Interest in evaluating and investing in open source startups is on the rise again after a dip in the past couple of years, according to speakers at a panel discussion on investment startups in the open source world.
The discussion took place at The Linux Foundation’s recent Open Source Leadership Summit (OSLS). In terms of investment activity in the open source startup space, “there is good appetite for the acquirers as well as the public markets, depending on the value proposition that these companies … have to offer,’’ said Rashmi Gopinath, a partner with Microsoft Ventures, the corporate venturing arm for Microsoft. She noted that Microsoft acquired Deis in 2017, an open source startup specializing in the Kubernetes container orchestration platform.
Monetizing something that’s free
Venture capital firms are always concerned with monetization and how to monetize something that fundamentally is free, observed another panelist, said Jocelyn Goldfein, a partner at Zetta Venture Partners, a venture capital firm that invests in enterprise startups solving problems with big data and AI.
“I think that Red Hat was the only one that seemed to seriously make a go of ‘Well, the software is free, but we’ll sell support,’” Goldfein noted. Although there was a belief when cloud computing was introduced that money could be made from hosting software, “I think we also have yet to see really big successes come there,’’ she said.
Goldfein, however, pointed to GitHub as one company that is “killing it on a monetization side.” This is because it is “selling an enterprise product with an enterprise feature set with a free open source version that does not in the least feel artificially crippled or constrained by its user base.” She called the GitHub model a “really exciting” and “inspiring” example of a company that identified “a proprietary business model on top of a foundation that’s free and open source.”
Open source is the rule
Goldfein added that “We’ve gone from a world where open source is the exception, to open source is the rule. There’s probably at least two dozen venture firms that invest a lot in open source now.” If people are going to build another database, now the tendency is to ask not why would it be open source, but why wouldn’t it be? That’s been the fundamental change over the past decade, she said.
Success for open source will come when people stop talking about it as a business model, because it essentially is a development model, maintained Jake Flomenberg, a partner at Accel, a global VC firm that focuses on both consumer and enterprise companies.
Accel looks at startups from what Flomenberg called a “Three-P Framework:” project, product and profit. “What that means is if you can’t build a project that people care about in a truly meaningful way and deploy a mission-critical use case, who cares,’’ he said.
Gary Little, co-founder of Canvas Ventures, which has invested Jaspersoft, MuleSoft, Soni Type, and Platform 9, said they have found that “the people who love open source are developers. Developers don’t have money and if they have money, they don’t want to spend it. But open source is great for basically being distributed and viral growth within the developer community.”
So investing boils down to finding a niche use case. For Jaspersoft, he said, its market was selling reporting software to developers. MuleSoft provides integration software to connect applications, data and devices.
As a business model, Little said, open source works for adoption purposes, but is “really poor for monetization, unless you’re monetizing at different levels.”
Open source momentum
Almost every company has some aspect of open source in their strategy at least in the software space now, said Erica Brescia, co-founder and COO of Bitnami, which offers a catalog of over 150 open source apps on all the major cloud platforms.
“They’re either using or building around open source like … the Kubernetes ecosystem for example, where companies are investing heavily there, and then building products around it and networking,’’ she said.
Open source has gained a lot of momentum, and that is incentivizing firms to want to invest in startups, Brescia said.
Flomenberg concurred, saying that there has been a rise in initial public offerings of companies that are fundamentally open source in the past year and a half, and he expects more in the next year. “I think we’ve seen a small uptick in buys in medium-scale open source companies including some pretty recent transactions,’’ he said.
The panel was asked whether, when pitching VC firms for funding, it is efficacious to be an open source company.
“The beauty of open source from an investor’s perspective is distribution, not innovation — it’s contribution to marketing, not to [research and development],” said Goldfein. She recalled a quote she’d heard, and, although she didn’t remember who said it, she wanted to share. “It’s something like, ‘Look, startups are in a race with big companies. Startups have innovation. Big companies have distribution. You’re in a race to get distribution before the big company can get innovation.’”
The panel of investors and entrepreneurs also included Sirish Raghuram, co-founder and CEO at Platform 9, which delivers open source cloud frameworks as a service, and Idit Levine, founder and CEO of solo.io, a company that streamlines the cloud stack.