With Stephanie Opdam, Vice President, Notion Capital
Open Source Software (OSS) has been around for the last 20-30 years. OSS started to gain scale in the hay days of Linux, Sun Microsystems (StarOffice product), MySQL and Netscape. More recently, hyper-scalable OSS business models are arising, resulting in impressive success stories across Europe. Some notable examples include GitLab’s expected $2.75bn IPO, Elastic’s $4.9bn IPO, GitHub’s $7.5bn acquisition by Microsoft and Suse’s $2.5bn acquisition by EQT. We believe that these outcomes are just the beginning of a new trend in OSS, fuelled by the need for rapid innovation and collaboration.
Following our investments into Element, Wercker and Forest Admin and with Melissa Di Donato (CEO at Suse) acting as EIR at Notion, we summarised a few observations in the space below (the full research can be found here).
OSS in 2020
As we all know, OSS denotes the result of making the source code of a project available for the public to see. This does not say anything about the underlying business use case. Yet, open-source software enables dynamics that are particularly well suited for the creation of next generation software, due to:
- Ability to find rapid PMF. Feedback from early communities can prove ‘project-community fit’ (as a precursor to ‘product-market fit’) earlier than traditional closed-source software.
- Developer-first product-led-growth. Sales cycles for closed-source solutions have always been and still are notoriously long, due to information asymmetries and formal decision making within organisations. Instead, OSS customers are developers attuned to implementing new software without facing standard adoption hurdles, reducing sales cycles and shortening payback periods. They also have a higher tolerance of incomplete products provided that the innovative component is strong enough.
- Increased quality and customisation. Providing access to the source code allows for intense public scrutiny, rapid patches on vulnerabilities and facilitates customisation.
Unfortunately, we have not yet reached utopia.
- The adoption of OSS is limited to senior developers that meaningfully contribute to and/or see the value of the software from the source code.
- Currently, OSS might also be less suited to projects where security is paramount, due to the distributed development, lack of quality standards for OSS and open discussions of vulnerabilities on platforms like GitHub.
- There is also less protection against hosting platforms copying the source code for own commercial purposes. However, new ways are established in solving this issue, including changes in commercial licensing agreements and business models. Alternatively, through the creation of an interface layer that increases user stickiness, data embedding, workflows and vertically built solutions.
2020 and beyond
The wave of recent seed investments (e.g. Nuxt.js, Gitpod, n8n, Seqera Labs, Orchest, etc.) is gearing up for their next investment in 6-12 months. As investing in OSS matures, we will refine benchmark metrics for Series A stage companies:
- A fast-growing base of active users (measured by GitHub stars / forks / users / downloads), growing at 5-10% MoM
- A handful of enterprise customers being able to share their use cases
- (Ideally) early monetisation
In the more distant future, closed-source software and open-source software might further converge rather than be treated as a stand-alone model:
- Think about trends like (1) product-led growth (PLG) in closed-source software and (2) an increase in internal vs. external developers contributing code to OSS projects.
- From a monetisation perspective, we see the first versions of hybrid licensing (placing open source and proprietary software in the same repository), which allows the code base to be unlocked through the purchase of a license key. In this way, users can contribute to proprietary features using the same workflow they use for open-source features.
If you would like to learn more, join us at a panel on best practices in OSS for start-ups: