Aplaque hanging on the wall of Larry Augustin's office commemorates a notable moment in U.S. business history--the highest opening-day gain ever for a stock. On December 9, 1999, shares of Mr. Augustin's company, then known as VA Linux Systems, opened at $30 and closed at $239.25, a 698 percent increase. Mr. Augustin says he no longer looks at the plaque.

"It's like your high school track record. It's not relevant anymore," says Mr. Augustin, VA's 39-year-old CEO. He puts in five miles a day on a treadmill at his headquarters in Fremont, California, and looks ten years younger than his age. But this icon of the Linux movement is determined to put youthful bravado behind him. "I have purged these things."

Indeed he has. The record IPO briefly gave the company--which made computers equipped with Linux operating systems--a market capitalization of $9.5 billion, helping it raise more than $150 million in cash. By spring of this year, however, the company had spent more than half of this stash, its market capitalization was down to around $100 million, and it had laid off more than 400 of its 575 employees. The company now operates from a single floor of a building in a gleaming Fremont office park, where it still holds the lease on two buildings (see "Caesar Augustin," page 51).

But worse than abandoned office space is an abandoned dream. Mr. Augustin is no longer pursuing his plan to build a business based on Linux. First released in 1991, the fabled OS was developed collaboratively by an army of programmers worldwide--for free. It excites chief technology officers and investors alike, because it challenges the dominance of proprietary server OSs, like Microsoft's Windows 2000 or Sun Microsystems' Solaris. Open-source advocates say that software like Linux, the code for which is freely available for anyone to tinker with and improve, is more reliable than products that come out of "closed" development systems used by companies like Microsoft.

In December, however, Mr. Augustin did the unthinkable. In order to save his company, he sliced Linux out of his company's name and adopted the vanilla moniker VA Software. "It's very hard," Mr. Augustin says. The move reflects his decision to recast his company as a seller of both open-source and proprietary software. The company is now less relevant to the Linux community, even as it remains dependent upon the open-source development community's continued use of its software and Web site, and dependent upon corporate buyers of commercial software for revenue. VA's survival depends on whether the company can please both camps.

Leaving the Linux hardware market could be a blow to Mr. Augustin's credibility. After all, he was the one who convinced investors that VA could become the next Sun Microsystems. And even though he ran a server company and not a dot-com, he was both a beneficiary and a victim of the Internet bubble (see "The Withered of OS," above). Shareholder lawsuits filed against him indicate as much; plaintiff law firm Milberg Weiss Bershad Hynes & Lerach, for one, has accused Mr. Augustin, VA, and VA's IPO underwriter, Credit Suisse First Boston, of artificially inflating the company's share price and otherwise defrauding investors.

Mr. Augustin may find some redemption just by keeping VA afloat, in any form. One by one, VA's top-paying customers have folded, clients like the online toy seller eToys, the Web-hosting company Exodus Communications, and the ISP 1stUp.com. For the company's fiscal 2001 (ended July), these customers' cash stores gave VA more than $56 million in revenue for a single quarter and more than $130 million in revenue overall. VA's revenue for 2002 is projected at a sobering $20 million.

FORGE AHEAD

Mr. Augustin first sensed his company was in trouble less than a year after VA's IPO. Things only got worse in the following months. Throughout 2001, the market for computer hardware shrunk, as many of VA's customers went out of business. The worldwide server market dropped 26 percent, from $16.9 billion in fourth quarter 2000 to $12.6 billion in first quarter 2001, according to the IT research firm IDC. VA also faced stiff competition from hardware giants like IBM, Compaq Computer, and Dell Computer.

During the spring and summer of 2001, VA's board met to decide how to respond. Douglas Leone, a general partner at the VC firm Sequoia Capital, which invested $5 million in VA in 1998, took the lead in pushing Mr. Augustin to find something else to sell besides servers. Even board member Eric Raymond, who authored "The Cathedral and the Bazaar," the 1998 paper credited with persuading Netscape to open its source code to the public, became convinced that, for practical purposes, VA couldn't both survive and stay true to its Linux roots.

The board considered three options: One, become a full-time Linux consulting and services business. Two, sell software to manage network-attached storage systems. Three, turn a free VA service called SourceForge into a business.

Mr. Augustin and his board decided that SourceForge provided the best option, and it formally exited the Linux server business last summer. "VA has departed from the doctrinal purity of everything being open source," Mr. Raymond says.

VA had launched a Web site called SourceForge.net in 1999 to serve open-source developers. The site gave developers free access to a set of Web-based tools, also dubbed SourceForge, to enable programmers to use the Internet to write software collaboratively even when half the team was located in, say, India, and the rest was scattered around the United States. Programmers from all over the world started to use SourceForge.net to host and develop their open-source programming projects, writing applications for Windows, Linux, Mac, and even Palm. Nearly 370,000 programmers are currently using the Web site at no charge to develop more than 35,000 different open-source software projects.

Though VA didn't charge anyone to use SourceForge tools or the Web site, the operation gave VA an easily accessible repository of open-source software. And though it initially served VA as a marketing tool to reach potential buyers of the company's Linux-based hardware, the site would also attract corporate software developers--the new VA's target market. The code behind the SourceForge tools was open itself; subsequent improvements to SourceForge were hacked together by open-source programmers inside and outside of VA. But SourceForge.net didn't generate much revenue for VA. Mr. Augustin won't disclose how much, only that it came from banner advertising on the site.

SOURCE SPOT

Mr. Augustin and the VA board selected the SourceForge strategy because they believed there was pent-up demand for a commercial version of the service. A year earlier, two corporations--the investment bank Goldman Sachs and the technology giant Agilent Technologies--had asked VA whether it could develop a version of SourceForge for their in-house programming staffs. As a software development platform, SourceForge links tools like bug tracking, source-code management, and discussion systems and makes them all searchable. It also archives historical versions of programs so that companies don't lose their intellectual history when they lose key programmers.

In August 2001, VA began selling licenses for SourceForge Enterprise Edition at $1,050 per year per seat (a perpetual license goes for $2,625). VA plans to sell SourceForge to IT executives at other large corporations to help them manage their own software development projects.

It's a challenge. Mr. Augustin, whose company once sold hardware to an eager, cash-rich crowd of young dot-coms, now finds himself trying to persuade huge, skeptical engineering departments to buy his software.

He's had some success, and VA's marketing materials now boast that Hewlett-Packard, Agilent, Pfizer, Goldman Sachs, and Compaq are clients. Compaq uses the commercial version of SourceForge externally to host all of its open-source projects. The SourceForge name gives Compaq credibility with the edgiest programmers. "They get to the average Linux geek," says Judy Chavis, director of the Compaq Linux program. "It's a community that we would never be able to capture here at Compaq." Now, though, Mr. Augustin has to persuade Compaq to use the commercial version of SourceForge for its internal software development.

To transform his company, Mr. Augustin is working against the clock. For second quarter 2002, VA reported pro forma losses of $6.3 million on revenue of $5.1 million. The company still has about $64 million in the bank from its IPO, but VA's survival depends on Mr. Augustin holding down costs--and losses--while software replaces hardware as the company's primary revenue stream. At a minimum, he faces a six-month sales cycle with each new client. Mr. Augustin estimates that VA's cash stores give him about two and a half years to complete the company's transformation.

He won't say how much of his revenue currently comes from SourceForge clients, but he allows it isn't much yet. Still, Mr. Augustin insists, "We have enough time to turn this around."

The competition--collaborative software development outfits like CollabNet, eRoom Technology, OnProject, and Rational Software--adds to the sales challenge. However, none boast as big a user base. That's the good news for VA; it makes Mr. Augustin's sales pitch easier. The bad news is that VA may have damaged the SourceForge name by using it to sell proprietary software--a graver threat.

Open secret

A new Web site called Savannah could undermine VA's survival strategy. Savannah was founded last summer by LoФc Dachary, a developer who wrote code for free and posted it on SourceForge. When VA asked Mr. Dachary to sign over the copyright to his SourceForge code to VA itself, he felt the agreement was unusually restrictive, and he refused. Two weeks later, according to Mr. Dachary, VA announced it would be selling proprietary software on SourceForge.net.

"Things are very different now," Mr. Dachary writes in an account he posted on the Free Software Foundation Europe Web site. "There is a danger that the many thousands of people registered on SourceForge will become increasingly hooked on the SourceForge site and on features implemented by proprietary software."

Mr. Dachary took the last free version of SourceForge and started Savannah to continue the free software development platform model popularized by VA. The Savannah site claims more than 600 hosted projects by more than 5,000 users.

Mr. Augustin says he isn't worried about Savannah. "There are always going to be people who don't want to use SourceForge because they object to proprietary software," Mr. Augustin says. "We're not going to be able to satisfy them."

Whether Savannah will substantially bleed off support from SourceForge remains to be seen, but some think it is a sign that the momentum of the free software community will move away from SourceForge--and from VA.

One of VA's critics is Michael Tiemann, the CTO at one of the best-known sellers of Linux OSs, Red Hat. He says VA has destroyed its reputation in the very community that birthed it. Red Hat, whose stock price high of $286.25 topped that of VA, doesn't sell proprietary software. "If you've got $60 million left over from your IPO, how you choose to spend it defines what your credibility is. And [in the case of VA], it is zero," Mr. Tiemann says. "The consensus is that they were much more opportunistic than visionary. By their moving to proprietary software, that only seals the opinion."

Anger in the free software and open-source software communities further extends to VA's stock ticker: LNUX. When VA's share price began to tumble and headlines blared that "Linux" had taken a fall, people felt a global community had been tainted by one company's stumble. "The whole VA debacle has brought a lot of negativity to the whole open-source community," Mr. Tiemann says. "The sooner they adjust their ticker, the better off we all are."

Mr. Augustin says that VA plans to change its ticker--but won't specify a date. He counters that Red Hat, with nearly $290 million in the bank left over from its IPO, has the luxury of remaining a pure open-source company. "We're just not in a position now where we can do that," he says.

OFF CENTER

It's worth noting that Mr. Augustin wasn't a newly minted MBA who woke up one day and decided to start a Linux company. His company has been around since 1993, and Mr. Augustin was one of the first Linux devotees.

He first heard of Linux while completing a Ph.D. in electrical engineering with a focus on computer programming languages at Stanford University. He equipped a computer with the system because it cost dramatically less than a Unix computer.

Around 1993, he first emailed Linus Torvalds (who had created Linux in 1991), and the two became friends. Six years later, Mr. Torvalds was with Mr. Augustin in the San Francisco offices of Credit Suisse First Boston on the day of VA's IPO, watching the company's share price rocket upward.

In the early years of VA, the company employed less than a dozen people. Mr. Augustin and his wife routinely worked double shifts, with Mr. Augustin working until 3 a.m. He brought VA back from the brink of collapse on several occasions. Once, to coax a line of credit out of a large distributor, Mr. Augustin signed a personal guarantee that put his family's home at risk.

Financially, at least, the work paid off. Though Mr. Augustin never saw anything close to the $2 billion paper fortune he momentarily held in VA stock, he has made around $10 million from the company by reducing his stake in VA from 16 percent to 11 percent. At his wife's urging, he replaced his tired old Volvo with a new Mercedes-Benz, but the family still lives in its pre-IPO home in Mountain View, California.

While VA was flush with cash, Mr. Augustin ensured that VA was a sponsor of most Linux events, from Installfests to LinuxWorld trade shows. A tremendous amount of VA's resources went toward Linux and the open-source community, even though it generated little direct revenue for VA. At the time, a financial analyst even described VA Linux as the "center of gravity" for the Linux movement. This moniker has caught on. Dan Frye, director of the Linux Technology Center at IBM, now calls SourceForge "the 'center of gravity' for the overall open-source community."

In doing so, many credit Mr. Augustin with using VA's fleeting, white-hot fame to help legitimize Linux, even if it led to his company's undoing. Before it ceased selling hardware, VA witnessed the entrance of companies like IBM, Compaq, Hewlett-Packard, Dell Computer, and Sun to the Linux server market. It's a market that the research firm Gartner Dataquest estimates at $1.1 billion for 2001 and projects will grow to $8.5 billion by 2006. Of the 1 million servers Compaq sells every nine to ten months, 12 percent are Linux servers, and that percentage is growing. IBM alone invested $1 billion in developing its Linux business last year and claims it has already recouped most of its investment. "Linux would not be the success it is today if not for VA," Mr. Frye says. "Larry Augustin and VA were some of the first people we talked to as we began to understand the Linux and open-source movements."

Today, as Mr. Augustin publicly distances VA from its Linux roots, he is doing his best to maintain personal ties to the open-source community. He's still a member of the Linux International board in Amherst, New Hampshire, and VA still sponsors the Open Source Development Laboratory in Beaverton, Oregon. "I'm going to stay on those boards unless I'm voted off," he says.

Even his old Linux server business hasn't moved far from home. A small company called California Digital bought the assets for a figure in the low millions in November 2001 and moved its headquarters one floor below VA in the company's vacated Fremont offices. The companies' two technical teams worked closely to service the same customers during the transfer of assets.

Mr. Augustin sometimes stops in downstairs, says California Digital founder B.J. Arun. "I think [the proximity] is a great source of comfort," Mr. Arun says. "This was his baby."

Being close to California Digital may be of personal comfort to Mr. Augustin, but it does little for VA. A lingering devotion to Linux makes his new, ambiguous role among open-source developers all the more poignant, even as it underscores the importance of those developers to VA and its SourceForge strategy. "I will always be a Linux advocate," he says, "but I have a responsibility to shareholders, investors, and employees. We have a lot of problems to face. But we're not going away tomorrow."

Ann Marsh is a freelancer writer based in Santa Monica, California. Write to letters@redherring.com.