Lessons from 'Open Source: From Community to Commercialization | Andreessen Horowitz'
I would like to share the insights I gained from reading Open Source: From Community to Commercialization | Andreessen Horowitz.
But look at what happened in the last few years. We have Cloudera, MongoDB, Mulesoft, Elastic, and GitHub that were the part of multi-billion dollar IPOs or M&A deals. Then, of course, there is RedHat. In 1999, it went public at $3.6B, and this year, it was sold to IBM for $34B. In the future, I’m excited to see if new bars will be set.
📝Examples of open source companies becoming targets of multi-billion dollar IPOs and M&A transactions
📝A section that provides a rough understanding of open source history
The history of open source highlights that its rise is due to a virtuous cycle of technology and business innovation. On the technical side, open source is the best way to create software because it speeds product feedback and innovation, improves software reliability, scales support, drives adoption, and pools technical talent. Open source was a technologically driven model, and these traits have been there since the “free software” era.
📝Open source history shows that its rise is due to a virtuous cycle of technology and business innovation.
On the technical side, open source is the best way to create software because it accelerates product feedback and innovation, improves software reliability, scales support, drives adoption, and pools technical talent.
The full potential of open source is only realized, however, when technological innovation is paired with commercial innovation. Without business models, such as pay for support, Open Core, and the SaaS model, there would be no open source renaissance.
📝The full potential of open source is only realized when technological innovation is paired with commercial innovation.
Without business models such as paid support, Open Core, and SaaS models, there would be no open source renaissance.
The success of open source businesses rests on three pillars.
📝The success of open source businesses rests on three pillars.
1.Project-community fit, where your open source project creates a community of developers who actively contribute to the open source code base. This can be measured by GitHub stars, commits, pull requests or contributor growth. 2.Product-market fit, where your open source software is adopted by users. This is measured by downloads and usage. 3.Value-market fit, where you find a value proposition that customers want to pay for. The success here is measured by revenue.
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All three pillars have to be present over the life of a company, and when each has a measurable objective.
📝All three pillars must be present throughout the company’s lifetime, with each having measurable objectives.
Support and Services was the model of the Open Source 1.0 era, and RedHat has really cornered the market on this and achieved scale. If you decide to go down this path, you will likely end up competing with RedHat
📝Support and Services was the model of the Open Source 1.0 era.
RedHat has actually cornered the market in this area and achieved scale. If you decide to go down this path, you’ll ultimately end up competing with RedHat.
Related: Why There Will Never Be Another Red Hat: The Economics of Open Source | Andreessen Horowitz
The Open Core model, which layers value-added proprietary code on top of the open source software, is a good model for on-premise software.
📝The Open Core model is a good model for on-premise software.
In a SaaS model, you provide a complete hosted offering of the software. If your value and competitive edge is in the operational excellence of the software, then SaaS is a good choice. However, since SaaS is usually based around cloud hosting, there is the potential risk that public clouds will choose to take your open source code and compete.
📝SaaS model provides a complete hosted offering of the software.
If your value and competitive advantage lie in the operational excellence of the software, SaaS is a good choice.
However, since SaaS is typically based on cloud hosting, there’s a potential risk that public clouds will adopt your open source code and compete.
Once an open source business reaches a certain maturity, the threat of public clouds and topic of licensing is likely to come up. Licensing is a heavily debated topic, and while it’s important, I see companies spend too much time debating licensing in their early days.
📝Don’t spend too much time on licensing debates in the early stages.
there isn’t a single open source company I am aware of that has been fully displaced by a cloud provider.
📝“There isn’t a single open source company that has been completely displaced by a cloud provider.”
Independent open source companies have three big competitive advantages:
- Enterprise customers don’t want vendor lock-in.
- They want to buy from people who have written the code.
- Big companies don’t have your expertise.
When you combine those three things, I think that’s a real competitive value-add and why we have not yet seen big clouds fully displace stand-alone open source companies.
📝Independent open source companies have three big competitive advantages:
When you combine these three things, it creates real competitive added value, which is why we haven’t seen major cloud companies completely displace standalone open source companies.
“The more important question for an open source company to answer is: if code isn’t a competitive moat, what is? Community.”
📝The more important question for an open source company to answer is: “If code isn’t a competitive moat, what is?” The answer is community.
Your open source community is a developer-driven top-of-funnel activity. Building a business is about connecting that open source top-of-funnel to a strong value-driven commercial product.
📝Your open source community is a developer-driven TOFU activity.
Building a business requires connecting that open source TOFU to a strong value-driven commercial product.
The open source go-to-market funnel breaks down into four stages and key organizational functions.
📝The open source GTM funnel breaks down into four stages and key organizational functions:
Driving word of mouth with developers, as measured by user registrations and downloads, is absolutely critical to success in later stages of the funnel.
📝Driving word of mouth among developers, as measured by user registrations and downloads, is absolutely critical to success in later funnel stages.
As you launch your business, you will also need to decide if it will carry the same name and brand as the open source project. Companies have succeeded both ways, and there are pros and cons to each. Separate names, such as Databricks and Spark, prevent brand dilution and provide licensing flexibility, while the same name often provides more momentum from the OSS project, but can risk alienating the open source community if they perceive that they are being exploited for profit.
📝When launching your business, you need to decide whether to use the same name and brand as the open source project.
Companies have succeeded both ways, with pros and cons to each approach.
Separate names like Databricks and Spark prevent brand dilution and provide licensing flexibility.
On the other hand, using the same name often provides more momentum from the OSS project, but there’s a risk of alienating the open source community if they perceive exploitation for profit.
Finally, user registrations and downloads is a common measurement for both open source and proprietary software, so the secret sauce is not what you are measuring, but how accurately.
📝Finally, user registrations and downloads are common metrics for both open source and proprietary software, so the key is not what you’re measuring, but how accurately you’re measuring it.
Once you have engaged a developer community, your goal is to maximize developer and user love, adoption, and value. This second stage of the open source funnel is typically accomplished with product management.
📝Once you’ve engaged a developer community, your goal is to maximize developer and user love, adoption, and value.
This second stage of the open source funnel is typically accomplished through product management.
Effective product management will execute a number of functions to support this stage: managing the closed and open source roadmaps, communicating the decisions to your developers and users, and building analytics into the product to collect more insights of usage patterns and predict sales opportunities.
📝Effective product management executes various functions to support this stage:
Unlike proprietary software, open source businesses typically have two roadmaps to manage. OSS CEOs and founders often spend the majority of their time managing these roadmaps and how one feeds the other. I like to see this laid out on a single page to show how these interlock and relate and what features are available in each.
📝There are two roadmaps.
Open source businesses typically have two roadmaps to manage.
OSS founders spend most of their time managing these roadmaps and how they feed into each other.
It’s helpful to lay this out on a single page showing how they interlock and relate, and what features are available in each.
The most successful companies and founders have a framework or guidelines that helps them delineate and communicate what will be paid and what will be free. For instance, PlanetScale is committed to keeping open source anything that would produce vendor lock in, a value that maintains the good will of their open source community and enterprise customers. It is helpful to have a feature comparison table so customers and your community understand the different value the free software and paid software provide.
📝Keep anything that creates vendor lock-in as open source.
The most successful companies and founders have frameworks or guidelines that help delineate and communicate what will be paid vs. free.
Transparency around research and development and incorporating community feedback into your product roadmap is particularly important to maintaining community trust. Many successful open source companies remain active, and often leading, contributors to the corresponding open source projects. For instance, Databricks has 10x the contributions to Spark of any other company.
📝Ideally, contribute 10x more to OSS than other companies.
Databricks makes 10x the contributions to Apache Spark™ compared to any other company.
When it comes to the product itself, you should build in analytics that help you understand your users and predict the percentage of OSS users who will convert to buyers. Once users have the product, product usage analytics will help identify product-market fit from value-market fit and the number of people likely to go from free to paid user to predict sales opportunities. For example, if five out of every hundred users consistently convert to paid users, then you can use 5% as an estimate to build your financial models.
📝Regularly analyze OSS to SaaS conversion rates.
You need to build in analytics that help predict the percentage of OSS users who will convert to paid users.
In the first, your open source user doesn’t lead to a buyer. In this case, you have great product-market fit, but no value-market fit.
📝The first failure mode is when open source users don’t lead to buyers.
In this case, you have great product-market fit, but no value-market fit.
In the second failure mode, your OSS project growth falls behind your enterprise sales. Here, your product-market fit may not be that great.
📝In the second failure mode, your OSS project growth falls behind enterprise sales.
In this case, your product-market fit may not be that great.
In the third, your commercial offering kills your credibility with developer communities. There is likely too much in proprietary and not enough in open source, and your open source project withers.
📝In the third mode, your commercial offering kills your credibility with developer communities.
There’s probably too much proprietary content and not enough open source, causing your open source project to wither.
As software has eaten the world, open source is eating software.
📝As software has eaten the world, open source is eating software.
Today, almost every major technology company, from Facebook to Google, is written on the backs of open source software. Increasingly, these companies are building their own open source projects as well – Airbnb, for example, has more than 30 open source projects, and Google more than 2000!
📝Today, almost every major tech company from Facebook to Google is built on open source software.
These companies are increasingly building their own open source projects as well.
(Examples)
I believe Open Source 3.0 will expand how we think of and define open source businesses. Open source will no longer be RedHat, Elastic, Databricks, and Cloudera; it will be – at least in part – Facebook, Airbnb, Google, and any other business that has open source as a key part of its stack. When we look at open source this way, then the renaissance underway may only be in its infancy. The market and possibilities for open source software are far greater than we have yet realized.
📝Open Source 3.0 will expand how we think of and define open source businesses.
Open source will no longer be just RedHat, Elastic, Databricks, and Cloudera, but will be – at least in part – Facebook, Airbnb, Google, and any other business that has open source as a key part of its stack.
The market and possibilities for OSS are far greater than we have yet realized.
That’s all from the Gemba, where I want to work on Open Source.