Why Open Source Software is Big Business

Heather Meeker is a lawyer and venture capitalist, and a 30-year veteran of Silicon Valley. Her new book, From Project to Profit, is a handbook for understanding and building COSS businesses.

When you think about open source software and business, it’s easy to fall into a false dichotomy. Is open source a selfless act of charity, or can it be a business? The answer is…yes!

Some open source projects are labors of love and true gifts to the world, or a way to establish developer cred, or have fun with a personal project. But some of them can also be a springboard for a new kind of business–arguably the most consistent trend in business in the 2020s. We call that model COSS: Commercial Open Source Software. That means that the business would not exist but for a core open source project. Think about Red Hat, WordPress, or GitHub, all wildly successful market leaders.

After decades of flying under the radar, investments in open source startups have picked up momentum in recent years. Entrepreneurs and investors alike are discovering the power of the COSS business model. This kind of business strategy transcends market verticals. It works for crypto, AI, enterprise software, consumer tech, social networks, and more–leading businesses today toward leveraging open source as part of their value proposition.

Caption: You can go from open source to business success

Here are the key reasons why COSS is appealing to entrepreneurs and investors.

The market is clear, but the way to access it is not. Most people don’t understand how you can build COSS into a large, scalable business. Investors and entrepreneurs who understand this emerging model have an advantage in the market. The path isn’t obvious–but the goal is achievable. 

Creating a COSS business model  requires going back to first principles, and re-thinking what businesses do. Many tech investors are focused on “protecting IP” and “IP monetization”–because they have been told this is important. They have learned that intellectual property is the biggest asset of a tech business. That’s true, but IP protection is not a goal in itself.  Focusing on protection ignores the fundamental truth that IP is not a product–it’s just a tool to build a product. Products are the result of human effort, quality control, and tending customer relationships. 

COSS businesses focus on value creation, rather than their rate of monetization, and emphasize the value-add that makes mere source code into finished products. Businesses like Red Hat honed in on how to leverage open source to create professional products. They took a free good–Linux–and turned it into an stress-tested product, Red Hat Enterprise Linux. In doing so, they focused on removing the pain points for CTOs who needed reliable computing stacks with turnkey maintenance. Open source code alone doesn’t provide that. Red Hat was selling what the customer needed. This approach to business is not new. As Henry Ford said, “A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large.”

The market demand is huge. Enterprise users love open source because it de-risks business continuity and provides security advantages. Users of COSS products have the option of running open source solutions locally, which gives them agency over their confidential or personal data. Open source licenses also preserve the right for users to use, customize, and share improvements, which addresses business continuity concerns. 

This is a great entry point into COSS business development. Finding a popular business need that is currently dominated by proprietary options–like digital signatures or online meeting scheduling (Docusign or Calendly) – and creating an open source solution (Documenso or Cal.com) addresses a hidden market demand that can exist, hiding in plain sight, even in an already crowded market vertical. 

Open source business models are both varied and road-tested. As Marc Andreessen famously said, software is eating the world. Now COSS is eating software. In fact, the growth curve for COSS is steeper than the growth curve for the software industry at large. Much as SaaS transformed software in the 2000s and 2010s, COSS is transforming software in the 2020s. Even A16Z is keeping its eye on COSS, offering a grant program for open source AI development.

Commercial open source businesses are efficient. Open source development has always been geographically remote and asynchronous. The pandemic was a blip for them. Businesses built around open source projects are usually built by small, efficient teams, leveraging low-cost talent in a range of locations. For an entrepreneur who doesn’t want to go the VC route, an open source business means the opportunity to build the business on modest funding. For investors, open source founders do a lot with a modest investment, often bypassing the need for later rounds of investment before the business achieves a cash-flow-positive position.

In a recession, open source startups compete successfully on price. Open source startups usually offer their products at lower prices, making them an easy sell to cost-conscious users. In fact, many successful COSS businesses are started during recessionary periods

The enterprise tech team is already rooting for you. CTOs at enterprise companies already understand the value of open source, better than their management does. Most COSS businesses, as a result, need to spend very little on sales and promotion. Sales happen via the engineering team rather than procurement. Word of mouth sales are the superpower of COSS businesses. COSS businesses leverage internal champions to win customers.

None of this should be surprising. The rise of COSS mirrors the general rise of try-before-you-buy (or freeware) products in the tech world. These days, most software products have a free tier for casual users, and a paid tier for power users. COSS implements this model implicitly, often using open source as a free tier, and offering complementary products to those who need and can afford them.

Open Source Has Grown Up. If you are an entrepreneur or investor, it’s time to think about open source as a business advantage instead of a risk. Open source is the future of software.


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