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Open Source is Investors’ New Favorite
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VCs are now more excited about OSS startups than ever. Read on to know why.

The coronavirus pandemic has accelerated digitization across businesses, geographies, and income groups. The industries realize that going digital is the key to success post-pandemic. Not surprisingly, it has become a reality for today’s businesses to create software in a way that is fast, secure, and scalable. 

But, there is nothing new in the case of software. It has been the backbone of companies with a great idea to take on and outpacing even international players in several cases. Companies like AirbnbUber, and Slack have all been born out of great ideas and excellent software. 

These smaller startups could do so because they invested in creating reliable, efficient, secure, and scalable applications that can adapt to rapidly changing business demands. 

Open Source: The Enabler of Innovation

Companies have long recognized open source as the fastest way to create scalable, secure, and reliable software. In addition, open-source development benefits considerably from the fact that it is mostly a community effort. 

Instead of reinventing the wheel, developers can turn towards the community to look for already available code, build on it, and accelerate the time to develop and deploy. With that, open-source has revolutionized the software development industry and created an interconnected developers’ community that is deeply collaborative and extends globally. 

Notably, today, 99% of software projects are developed via open source (1). 

To get an impression of the pervasiveness of open source software, commercial or otherwise, consider WordPress. The name is synonymous with CMS, a content management system – spanning two broad embodiments, WordPress.Org, the self-hosted open-source version, and WordPress.com, a hosted version operated by Automatic. Collectively, they power over 40% of all websites (2). 

Similarly, we are all familiar with Android, the open-source mobile OS with an international market share of over 84% (3). However, the lion’s share of it belongs to Google’s essence of Android, which includes an ecosystem of proprietary apps and services of Google. 

However, the core AOSP, Android Open Source Project has been forked many times, perhaps most notably by Amazon to build Fire OS, which powers most of its TV streaming devices and tablets (4). Android is also the most admired OS in China, although local handset manufacturers have their own forks. 

Notably, Android is based on an altered version of the Linux kernel (5), arguably among the most prominent success stories emerging from the open-source realm. Today, Linux is used in everything from air traffic control to automobiles and medical devices. It is also widely used in web servers, with Apache being the most common one.  

As the growth of the web over the last three decades has been driven largely by open source software (6), it is hard to imagine our world without open source. 

 

Our World Without Open Source

“Everything from web servers, databases, operating systems, programming languages, and developer tools, it would all be not possible without open source,” said Martin Traverso, a former Facebook engineer and co-creator of the Presto, a distributed SQL query engine (7). 

“There would be fewer developers in the world since not all developers have the luxury of being a part of certain companies, and a lot of innovation happens outside of companies like MicrosoftGoogle, and Facebook,” says Traverso.

In short, for starters, indie or self-taught developers would have less opportunity to get a foothold in the software development space if everything was locked behind a proprietary door. 

Notably, Amazon’s AWS uses Presto and Trino, a fork of the original Presto project, as a part of its Athena interactive query service. Companies like Netflix, Uber, Twitter, Intel, Airbnb, Atlassian, and Alibaba also use it. But, of course, nothing of it would have been doable without open source (8). 

Undoubtedly, open source has created an innovative community that would not otherwise exist. Anything, from our tv, car, phone, and so on that have software today depends on open source. There is huge leverage across the industry, and without those open source elements, everyone would have to create them or purchase them. 

It helps illustrate the importance of open-source software to businesses of all sizes and scales. It is not “free software” for cash-strapped startups. Even the major tech giants rely on them. Open-source software is the fundamental building block of most technologies we use in our everyday lives.

While big tech giants may have the resources to create these technologies from scratch, they would not have the same diverse and growing contributors body who are continually iterating and making the technology better. Especially when open source software is constantly ramping up because it is updated regularly to meet the requirements of diverse user groups, resulting in technologies that are more powerful and broadly applicable than merely a single company and a single-use case. 

And even a trillion-dollar company wouldn’t be thrilled with the idea of developing everything from scratch as it would mean starting from programming languages, OS, web servers, databases, and more. So instead, using open-source software enables companies to assign those resources to more business-critical projects.

 

Predicaments and Pitfalls

Regardless of all the advantages of open-source software, it also has some significant challenges. It includes the lack of proper project documents to establish the safety of a specific software piece. 

The biggest hurdle is determining whether your use of open source is compatible with your business’s legal, privacy, and security needs. It is often challenging to check from where the open-source package originates. Without the creator’s knowledge, it may not be easy to check whether you can or should use it in your business. 

It is also worth checking how well a project is supported; after all, several open-source developers work independently in their spare time. 

According to a recent Synopsys report (9), over 91% of codebases contained open source dependencies with zero development activity in the last two years, indicating a 3% point increase in the last year. It should be a red flag for any entity as it could mean major vulnerabilities. 

However, when technology becomes critical for everyday use, companies and industries often collaborate to support a project that otherwise may have fallen by the wayside. Hence, the Linux Foundation had set up the CII, Core Infrastructure Initiative with support from tech giants like Amazon, Google, Microsoft, Cisco, Facebook, and Intel (10). In addition, only a few months back, Google announced that it would start funding developers for the Linux kernel, which Android is based upon (11).

Businesses need to select their open-source technologies carefully. If there are no obvious downsides, companies still need to avoid relying too much on contributions from a narrow users’ community. 

With open-source, there are no obvious vendors that companies can push or demand to implement certain functionality, says Oskari Saarenmaa, CEO and co-founder of Aiven. This Finnish company manages businesses’ open-source data infrastructure on all the major clouds (12).  

On the other hand, since the code is open, businesses can always contribute needed changes for everyone’s benefit. Hence, they should be asking themselves if they have the expertise and resources to create the technology in-house. If not, businesses need to look for thriving projects with vendor or community support, says Traverso. 

Another major concern among open-source developers is licensing. Today, most open source projects have a pretty narrow set of licenses. However, some “commercial open source” companies muddy the waters between proprietary and open licenses. Hence, it is important for businesses to ensure that they are not building on top of something which would limit their future business opportunities, cautions Saarenmaa. 

“When it comes to starting to create something new directly on top of open source technologies, it is crucial to comprehend the role of the technology, how it is licensed, and how it is supported. If it is a critical piece of tech, businesses should look to use popular open-source technologies which a wide community of contributors has created, in case one company or contributor steps away; there are always others to fill the gap,” explains Saarenmaa. 

There are several examples of “bait-and-switch” activity, in which a company that created itself on an open-source ethos changes the engagement terms down the road. For example, MongoDB (13) built the SSPL back in 2018 to enforce the similar types of restrictions Elastic pursued, essentially stopping large cloud providers from profiting off open source without giving back. However, MongoDB attempted to pass SSPL off as open-source but withdrew its application to the OSI open source initiative the following year. The OSI also called SSPL “faux pen source,” a proprietary software that masquerades as an open-source. 

According to Justin Dorfman, an open-source program manager at Reblaze, a cybersecurity firm (14), there is nothing illegal about such license switching. The “risk is minimal” for businesses involved with such practice. It may be good for business. Noting that MongoDB’s market capitalization has gradually surged from about 4 billion USD amidst its license switch to an all-time high of 25 billion USD earlier this year. 

According to Dorfman, there is not much we can do to counter this trend, but education can help.

“The community should educate computer science students and encourage them to become volunteers or members of the OSI early on. They need to get more clarity on what is truly open-source and what is not,” he explained. “Just because we can see code on GitLab or GitHub, it does not mean they are truly open-source. It still does not protect a project from switching when convenient for them. It is still better if they are aware of “open source” vs. “source available.” 

 

Tech Giants and Open Source

At the apex of the tech food chain, several companies have built billion and trillion-dollar business empires off the back of open-source software. Facebook, for instance, is built on open source technologies from the get-go, with the likes of Apache, Linux, PHP, and MySQL, serving as the foundation for what is now one of the ten most significant companies globally. 

“Much of the technology we have created to power our AI and machine learning, data centers, or developer tools wouldn’t be anywhere as reliable, robust, scalable, or feature-rich as they are without the contributions, feedback, and more collaborative energy of countless communities, individuals, and companies we work within open source,” says Kathy Kam, Facebook’s head of open source. 

On the other side, the social media giant has also open-sourced numerous internal projects, including React, a Javascript library for building UIs that are now among the most popular open-source projects globally (15). 

“Using open-source and making the open-source available allow us to create better software together,” added Kam. 

However, why would an organization open-source some of these technologies and not others?

“Several companies open-source non-differentiating parts of their technologies to drive adoption for the differentiating, closed-source parts of their technology,” explained Kam. 

It means any technology an organization has created to support a core function of its business. Still, it isn’t a direct competitive advantage in itself and maybe better off as an open-source project. In the community, it can gain from the input of thousands of other developers who may also factor into a niche of products that support the creator’s company’s core product. 

However, a giant like Facebook may have several other reasons for pushing a software bit into the open-source realm. 

“When it comes to open-source, the focus of Facebook is a bit different,” says Kam. The company’s mission is to offer people the power to create community and bring the world closer. Realizing the vision at the complexity and scale of billions of users globally needs us to collaborate openly with diverse external stakeholders to meet these challenges, explained Kam.

While there is often altruism involved, when tech giants decide to open-source some of their technologies, they usually stand to benefit somewhere on the way by spurring activity in a particular area, for example. 

Facebook, for instance, open-sourced its Magma in 2019 to help telecom companies more easily deploy wireless networks in remote locations, a project that the Linux Foundation eventually took over. How may it benefit Facebook? Well, getting more people online means they can access the services Facebook offers. The strategy is further proven by Facebook’s huge investments in internet infrastructure, spanning satellites and subsea cables (16). 

Lastly, adopting open source can also help businesses lure top mechanical talent as developers generally like all things open source. 

 

Open Source Opportunities

There have been multiple billion-dollar exits in the COSS commercial open source software space in recent years. It includes enterprise-focused Red Hat, acquired by IBM for a whopping 34 billion USD (17), Mulesoft, acquired by Salesforce for 6.5 billion USD (18). There are also countless other businesses drawing in significant investments for their offerings with the open-source realm. And it is more straightforward than ever that investors are getting hyped up for open source. 

However, it has not always been the case. So, what has changed?

As per industry experts, the cloud has played a significant role in this transformation. 

“Historically, successful COSS businesses, most notably, Red Hat, have profited from selling technical support to their customers. It was never a super compelling or scalable way to create a huge software business. However, over the past few years, the cloud surge has allowed COSS companies to sell their software as a managed service. Businesses like MongoDB, Cloudera, and GitHub were early trailblazers in leveraging the “open core” model successfully, making way for new and far more compelling COSS monetization model,” explains Vijay Iyengar, VC at Two Sigma Ventures (19).

Generally, COSS businesses have huge pre-existing communities and the love of several developers before they even start their commercial offerings. It leads to remarkable efficiency in customer acquisition and growth compared to its closed-source counterparts. Moreover, several of these projects make a core part of a business’s infrastructure, making them quite difficult to replace once implemented, explains Iyengar.

It leads to “great net retention dynamics” and less churn. We have witnessed this repeatedly, especially with some of the new COSS leaders such as Databricks, HashiCorp, and Confluent, adds Iyengar. 

Several major VCs and private equity companies have already gone all-in on businesses that monetize open source tools in one way or another. And there is at least one investor fully focused on COSS startups.

 A good example for it would be Confluent which went public last week to pretty good effect, and pricing higher than its IPO range. 

Earlier this month, Prefect, the company based around an open-source project, PrefectCore, helps other businesses ensure that their data inflow is correctly set up, concentrating on things such as monitoring, scheduling, logging, and more, secured a 32 billion USD Series B funding round (20). 

Nonetheless, the recent success of COSS startups like Prefect and Confluent, which are reaching huge scale and becoming big IPOs, indicate that there may be even more ways to make money off open-source software. And we can only expect more VC deals in the space in the coming days. 

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Rucha Joshi, currently managing a team of over 20 content writers at TimesNext is fueled by her passion for creative writing. She is eager to turn information into action. With her hunger for knowledge, she considers herself a forever student and a passionate leader.

Disclaimer: The views, thoughts, and opinions expressed in the article have been curated for our audience and does not warrant a 100% accuracy. All the information mentioned in the article is subject to change according to the changing viewpoints. Feel free to reach us at [email protected] for any change or copyright issues.

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Team Rucha Joshi
Team Rucha Joshi
Rucha Joshi, currently managing a team of over 20 content writers at TimesNext is fueled by her passion for creative writing. She is eager to turn information into action. With her hunger for knowledge, she considers herself a forever student and a passionate leader.

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