Open source, with Sugar on top.

One thing’s for sure, John Roberts knows how to pitch. We sat down with him in October. The CEO of SugarCRM starts cautiously, but give him a chance, and he gets on a roll, and is pretty convincing by the end. He proclaims the demise of the customer relations management software industry as we know it, pledging to turn the bloated $6 billion a year industry (dominated by the likes of Salesforce.com and Siebel) into a mere $1 billion market — by undercutting competitors on cost.

Guess it’s not hard to be confident when 1,000 people download your software within two weeks of release, and then translate it into 15 different languages for you. Within four months, Sugar had 50,000 downloads, Roberts tells us.

Still, almost every VC we talk with remains divided on their views on the sector. They see the market for open-source, but they’re skeptical about how much money the companies can make. We wrote about Sugar here for today’s Merc, about it raising another $5.75 million — and included the very skeptical comments of one analyst.

Yet a lot of venture capital firms looked at the Cupertino-based Sugar during its recent venture capital round. We visited Walden International several weeks ago, and bumped into John Roberts, who was in the lobby waiting for his meeting. Turns out, Walden chose to invest. Today, we visited Nicolas El Baze and Philippe Cases, the software specialists at early-stage VC firm Partech International in San Francisco. They’d looked at SugarCRM too, they told us.

And like others, they’re cautious. Sure, open-source is a great guerilla sales tactic in a market that is consolidating. It’s hard for start-ups to sell new software to satiated big companies these days, explain Cases and El Baze. But by offering free, flexible open-source software, companies like SugarCRM or open-source application server start-up, JBoss, are luring software developers within large companies to download the software for secret experimentation — perhaps on a project they want to keep off the radar-screen of their employers. Then, when those developers eventually pitch their managers with a cool software product — based on the free open-source software –their managers are more likely to approve purchase of the business-version of software because it’s so cheap and simple. Salesforce.com (a competitor to Sugar) “is very rigid,” Cases told us. But from an investing standpoint, Partech isn’t sure many of these companies will get big enough to make real money. (Cases, though, seems interested in investing in the right one.)

Cases gave one insightful anecdote about JBoss. Apparently, Partech’s advisory board is filled with CIOs of big companies, and one of them expressed confusion about why his company’s software developers had downloaded some 500 copies of JBoss to work with. Well, because it’s cheap and easy.

But for big companies to keep track of all these open-source software components floating around, and to feel secure, they’ll need a service to help them manage it all. That’s where companies like SpikeSource, SourceLabs (our story here), and OpenLogic come in: They’re busy certifying the various components of open-source software so that large companies can be assured they work together. Om seems to be skeptical about the business model of these companies, but we’re hearing there’s a real need for this stuff.

We hope to follow up. Mary Coleman, Walden International’s investor in Sugar, says she’ll be meeting soon with Kim Polese, the CEO of SpikeSource, to find out more about it. SpikeSource recently got funding from Kleiner Perkins Caufield & Byers. We’ll be interested in what she thinks…

Oh yeah, and Xfire came up, Cases mentioned his son uses it — it’s pretty nifty for allowing kids to know their geographical whereabouts.