The Open Source Tightrope: Bridging Community Spirit and Commercial Success
Originally from Mozambique, I grew up using open source applications when proprietary ones proved unavailable, overpriced, or both. As I gained access to closed software and developed an interest in startups and investing, I noticed a disconnect between what startup milestones were celebrated and how open source was understood. I’m hoping to bridge that gap here.
Only publicly available information was used in the writing of this article.
Over 90% of businesses rely on open source software to build their products and keep them running.
It’s a staggering statistic to those not familiar with developer workflows. It merits a deeper understanding not only due to its role in product development but also for its potential to create thriving businesses.
In this article I’ll be diving into what open source software is, why it matters, and how its community values can clash with corporate incentives.
I’ll also cover how to mindfully build an open source business and how to invest in one, for those built for growth.
At a Glance
- 🕰️ A Brief History of Open Source
- 🏛️ The Three Pillars That Make An Open Source Business
- 🌍 What Makes The Open Source Community Unique
- ⚖️ The Delicate Value Capture Equation
- 📚 The Open Source Investing Playbook
- 🗺️ Making Sense of the Open Source Landscape
- 🕵️ What to Look For When Investing in Open Source
🕰️ A Brief History of Open Source
Free software is as old as computing itself. Since the 1950s and 60s, programmers saw value in sharing their code with each other as a way to learn and improve.
Later, free software would be defined as giving certain freedoms to users on what they could do with it. For example, users could run, change, and redistribute it with no restrictions.
The commercialization efforts of the 70s and 80s led to a decreased emphasis on free software. However, it saw a resurgence in the late 80s as Richard Stallman worked on GNU and Linus Torvalds worked on Linux.
In the late 90s, Eric S. Raymond’s The Cathedral and the Bazaar sparked discussions about bringing the benefits of free software development to the commercial software industry. This wasn’t very successful at first, leading to a rebranding from the ambiguously-defined “Free” to Open Source Software (or OSS) — in essence, this meant that as open source was taken up, user rights weren’t prioritized, leading to the major philosophical difference between free and open source.
Nonetheless, the free and open source definitions tend to be similar in practice. This has led many to label them as Free and Open Source Software (FOSS) due to the similarity of the licensing.
Software vendors had concerns about the business dynamics of open source regarding what they could monetize and when. But they still relied on them as the foundation for most of the products they developed.
They would remain skeptical — and sometimes antagonistic — until the late 2000’s, when they started experimenting with new commercialization strategies.
Google and Microsoft warmed up to the idea of jumping in the open source game. Google built Kubernetes and open sourced the machine learning transformer. Microsoft bought Github in 2018.
🏛️ The Three Pillars That Make An Open Source Business
To build a successful open source business there are three pillars to consider: the community, the product, and the monetization approach.
These three pillars are tightly wound together and lead to a distinct dynamic that colors how a project is seen, how it’s used, and how it succeeds.
In regular product development, the two main goals are often building a robust product and having the market spend something to use it — be it attention or money.
Providing value usually involves addressing user needs (with security and privacy in mind). Capturing value involves monetizing in a way that feels commensurate with the value being provided. It’s a delicate balance to find.
Under-monetizing means leaving value on the table. Yet, over-monetizing risks stressing the relationship with users and encouraging them to look for better value elsewhere.
Building on open source software provides another pillar to contend with: the community. The people building and contributing to open source projects often feel like they should have a say in the projects’ future.
This also affects the decisions for companies hoping to build a business around them. The community’s voice and motivations are crucial aspects that builders should stay in tune to.
🌍 What Makes The Open Source Community Unique
Most open source projects begin as small, personal projects by a developer or a small group. They’re usually created for their own use and then shared if they believe it may be useful to others. If the project is well-received, other developers may begin contributing to it. This can lead to a thriving community of people who work together to keep improving it.
Raymond describes this dynamic as the bazaar, a cacophony of voices with “differing agendas and approaches, out of which a coherent and stable system could seemingly emerge only by a succession of miracles.”
This dovetails with the passion developers display about their open source work. The online collaborations are highly engaging, often resulting in the cultivation of real expertise.
This passion and expertise can lead to a strong sense of ownership of a project. Given how their experience is usually filtered through open source values and freedoms, many developers have a strong idea of what open source software should be in terms of not just function, but accessibility as well.
A cursory glance at forums on Linux, MySQL, or Wordpress makes these views clear. Ideas and code are hotly debated, though they shouldn’t intimidate those who wish to jump in and help build it out.
⚖️ The Delicate Value Capture Equation
Once an open source project has a large and active community, it may be ready to be commercialized. This means converting the project into a commercial product that can be sold to users.
There are a variety of methods for monetizing an open source project, with companies employing one or more of the following:
- Free software plus paid services: The project is free to use, but users can pay for additional services or support (e.g. Red Hat and Canonical).
- Open core: The core of the project is open source, but some features are closed source and require a license to use (e.g. Confluent and Elastic).
- SaaS: Software is provided through the cloud as a subscription (e.g. Automattic and Databricks).
- Sponsorship and Donations: Individuals or businesses can financially support the project (e.g. LibreOffice and VLC Media Player).
When choosing monetization strategies, it’s critical to consider how the community will react — and how well they can can serve the project’s growth strategy.
The buzzing voices of the bazaar can become strong user advocates by mediating value creation and value capture. This means that there’s an additional mediator between supply and demand that tips the balance towards users. Even when developers aren’t setting the project’s roadmap, their opinions hold a lot of sway. Their roles as user champions and community influencers make it so.
This advocacy can be partly attributed to a suspicion of corporate incentives, as profits have often come at the expense of users. In the worst cases, this has led to the “Embrace, Extend, Extinguish” model that Microsoft used in the 90’s. Widely used standards were embraced, then extended with proprietary capabilities. This newfound leverage was then used to strongly disadvantage their competitors.
There is a case for building on open standards and protocols. Proprietary solutions can be brought to market faster and can address user pain points in a more relevant way. However, this can create unfair advantages and raise antitrust concerns, which can in turn hamper healthy competition.
Keeping that in mind, it’s worth noting two broad groups of businesses that can be created: growth and bootstrapped ventures. Growth ventures aim to quickly expand and become a dominant player in their markets, while bootstrapped ones mostly aim to provide a product or service in a sustainable way.
The expectations of a growth venture backed by venture capitalists are very different from a bootstrapped cash flow-based business, and this strongly affects the dynamics of how they commercialize. The former expects high growth while deferring profits. Companies grow into their valuations later and potentially return a VC’s entire fund. The latter only depends on its cash flow to get a modest profit margin. This can be used for mindful expansion of the company as needed.
Some open source projects aren’t a good fit for commercialization. This could happen if value-market fit has proven illusive, or if their communities see more societal value in keeping it completely free.
It’s important to recognize the latter and open up lines of dialogue with users and collaborators. This is doubly important when they feel strongly about how the value dynamics should work, which often happens.
It’s also vital to note that some open source projects aren’t set up for growth, even if they meet the commercialization bar. For example, the Fediverse is a collection of federated servers that allows interoperability between different social networks and blogs. It requires a certain level of comfort with the technical setup and usage, which makes growth a slow affair. Knowing this, aiming for hypergrowth would be ill advised, even if commercialization was possible.
In fact, it may be in that community’s best interest to grow slowly. This way, they can maintain the culture of their user base and keep engagement meaningful for the specific niche they want to focus on. As always, communication with the community needs to be intentional and regular for sustainable growth.
📚 The Open Source Investing Playbook
🗺️ Making Sense of the Open Source Landscape
Open source software exists up and down the tech stack. It’s used by not just technical folks like developers and data scientists, but also business operators, consumers, and everyone in between.
Most open source software requires technical know-how to set up and configure. However, many also offer simple setup and usage that is approachable to non-technical users. For example, a developer can have Visual Studio running on an Debian OS to write code, and use Github for version control. A consumer can use LibreOffice and GIMP on Ubuntu.
If it can be done in code, it can be open sourced and grow, provided the community finds meaning in the project.
Many of these projects are bootstrapped initiatives. But there have been a few growth successes in the past few years, stemming from large mergers, acquisitions, and public market listings.
🕵️ What to Look For When Investing in Open Source
For projects where a strong community can build a product in demand with a viable path to monetize and grow, it makes sense to build a growth venture. Bessemer Venture Partners has a relevant framework for the aspects that are worth considering, which encompasses the team, the community, the traction, and the monetization approach.
High potential ventures tend to have influence over the project roadmap, even when they’re not in the driver’s seat. They are nimble, find inroads with committed customers, build a painkiller (and not a vitamin), and create a highly engaged community. Those more familiar with other startup types won’t be surprised, as these themes are similar to other startup evaluation considerations.
These dimensions manifest differently for open source ventures though, especially on the community side. The dynamics between contributors and project roadmaps are quite unique. These are important things to keep an eye on as more and more open source projects prove to have all the right ingredients to make the leap to growth.
🛤️ The Way Forward
Open source software has been critical to software development ever since the start, and odds are it’ll stay that way for the foreseeable future. Managing communities will be key for them, no matter their aspirations — and for those that are a fit for monetization, there are clear skies ahead.
💭 If you have any thoughts or feedback you’d like to share, feel free to reach out to me on LinkedIn.
