Before open source software was ever called “open source,” it was standard for academics and researchers to openly share and collaborate on code. The concepts of open collaboration and peer production have been embedded in the creation of software since the beginning. It wasn’t until 1974, decades after the first software programs were written, that software was even considered copyrightable. Today, the use of open source software has become ubiquitous, providing the foundation for software innovation across technologies and industries.
Open source drives innovation because it can evolve much faster than software that’s created in a black box by a few. When an open source project successfully attracts a community of contributors and users, a network effect takes hold, further driving innovation, reliability, and adoption. Allowing anyone to run, inspect, and make modifications to the code without the permission of a proprietary entity greatly increases the velocity of development and improvement. When the speed of the open source development model is matched with commercial innovation, open source can become a powerful business advantage.
The last decade has given us plenty of open source business success-proof points. There’s been an increase in IPOs of open-source-based companies (MongoDB, Confluent, Elastic, Couchbase, HashiCorp, etc.) and growing venture capital investment. “Open source is eating software” according to Peter Levine, partner at Andreessen Horowitz, but “we’re still in the early days of the open source software revolution,” according to Bessemer Venture Partners. There’s an understanding that open source businesses can raise billions in capital to compete and win against proprietary software giants and drive huge amounts of revenue. Understanding why and how to sift through the millions of open source repositories to find the ones with the greatest commercial potential boils down to the three biggest advantages of open source: visibility into product-market fit, a pre-existing user base, and a community of passionate contributors.
Open source startups have an early advantage over non-open-source startups. While an average startup may spend its first 3-6 months trying to find customers and product-market fit and another 6-12 months trying to find the right first hires, open source software companies come with a pre-packaged community making it easier to find early customers (including enterprise customers who may already be using the project) and passionate employees.
A popular project will have growing usage indicating there’s a market need for the software, a core set of contributors who care deeply about improving the software, and an initial user base forming. Projects with these leading success indicators are in a great position to build a business and raise a seed round to start building commercial momentum. We can evaluate the popularity of a project based on three criteria: monthly contributions, the existing user base, and the frequency of commits.
A major benefit of open source is that you can see the popularity of a project before deciding to start a company around it. Open source projects are often started by a single developer seeking to solve a specific problem when they can’t find an existing solution. When a project solves an important problem that thousands of other developers are feeling as well, it attracts a community of developers who become invested in the project and start to contribute by submitting feedback and code improvements.
According to Bessemer Venture Partners’ “Open Source Six” framework, open source projects that see rapid community involvement are in the best position to start a company around: “If a developer searches far and wide and can’t find an existing solution, chances are there are tens of thousands like them out there seeking the same thing. When an individual project creator can get his or her project to be widely adopted by others, that market ‘pull’ is often a great indication of broader business value to be built. This is a fantastic characteristic of open-source businesses—you can test for product-market fit.” Popular projects attract a large-scale community indicating there’s a strong market need.
While building a company around an open source project doesn’t guarantee product-market fit, growing contributors and contributions per month are great signals. Contributor growth, measured as monthly active contributors, and monthly contributions provides the best insight into the scale of the community. Recent data on open source startup funding found that the average OSS startup raising a Seed round had a median of 24.5 contributors. Companies that go on to raise Series A grow this metric by about 10% month over month.
The biggest hurdle most startups face is getting initial customers. They have to overcome the fact that no one knows they exist and gain visibility among their target audience. Meanwhile, open source startups tend to have an existing user base of early adopters that are easily reachable via the open source repo and community forums. This benefit allows founders to gauge traction and quickly and easily tap into the community hivemind for insights and feedback.
When nurtured appropriately, these early users become a loyal user base and create a network of potential users and advocates for the startup. The startup can leverage this existing user base to attract initial customers. When open source users are happy and excited about a project, they share and recommend it to friends and colleagues. This creates a network effect for the project that can result in swelling growth. Startups can use this initial traction to show investors growing interest in their software.
Some signals of a project that is gaining tons of users are an overwhelming number of issues and pull requests from people attempting to contribute or share feedback while using the software. Another good indicator is people are creating integrations and extensions to make your software work with existing software. This makes the project and future product more sticky when it’s easily embedded into existing workflows. It shows that usage and adoption are becoming deeply rooted within existing frameworks.
Hiring contributors into the company is a quick and easy way to not only find people who are already familiar with the technology but are also highly interested in improving it:
“Even better is when these creators manage to build a community of active contributors and maintainers around their project - often as employees of the company even if they aren’t focused on commercialization. This not only reduces the load on the project creator(s) but also establishes the most relevant and valuable talent pool for the company’s first engineering hires,” -Bessemer Venture’s OSS Investing Guide
People who have spent time and effort making an open source project better (presumably for fun and without compensation) are intrinsically motivated to help the project be successful. Contributors-turned-employees benefit from being paid to work on a passion project and are more likely to have the motivation necessary to work in a fast-paced startup environment. Projects with multiple maintainers, in addition to the project creator, are best set up to take advantage of hiring from within the community. Achieving maintainer status indicates that a level of trust has been built between the creator and the individual, and the maintainer has actively chosen to take on a greater role within the community outside of submitting the occasional bug fix or suggestion.
When looking at potential contributors to hire, look at how frequently their contributions are committed to the codebase. The number of commits gives insight into how active the contributor is and the quality of their contribution. A contributor who submits pull requests often but rarely sees their code merged probably isn’t the best fit. Look for contributors who submit often and get their code merged often.
Open source startups face significant hurdles like any other startup. For instance, when following the open core model, they will need to figure out which paid features to create and validate that enterprise-level customers will pay for them. However, having an existing product and a community of experts to rally around the effort is a huge advantage. Inevitably many open source and open core companies will still fail but we think a larger percentage of them will succeed if they play to these strengths.
While not all open source projects will or should become businesses, forming a business around a popular open source project not only allows contributors to get paid for their hard work, but also benefits the overall progress, stability, and future of the project as a whole. The open source code base is improved faster given more resources. The company can dedicate a team of engineers to monitor and maintain open source contributions, feature suggestions, and bug fixes. Improving the open source project is part of the business flywheel—the better the open source project is, the more people will discover and use it, and businesses will start to adopt it and pay for value-added features because their developers are demanding it.