In recent years, a growing number of companies have made open-source projects a mainstay of their product development strategy. These companies often start by freely distributing the source code of internally developed products and frameworks, but over time, they gain more traction and eventually become industry standards. As a result, the OSS industry has attracted an increasing number of venture capitalists, and many of these companies have reached multi-million dollar valuations.

Origins of open-source projects

Open-source software is a type of software that is free and available to the public. Those interested in the history of the computer industry will find many references to the open-source movement in “The History of Hackerdom,” written by Nicholas Raymond. In this book, he describes the evolution of open-source software and explains its origins.

The open-source movement began in response to proprietary software and copyrighted technology. This expensive technology had locked many potential users out of using certain applications. In response, Richard Stallman started the mass-collaborative GNU Project in 1983. While this project initially was used by hobbyists, it later gained momentum when large companies began to use it.

The free software movement gained momentum with the rise of the Internet. This movement helped clarify various copyright and licensing issues, as well as consumer-friendly issues. Open-source projects are now supported by large formal institutions, such as the Apache Software Foundation. For example, the Linux kernel was created using the GNU.

Despite its widespread use, open source projects are still controversial. In its early days, the free software movement was met with opposition from traditional economists. These economists, who view human behavior through game-theoretic models of resource-distribution, view the open-source movement as fundamentally different from traditional industrial organizations. Some open-source advocates even claim that the movement represents a post-materialist mode of industrial organization.

Business models

In the early days of open-source software, the most notable open-source companies were primarily Gen 1 and Gen 2 companies. Often, these companies would write the code for open-source projects. These companies would later monetize their products through multiple channels, including subscriptions and software-as-a-service.

As the open source movement grew in popularity, more companies started using open-source software. While traditional closed-source software targeted the IT department as a purchasing center, open-source companies focused on the developer community. Developers discover open-source software and integrate it into prototypes and other projects. This process occurs over several phases of development, including development, integration, testing, and staging. It also does not suffer from the usual production-cycle shuffles.

The business model adopted by open-source companies has many advantages. For example, it enables them to focus on conversion sales, which are upsells of existing free users through paid features. This bottom-up approach is very attractive because it is much cheaper than the acquisition of new users.

Open-source companies are often more efficient than closed-source software companies. The go-to-market motion for open-source software is viral, which means that developers are already customers even before they pay for a product. Because the adoption of open-source software is organic, the company can skip the marketing pitch and proof-of-concept stage. Instead, a sales pitch will be more along the lines of, “We have 500 instances of this software and they need more of it!”

Growth

Open-source companies are still in the early stages of the process, but there are many ways to turn open source projects into commercial products. One of the best ways is to focus on services. This model allows startups to learn from their users and provides a steady revenue stream. Tigera, for example, used to close support deals with companies in the seven-figure range in its early days. However, while these support deals can be lucrative, they aren’t a sustainable long-term business model for open source companies.

Community

Open-source companies have many ways to monetize. Some will provide pure-play support for open source, but this can lead to awkward software quality incentivization. Others will hold back certain features to promote commercial adoption, often enterprise security and governance capabilities. In many cases, these features are listed separately in the product’s Community or Enterprise Editions.

The most effective approach for an early-stage open source company is to build a hybrid model that incorporates the best of both open core and support models. This model can help mitigate the renewal problem that occurs in a pure support-based model. Open-source companies should also involve executive leadership in developing their business strategy.

The community-driven nature of open source is a key benefit. These communities tend to be diverse and align with the company’s mission. However, these communities require care and attention to flourish. When well-developed, these communities can serve as a powerful network that amplifies the company’s corporate messaging.

Despite these challenges, open-source software can be essential to some organizations. Yet, it can be tough for open-source companies to sell to enterprises, even when their customers are already free users. To be successful, open-source companies must build a messaging strategy that is challenging to convince existing open-source users to purchase their product.

Market opportunity

The success of open-source companies is often attributed to their ability to build a customer-base by leveraging the power of their open source code. These companies can often operate with favorable account executive to systems engineer ratios and go from a sales qualified lead to a closed sale in as little as a quarter.

As a result, open-source companies have a more effective and viral go-to-market motion. Open-source software adoption comes organically from developers, who use it and download it. This eliminates the need for a marketing pitch or proof-of-concept. Instead, the sales pitch is more along the lines of a “we’ve built 500 instances of our software and have a lot more in the works.”

Open-source software companies have been evolving from Gen 1 and Gen 2 companies. Many open-source projects are written by employees of commercialized software companies. These companies are now offering their products as a cloud service and have multiple monetization pathways. However, the open-source business model isn’t without its limitations.

Open-source companies’ business model was initially met with doubts from investors. The common thesis was that the open-source business model wouldn’t catch on and only a few companies would grow into significant companies. Now, the concept is gaining momentum.