Open source software has long been misunderstood by most people as a “free public good”, and this is generously presented to you by well-meaning programmers who either don’t have a business mindset or have an extreme penchant for altruism. While there’s a shred of truth to this hypothesis, it’s far more than we’ve seen. Not only is it a powerful force for advancement in the IT industry, but, when done right, it is a unique competitive advantage that few private organizations can match. After some research, the DAOrayaki community will discuss open source economics from the following aspects.
- How do you define open source software?
- What is the history and impact of this development concept?
- How does it work financially, and can it compete in a highly privatized industry?
- Do the economics of open source projects make them attractive venture capital investments?
Year-on-year growth in VC investment in open source projects (Image source: Battery: https://www.scribd.com/document/536774580/Battery-Ventures-OpenCloud-Report-2021)
OpenSource.com defines it as follows:
Open source software is software with source code that can be inspected, modified, and enhanced by anyone. “Source code” is a piece of software that most computer users have never seen; it is code that computer programmers can manipulate to change the way a piece of software — a “program” or “application” — operates. Programmers with access to the source code of a computer program can improve the program by adding functionality or fixing parts that do not function properly.
The first thing you’ll notice is that the definition doesn’t include the word “free”. While most open source tools are free (we’ll talk about monetization later), this definition revolves around the availability of source code, and your contribution to the project as an independent developer, asking about it right. Open source project development actually started as a fringe activity, tied to the ethos of the early internet community.
History of OSS
Writing, sharing, and patching code has become easier because of the expansion of the web. Furthermore, R&D in this area is largely funded by government (ARPANET) and academia (MIT and others), which means there is no preconceived notion of compensation or reward for time spent on projects. Early projects such as the LINUX operating system and MySQL were built publicly, with a distributed community of developers to fix bugs, improve the code base, and ultimately foster the growth of an ecosystem.
RedHat is an open source project started in 1993 and an early success story (read the full success story here).
There have been numerous success stories of open source projects, even if not indirect interactions (including RedHat mentioned above, in fact, many open source projects you may have heard of. However, when you envision high-growth, fundable business models, open-source projects Not the first pattern you think of. It’s counter-intuitive in nature: you build a common codebase that anyone can contribute to, and then expect, perhaps organically, to monetize the aforementioned functionality. However, this initially Often cited as a major weakness, but in some cases proving to be a huge advantage: community. Now, some private companies have adopted this strategy, namely Apple and Microsoft – but nothing can weaken it The power, enthusiasm and appeal of the open source developer community. Let’s take a look at why this is and how it actually works in practice.
OSS economics and competition
Open source projects have always been to the developer community like weapons for villains. Hackers who have a particular focus on a project give their lives with no expectation of anything in return. What they want more is to build something cool, maybe “stay the course”, that is, if there is no open source counterpart to the software company, the company will be very profitable. But it’s not all idealism and altruism, most of the early, well-defined open source projects built the tools and frameworks for the modern enterprise. Infrastructure, analytics, hosting, middleware and data transformation – these functions are essential for other things to function.
Admittedly, they can only be achieved in the context of open source project development: highly motivated and smart developers striving to achieve a functional outcome, not a vanity metric. But often the truth is, you can’t devour that warm and vague feeling you get from participating in a meaningful project. The ethics and challenges of compensation for open source projects are well documented. However, from what I’ve gathered, the largest and most successful projects are able to scale, hire people, monetize, and in some cases even IPO. Let’s see how exactly this works.
Source: Plan from Bessemer Venture Partners: Open Source Project
According to Peter Levine, partner at a16z and longtime open source software advocate and leader, there are three stages in the development of open source projects and three key differentiators that can provide a competitive moat for private/proprietary software organizations:
- Project-community fit, where your open source project creates a community of developers actively contributing to the open source codebase. This can be measured by GitHub stars, commit volume, pull requests or contributor growth.
- Product-market fit, i.e. your open source software being adopted by users. This can be measured by downloads and usage.
- Value and market fit is when you find a value proposition that customers are willing to pay for. Success here is measured by revenue.
- Enterprise customers don’t want to be locked in by vendors
- They want to buy from someone who has written code
- Big companies don’t have your expertise
These stages are similar to the inverted version that a typical startup pursues. Most of the time, founders identify a problem and build a solution that customers are willing to pay for. Once they develop a product, they test it in the market looking for product-market fit. Finally, once they’ve built a solid customer base willing to advertise the product, they’ll work hard to drive the community forward — a theme we touched on a few weeks ago. Open source software products and companies are designed with the community first. The next challenge is not finding supporters, but how to generate income.
In addition to community-driven enthusiasm, there are key competitive moats that are unique to the open source software model. There is a clear path to monetization through this channel, perhaps because of their close relationship with enterprise companies (open source software powers the backbone of modern enterprise tools…). Enterprise companies like flexibility (aka no long-term contracts), developer-to-developer relationships (fewer sales barriers), and experts to help with implementation, maintenance, and advice. But the preferred method of capturing this value has evolved over time.
- The aforementioned RedHat case study is a pioneer in offering free software, but monetizing it by offering support and services.
- Later, this approach was replaced by the practice of offering proprietary/enhanced functionality, somewhat like a free model with a roadmap that forked between public and private/paid access tools [eg: Elastic, Confluent]
- Today, most modern open source companies make money through the SaaS model (surprise, surprise): handling hosting, tooling, and operations for businesses that leverage their technology [eg: Databricks].
OSS Pivot to Cloud scales faster than ever before (Source: Battery Ventures)
Successful open source software projects have a pre-established community (subject matter experts, developers who know how to use the product, and regular updates and documentation releases). This is attractive to any business looking to integrate source code into their own projects and then hire developers to oversee it (or expect rapid adoption by current developers). For an open source software company, it’s a good balance: your project is visible to everyone. In theory, the community could “fork” the project (clone and fork the source code to build a different direction), which could cause problems. You live and die for your community, but if you can thread the needle, you have a very powerful resource at your disposal. Historically, open source has been seen as a commodity. In reality, it has become a key accelerator of commercial activity and business innovation.
Source: Open Source Business Forum (O4B). Open Source Business Forum (O4B) Outlook for EU Open Source Software
Prospects for funding OSS
Some argue that open source projects are experiencing a moment of renaissance. It is deeply rooted in developer culture and now also benefits from macroeconomic tails such as remote and distributed workforces, mass migrations to SaaS, and early internet culture as observed through the lens of the cryptocurrency and blockchain communities recovery. The exit path is somewhat different from traditional private startups, but the opportunity remains.
Additionally, open source projects are known to have become key strategic acquisition targets. MySQL was acquired by Sun Microsystems, then by Oracle; Salesforce acquired Heroku and Mulesoft; XenSource was acquired by Citrix; RedHat was acquired by IBM; and Microsoft acquired GitHub. Additionally, open source projects have gone beyond the limitations of pure gameplay architectures to expand into all key verticals with significant advantages: fintech, edtech, cybersecurity, e-commerce, and more. Many of the examples are in the US, but it should be noted that there are also plenty of good open source project companies in our backyard (Europe). Aiven (recently garnered a $3 billion valuation with an investment from Eurazeo), AI repository Hugging Face (just hit $2 billion after a recent funding round), MariaDB, SUSE, Strapi, Axion IQ, Elastic ($ESTC public stock) and GitLab, among others.
Source: The Future of a16Z – Open Source Code. From community to commercialization
As stated at the beginning of this article, venture capital investment in open source projects is increasing year by year. It’s important to note that exit values are also increasing, with IPOs and M&A activity increasing more than 3x between 2019 and 2020 alone. So, what have we learned? Well, the first is that open source is not simply free software, in fact, successful projects are able to achieve revenue goals and exit at multiples comparable to traditional proprietary startups. Open source projects are both a philosophy and a marketing strategy — it’s largely developer-centric — and requires careful, deliberate management and oversight to succeed at scale.
Finally, it embodies the movement of transparency, decentralization and building for good, which is representative of the current trend of the times. Even some of the largest companies in the world are turning to open source to accelerate R&D and experiment at scale (Google has over 2,000 open source projects!).
While we do not have specific requirements around open source applications, we will closely monitor the market for projects that align with our own investment thesis and have the potential to achieve value and market fit and unlock innovation in commercial products around the world.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/economics-of-open-source-projects/
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