How To Open A Software Company – Editor’s Note: The open source software (OSS) movement has created some of our most important and widely used technologies, including operating systems, web browsers, and databases. Our world wouldn’t function without open source software, or at least it wouldn’t work as well.
While open source software has provided amazing technological innovations, commercial innovations – most recently the emergence of software as a service – have been equally important to the movement’s success. And because open source is by definition software that anyone can use, modify, and redistribute for free, open source companies require different models and a different path to market than other types of software companies.
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Peter Levine has been working with open source software as a developer, entrepreneur and investor for over thirty years. He recently gave a talk entitled “Open Source: From Community to Commercialization” (download the full presentation here), drawing on his own experiences and interviews with dozens of open source experts. Below is a written version of this presentation where Peter follows the development of open source software and presents a practical, comprehensive framework for turning an open source project into a successful business.
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Open source started out as a side business but has since become a center of software development. One of my favorite anecdotes from the early days of open source – when it wasn’t called open source yet and was just “free software” – involves the Linux/Unix command [~}$BIFF, which tells the user when a new email is coming in. The command was named after the Berkeley Hippie dog who would go out barking at the postman. I love this anecdote because open source software was so popular in the beginning that an important command was named after a programmer’s dog.
I have worked with open source for many decades, initially as a developer at MIT’s Project Athena and the Open Software Foundation, then as CEO of the open source company, XenSource. And over the past 10 years, I’ve been on the boards of many open source companies. From developer to board member, I’ve seen the evolution of open source and watched large companies build on open source projects.
I truly believe there has never been a better time to build an open source business. Commercial innovation is essential to the open source movement and here I provide a framework for bringing open source products to market.
The last 10 years have been the renaissance of open source. The chart above shows the last 30 years, during which time around 200 companies have been founded with open source as their core technology. Combined, these companies have raised more than $10 billion in capital, with the trend over the past 10 years towards ever larger deals. In fact, three quarters of the companies and 80% of the raised capital were established after 2005. And I think we’re just at the beginning of this renaissance.
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It is worth noting that in 2008 mySQL was bought by Sun Microsystems (which later bought Oracle) for $1 billion. At the time, I was convinced that $1 billion was the maximum an open source company would ever receive. This was the bar for many years, and $1 billion was seen as a huge exit from a software industry that saw open source as a commodity.
But look at what has happened in the last few years. We have Cloudera, MongoDB, Mulesoft, Elastic and GitHub that were part of a multi-billion dollar IPO or M&A deal. Of course there is also RedHat. In 1999, it went public for $3.6 billion, and that year it was sold to IBM for $34 billion. Am , can’t wait to see if new bars will be created.
Open source is also expanding into more areas of software. Traditionally, OSS has been developed primarily around enterprise infrastructure such as databases and operating systems (e.g. Linux and MySQL). With the current renaissance, active OSS development is taking place in almost every industry – fintech, e-commerce, education, cybersecurity and more.
So what is behind this renaissance? To understand this, let me walk you through the memory and history of open source.
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Open source started in the mid 70’s and I am a programmer, I call this era 0.0 – the “free software” era. Scientists and hobbyists made software, and the whole ethos was this: give away software for free. When ARPANET paved the way for the Internet, networks made it much easier to collaborate and exchange code.
I remember working at MIT or the Open Software Foundation at the time and had no idea where my salary was coming from. There was no concept of a business model, and the money behind the development of “free software” when it existed came in the form of university or corporate research grants.
With the advent of Linux in 1991, open source software became important to enterprises and proved to be a better, faster way to develop core software technologies. With increasingly fundamental open source technologies, open source communities and enterprises began to experiment with commercialization.
In 1998, the Open Software Initiative coined the term “Open Source” and around this time the first real business model emerged with RedHat, MySQL, and many others providing paid support and services in addition to free software. For the first time we saw a real economic model supporting the development of these organizations.
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Another thing of note at the time was the value of open source companies, which paled in comparison to their proprietary counterparts. When I look at RedHat vs. Microsoft, mySQL vs. Oracle, XenSource vs. VMWare, the value of a closed-source company is so much greater than its open source counterpart. The industry viewed OSS as a commodity that could never even approximate the potential economic value of the ownership company.
In the mid-2000s, these ratings began to fade. Cloud computing has opened the door and enables companies to run open source software as a service (SaaS). Once I can host an open source service in the cloud, the user knows or doesn’t care whether it is open source or proprietary software under the hood leading to similar assessments of open source companies and proprietary companies and proves that open source software is really very economic and strategic value.
A wave of acquisitions, including from my own start-up XenSource from Citrix (not to mention MySQL from Sun and then Oracle), have made open source a key part of big tech companies. In 2001, Microsoft CEO Steve Ballmer called Linux a “cancer”. Now even Microsoft is using open source in its tech stack and is investing heavily in open source projects. As a result, the next open-source start-up could just as easily grow out of a major tech company as it does out of an academic research lab or a developer’s garage.
The history of open source emphasizes that its growth is due to a positive cycle of technological and business innovation. From a technical point of view, open source is the best way to develop software because it accelerates product feedback and innovation, improves software reliability, scales support, drives adoption, and gathers tech talent. Open source was a technology-based model, and these features have been around since the “free software” era.
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However, the full potential of open source will only be realized when technological innovations are combined with commercial innovations. Without business models such as Pay for Support, Open Core, and the SaaS model, there would be no open source renaissance.
Economic interest creates a positive cycle, or flywheel. The more business innovation we have, the larger the developer community, the more technological innovation it stimulates, which increases the economic incentive for open source. At the end of the presentation, I will talk about what I think Open Source version 3.0 is and point out some interesting innovations that are currently taking place on the technological and business side.
The success of open source companies depends on three pillars. These initially develop as stages, one leading to the next. In a mature society, they become pillars that must be maintained and balanced for a sustainable business:
1. Project Community Alignment, where an open source project creates a community of developers who actively contribute to the open source code base. This can be measured with GitHub stars, commits, pull requests or contribution growth.
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2. Matching the product to the market where open source software is accepted by users. This is measured by downloads and usage.
3. Matching value to the market where you find a value proposition that customers are willing to pay for. Success here is measured by revenue.
All three pillars must be present throughout the life of the company, and each has a measurable purpose.
Project-Community Fit is the first pillar and is about critical mass of community and project traction with developers. While the size of the OSS community varies, a large following and growing popularity are key indicators that an OSS project is attracting a lot of interest from the developer community. The metrics include GitHub stars, number of contributors, and number of pull requests.
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