Venture capital investment in open source vendors dropped by 37% in 2009, but fared better than the overall software sector according to a new 451 Group report

The slowdown in venture capital funding for Linux and open source-related vendors continued in the third quarter as disclosed funding deals were down 41.6% to $77.8m*, compared to $133.3m in the same quarter last year.

We have previously voiced concern about the pipeline for VC funding based on the fact that while the first quarter of 2008 was the most successful quarter in history in terms of open source vendors raising venture capital funding, the percentage of disclosed Seed and Series A funding hit an all time low in the quarter.

The level of funding in free and open source-related vendors rose over 33% in the second quarter compared to the same period last year, following a decline in the first quarter.

The figures for publicly disclosed venture capital funding in open source vendors during Q4 and FY08 are in and while the numbers themselves provide a mixed picture, the statistics don’t necessarily tell the full story.

Zend, one of the lead commercial PHP vendors, today announced that they have received another $9 million in venture capital funding, led by Greylock Partners. So my question is - if Zend is already successful, both in terms of technology and customers why does it still need additional venture funding?

“2008 is starting with a bang for open source,” wrote Mark Radcliffe last week, and he’s not wrong. Not only did we see Sun’s $1bn acquisition of MySQL, but we’ve also seen an extraordinary amount of venture capital funding. Today saw no fewer than three investments announced, with Greenplum landing $27m Series C, Zenoss closing a $11m Series B round, and Alfresco announcing a $9m Series C round.

VC funding levels rose again in the second quarter compared to last year, up just under 14% to $115.5m, compared to $101.5m in 2Q07. Given the overwhelming level of investment in open source vendors seen in the first quarter, it was always unlikely that level of momentum would continue into Q2.

Recession be damned. The first quarter of the year saw a record $203.7 million of venture capital flow to young open source companies. You'd think that would be a cause for celebration, but for too many members of the open source community money is, well, icky.