineer, I wanted to build something.''
VA Linux Systems has now grown to about 130 employees, up from about 21 at the end of 1998 and moved to a bigger space.
''VA Research is the de facto standard if you are going to buy pre-loaded hardware, even though IBM and Dell are now selling it, VA Research is the one who comes up first,'' said Bill Peterson, an analyst at IDC. ''Timing is good for both of them (both Red Hat and VA Linux Systems).''
Both Red Hat and VA Linux Systems have top-notch investors. Compaq Computer Corp., Dell, IBM, Oracle, Netscape and Intel Corp. have invested in Red Hat while Intel, Sequoia Capital and other venture firms have invested in VA Linux Systems.
SUPPORTING OPEN SOURCE
VA and another company called Penguin Computing Inc., a private company in San Francisco's Multimedia Gulch, sell hardware running Linux but both companies offer Linux support. Because no one company owns or supports Linux, many of these new companies hope to make money by providing customer services, such as LinuxCare Inc., based in San Francisco.
''If you are going to be an open source company, it makes sense to do something around services and helping customers, harnessing the whole power of the open source movement,'' said Ted Schlein, a general partner with Kleiner Perkins Caufield & Byers, one of the big venture capital firms in Silicon Valley, and an investor in the recently formed LinuxCare.
Another Linux vendor, Caldera Systems Inc., which also packages Linux and Linux applications software, said it was looking at an eventual public offering, but was in no hurry.
''We are definitely looking at doing an IPO in the future ... but there is no deadline, it could be very rapidly, it could be a year from now,'' said Ransom Love, president of Caldera Systems. Based in Salt Lake City, Caldera includes Ray Noorda, the former CEO of Novell Inc., among its investors.
WILL IPO BOOM HURT LINUX COMMUNITY?
One of the risks these companies face in going public is the potential impact that an IPO boom could have on the Linux community, which is a group of eccentric developers, some of whom work on Linux in their spare time, for free. Many work for the glory of recognition by their peers, in the hopes that their work may become part of the overall operating system.
Torvalds, who wrote the Linux ''kernel'' 8-1/2 years ago and still manages all the updates to the software, has a job with a top-secret semiconductor start-up in Silicon Valley, called TransMeta Corp.
''I think it's great that people are getting paid for doing Linux,'' Torvalds said at last week's meeting of the Bay Area Linux Users Group. ''They can laugh and say what a stupid company to pay them for doing something they would do for free,'' he added, to much laughter.
''It's kind of tricky because you have a situation where Linux is kind of a religious, philosophical thing,'' said Chris Dibona, Linux Community Evangelist at VA Linux Systems. ''It's a matter of how people act with the money.''
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