How to Build an Open Source Business | Summary and Q&A

TL;DR

Open-source has experienced a renaissance in the past decade, leading to bigger IPOs and M&A transactions. Open source is now being developed in various industries, making it a robust time to be involved in the community.

Key Insights

• 😃 Open source has experienced a renaissance in the past decade, leading to bigger IPOs and M&A transactions.
• 🤗 Open source is now being developed and used in almost every industry, making it a robust time to be involved in the community.
• 🈺 The success of open source is attributed to both technical and business innovations, with the virtuous cycle driving more innovation and incentives for open source.
• 🤗 Open source is built on three pillars: project-community fit, product-market fit, and value-market fit.
• 🈺 Different business models, such as support and services, open core, and SAS, exist for open source companies.
• 🤗 It is essential for open source companies to balance between open source and commercial offerings to avoid alienating users or losing credibility.
• 🤗 The growth of open source can be facilitated through developer evangelism, community management, product management, outbound marketing, and sales development.
• 🛟 Coordinating self-serve and sales serve models can lead to revenue growth in open source companies.

Transcript

hello I'm Peter Levine a 16-0 partner I've been working on open source for many decades and the last 10 years there really has been a renaissance in open source this graph shows the bulk of investments have occurred over the past 10 years there isn't just more open source investment this investment is leading to bigger IPOs and larger M&A transacti... Read More

Questions & Answers

Q: What has contributed to the renaissance of open source in the past decade?

The renaissance of open source can be attributed to both technical and business innovations. Technically, open source offers faster product feedback, drives adoption, and improves reliability. From a business perspective, innovations such as pay-for-support, open core, and open source as a service have played a significant role in driving the growth and adoption of open source.

Q: How has open source expanded beyond software for enterprise infrastructure?

Open source has evolved to be developed in almost every industry. From FinTech to e-commerce to EdTech to cybersecurity, open source is being used and developed to create innovative solutions across various sectors. This expansion signifies the robustness of the open source community.

Q: What are the pillars on which open source is built?

Open source is built on three pillars: project-community fit, product-market fit, and value-market fit. Project-community fit focuses on building critical community mass, product-market fit involves organic adoption and user value, and value-market fit centers on departmental and enterprise buyers. Each of these pillars has measurable objectives that contribute to the success of open source projects.

Q: What are the different business models for open source companies?

There are three primary business models for open source companies: support and services, open core, and SAS (open source as a service). In the support and services model, the software is given away for free, and revenue is generated through support services. Open core involves differentiated licensing, with a core open-source product and additional proprietary features. SAS offers a complete hosted offering, where open source is delivered as a service. Each model has its advantages and challenges.

Summary

In this video, Peter Levine discusses the renaissance of open source in the past decade, highlighting the increase in investments, bigger IPOs, and larger M&A transactions. He attributes this growth to a virtuous cycle of technological and business innovation. Levine explains the three pillars of open source (project-community fit, product-market fit, and value-market fit) and emphasizes the importance of measuring user traction and value in each stage of the funnel. He also provides insights on different business models for open source companies, the role of licensing, and the competitive advantage of open source over cloud providers. Finally, Levine discusses the key functions and stages of building an organization around open source and shares his views on the future of open source as it becomes an integral part of every company.

Questions & Answers

Q: What has led to the renaissance of open source in the past decade?

The renaissance of open source can be attributed to a virtuous cycle of technological and business innovation. On the technological side, open source provides the best way to create software as it speeds up product feedback, drives adoption, and improves reliability. As for the business innovation, practices like pay for support, open core, and open source as a service have created economic incentives and led to larger communities, which in turn spur more technical innovation in open source.

Q: What are the three pillars of open source?

The three pillars of open source are project-community fit, product-market fit, and value-market fit. Project-community fit refers to the critical mass of the community, indicators like the number of collaborators, GitHub stars, and pull requests. Product-market fit is about organic adoption measured by the number of downloads, which serves as a precursor to later-stage sales engagement. Value-market fit revolves around finding the right pricing and features that appeal to departmental and enterprise buyers and is measured by revenue.

Q: What are the different value market fit business models for open source companies?

There are three common value market fit business models for open source companies. The first is support and services, where the software is given away for free, and revenue is generated by providing support to users. Red Hat is a notable example of this model. However, this model can be challenging to scale operationally. The second model is the open core model, where a core open source software is complemented by differentiated licensing for additional features. This is often used for on-premise software. The challenge here is managing the tension between open source and proprietary components. The third model is the SAS (Software-as-a-Service) model, where the open source software is offered as a complete hosted solution. This model enables the strategic value of open source to be delivered to customers, regardless of whether the underlying code is open source or proprietary.

Q: What is the role of licensing in open source companies?

Licensing is an important aspect of open source companies but should not be the primary focus in the early stages. It is more crucial to understand your competitive advantage and go-to-market strategy before incorporating licensing as part of that strategy. Licensing can be used as a tool to protect intellectual property and support your business model. Most open source projects use permissive licenses like MIT and Apache, as these licenses promote contribution and inclusiveness. Legal experts can help you choose the right license for your project while aligning it with your distribution strategy.

Q: What is the relationship between open source companies and cloud providers?

There is often concern about large cloud providers co-opting and potentially replacing open source projects. However, this concern is often greater than reality. Open source companies can actually become great partners for cloud providers. It is important to remember and leverage the competitive advantages that open source companies have, such as the avoidance of vendor lock-in, the ability to directly access developers who wrote the code, and the specific expertise that the big cloud vendors may not have. By approaching cloud providers as partners rather than competitors, open source companies can navigate the relationship more effectively.

Q: How can open source companies build a strong competitive advantage?

Open source companies have several competitive advantages over proprietary software and big companies. Enterprise customers generally prefer to avoid vendor lock-in and prefer to buy from those who have written the code. Open source companies possess specific expertise in their projects that big companies may lack. Moreover, the involvement of project leaders and CEOs in the roadmap and product development ensures a deep understanding of the code and the ability to deliver better support and features to users. By emphasizing these advantages, open source companies can differentiate themselves in the market.

Q: What are the stages of building an organization around open source?

The stages of building an organization around open source start with creating awareness and interest through developer evangelism, community management, and branding. This is followed by maximizing developer love, adoption, and value through product management and clear differentiation between open source and proprietary features. The next stage is evaluation and intent, where outbound marketing campaigns targeting specific market segments are prioritized, and sales development takes a customer success approach. Finally, there is the purchase and expansion phase, which involves both self-serve and sales-serve models, with coordination and expansion opportunities within customers.

Q: What are the common failure modes in coordinating top-of-funnel organic growth and enterprise sales?

There are a few common failure modes encountered when coordinating top-of-funnel organic growth and enterprise sales in open source companies. One failure mode is when open source users do not convert to buyers, indicating a lack of value market fit that aligns with product market fit. Another failure mode is when open source growth falls behind enterprise sales because the balance between open source and proprietary components is skewed toward the closed source, making the organization seem more like a proprietary company. Similarly, excessive inclusion of features in proprietary products can lead to a loss of developer street-cred. However, with the right balance and coordination, these failure modes can be avoided.

Q: What is the future of open source?

Open source is becoming an integral part of every company, as even proprietary technology companies are embracing it. Open source is expanding beyond traditional players like Red Hat, Elastic, and Cloudera, and is now a significant part of companies like Facebook, Airbnb, and Google. The opportunities for open source are far bigger than what has been realized so far. The ongoing innovations in technology, like artificial intelligence, open source data, and blockchain, coupled with business innovations such as crypto tokens and data-driven revenue, will continue to drive the growth and relevance of open source in the future.

Q: How should startups approach licensing in the early stages?

Startups should focus more on understanding their competitive advantage, go-to-market strategy, and product-market fit before deciding on licensing in the early stages. It is more important to engage legal experts to explore the licensing options that align with the company's goals and values. By prioritizing the product and community, startups can establish a strong foundation for their open source projects, and then refine licensing as part of a go-to-market strategy that supports the overall business objectives.

Takeaways

The renaissance of open source in the past decade has been driven by a virtuous cycle of technological and business innovation. Open source companies should focus on the three pillars of project-community fit, product-market fit, and value-market fit to ensure success. Different business models, such as support and services, open core, and SAS, can be utilized to monetize open source projects. Startups should approach licensing as part of a go-to-market strategy rather than a standalone decision. Open source companies have a competitive advantage over big companies and cloud providers, which include customer preference for non-vendor lock-in, direct involvement of project leaders, and specific expertise. Coordinating different stages and functions within an organization, from developer evangelism to sales development, is essential to building a successful open source company. The future of open source continues to expand and will become an integral part of every company.

Summary & Key Takeaways

• Open source has seen a renaissance in the past 10 years, with more investments leading to bigger IPOs and M&A transactions. Examples include the acquisitions of MySQL, GitHub, and the IPOs of companies like Cloudera.

• Open source is now being developed in almost every industry, from FinTech to e-commerce to EdTech to cybersecurity, indicating a robust time for the open source community.

• The success of open source is attributed to both technical and business innovations, with the virtuous cycle of innovation leading to larger communities, more tech innovation, and increased incentives for open source.