There is such a thing as an open source business model

As long as I have been in open source I have heard folks repeat the mantra: ‘There’s no such thing as an open source business model’ and usually Red Hat gets mentioned shortly after. For a long long time I generally agreed. But in recent years, say the last 3-4, this is no longer the case – there is such a thing as an open source business model! And I believe it is down to one game-changing reason: open source has well and truly won.

Open source has won and is now an essential part of the global technology supply chain and inextricably linked to every part of modern life. Especially when it comes to digital infrastructure, open source technologies dominate, and by some estimates make up 80-90% of modern systems. For the most part, the people who matter understand open source has won.

A business model describes how an organization creates, delivers and captures value. Many business models only focus on one or two aspects of the business. The key part of a good business model is when it illuminates a pattern or playbook that represents a better way than the existing alternatives, especially when brought on by something new and innovative.

The open source business model is new – and increasingly prevalent now thanks to the ubiquity of open source. The other key thing is that it does not apply to any open source – it is very specific. This is what the pattern/playbook typically looks like:

  • there is a new open source technology disrupting an existing market
  • the open source software has the potential to position itself as the de-facto standard
  • an organization (typically a start up) focuses on driving adoption of the tech until it becomes the dominant tech in the space
  • the organization can then go on to apply whichever software monetization strategy works best (more on this later)

To emphasize, open source technology succeeds when it becomes a developer standard. In order to do this, it needs to:

  1. Be the best technology in the market for a cohort of developers (e.g. solve a huge pain point for them)
  2. Win both the hearts and minds — e.g. developers need to love it so much that they themselves evangelize it to other developers. This step of developers evangelizes to other developers is when things become a “standard”.

I think it would be fair to call this the start up open source business model. While an enterprise company could also do this, in practice enterprises are bad at disrupting themselves (e.g. fear of cannibalized revenue) or simply just move too slowly internally (e.g. they can’t get consensus from leadership). 

This open source business model covers multiple aspects of the business:

  • the market development model (go-to-market)
  • competitive strategy (category creation/becoming the de-facto standard)
  • customer acquisition strategy (developers are king/queenmakers)
  • barriers to entry (open source skills & specific project expertise)

The beauty of it is that the specific monetization strategy isn’t all that important in this model: SaaS (usage pricing), selling subscriptions/licenses, support & consulting or even all three – there’s no need to be prescriptive. The key is that open source is a distribution mechanism. It is free so you can get wide adoption quickly. Once you’ve captured the market monetizing is relatively straightforward. 

Today there are an ever-increasing number of venture capitalists who understand this pattern and more importantly specialize in this model. This is important because in this open source business model you don’t have a product for quite some time and this requires immense patience. Start up founders looking to go down this path need to fundraise specifically for this open source business model.

Amplify Partners are one example of a VC in this space who understand the model and have invested in a wide range of companies in all sorts of different sectors, showing the ever-increasing prevalence of this model:

Tech Domain

Start up

Open source project

MLOps (Machine Learning Ops for Software Deployment)

OctoML

Apache TVM

Web Services

Suborbital

WebAssembly

Software Supply Chain Security

Chainguard

Sigstore

This is all good news for open source contributors as it opens up some amazing opportunities:

  • get funding to build a company around your amazing project that developers love
  • go work for a start up where open source is well aligned with the business goals rather that the usual conflict and tension that is often the case
  • those with interest or experience in community building have a particularly bright future in the industry

In summary, in recent years a new start up open source business model has emerged along with investors who recognize the immense power of this model to disrupt existing tech sectors. The key is open source technology that can become a developer standard. It’s an exciting time to be in the industry and it’s all thanks to the fact that open source has won.

Credits

Many thanks to Renee Shah of Amplify Partners for extensive contributions and feedback for this article.

Image: Julia Donaldson’s Gruffalo via pngwing.com

2 comments

  1. The article is great and has a lot of good points.

    I just don’t think that getting one specific way of making money with open source and calling that “open source business model” is reasonable.

    The actual business model is the making money (fund-raising, SaaS, subscriptions, etc).

    What you are describing is a great startup business model, one that some investors seem to like as you point out.

    But… Open source is so much more than that, and naming this “open source business model” is like saying that selling Christmas trees is “Christmas business model”. It is not, and it does not even begin to represent what Christmas (or open source) is.

    Like

Leave a Reply to I’m joining Chainguard – Hacking A Career In Tech Cancel reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s