rusty coder, venture capitalist, economist by training, iterating through life
In the original days of the new software stack evolution, there was a fringe section which consisted of developers getting together in old fashioned chat rooms, offline and online, and coding for the love of it. When Linus Torvalds started the project to create a new operating system it was a way of community activation. Back in university, open source wasn't known as such, Linux wasn't the paragon of open source, instead it was a good enough version that allowed one to not pay for Microsoft Windows.
But it's fringe no longer. Just in the last decade we've seen close to $10B of capital go into bigger and bigger deals in the open source software world. We've seen MySQL get bought for $1B by Sun, which seemed incredible in the days before unicorns came to existence. But after that there was a Cambrian explosion in the offerings. New, incredibly successful, enterprise offerings came into being. Cloudera, Map and Hortonworks with Hadoop, GitHub with git, MongoDB for its eponymous database, Elastic providing Elasticsearch and beyond. Some went public, like Elastic, and some got acquired, like Mulesoft. And that's not even including the incredible sale of Red Hat to IBM for $34B.
While it started with operating systems and databases, extremely nerdy pursuits that developers like to work with, to show improvements in doing something that's hard and to contribute something to problems they spent most of their time working on.
Origins of open source used to be through individual coders who had a shared sense of vision. This changed in the late 2000s and 2010s. That's when companies, sometimes venture backed, created codebases and engaged the community to act as evangelists and product managers as opposed to code contributors. But the sheer size and scope of effort required to build something truly useful has also increased. So the projects tend to start in large organisations with unlimited resources, either educational institutions like Berkeley, or technological institutions like Google or LinkedIn. The technological byproducts then get turned by their creators into businesses, as with Hadoop, Spark or Kafka.
The three major business models...
There's three main business models that open source companies have pursued, all successfully. As the market landscape has shifted some of them have become more dominant than others, though the businesses that have been built exploit the key needs that larger enterprise customers have, above and beyond just functional code. They need SLAs, they need resilient tooling around the code, modules around accessibility, security and monitoring purposes, and so on and on. It's worth noting that this isn't just bureaucratic overhead, but actual functionality needed for larger companies to run.
Necessary (but not sufficient) conditions for a successful project
As projects increase in size and scope, and venture backed companies try to exploit this new method of creating value for its end customers, the roadmap that needs to be followed for success has become more rigorous, if harder.
One of the interesting aspects of this new method of building enduring enterprise companies is that the initial adoption amongst its chosen market participants, in this case developers, go through stages that would be excruciatingly familiar to anyone who has looked at consumer focused businesses. A clear bias towards brand building, bottom up product adoption, focus on ease of use and integrations, and in creating a sense of belonging and community amongst its users and adherents.
The overall trendlines in the market meanwhile continue to be; a) increasing dominance of the cloud and incredible proliferation of saas and paas solutions, b) far better interconnectivity amongst the larger apps which enable movement of data and metadata amongst systems, through APIs and smarter middleware (some of the best of which were open source, like Mulesoft), c) enterprises are tired of having large scale vendor lock-in, which reduces their agility, resiliency and in some cases their security.
Open source in a cloud world: an investment perspective
As we are buffeted by the tailwinds of several trends coming together, it's worth assessing how they might impact the next wave of open source enterprise companies that will emerge.
Previously published behind a paywall at https://medium.com/foundamental/free-the-software-stack-b50a5bf914be