Open source software (OSS) is undeniably a force for good. And society is yet to value the open-source building blocks and the contributions of passionate developers on which it runs.

Much of the most cutting-edge and critical software infrastructure in use today is powered by open source, with even Nasa’s Mars Rover relying on an open-source project for its operations.

Numerous citizen-sector organizations benefit greatly from OSS. In an era where technology has become a necessary enabling toolkit across industries, tech talent can be prohibitively expensive for NGOs. Open source allows people with technical skills to contribute in their free-time and simultaneously empowers organizations in these sectors to save on precious resources that they might otherwise bleed to software vendors. The same is true in the case of for-profit ventures too.

Open-source is not only a cost-saving measure, but also is a catalyst for collaboration and innovation. By crowdsourcing the work at hand to a global talent pool, open source projects are a hotbed of creativity and innovation. And an open source project inside of a for-profit organization demands breakneck speed by virtue of it being built publicly.

Also, almost every software developer, regardless of their domain or location, reuses and tinkers with publicly available code when faced with technical implementation challenges — how else would one learn? — making OSS ubiquitous and I don’t think the following comic is all that much of an exaggeration at all.

Traditionally, and to the most part, OSS has been free. And this has benefitted the developer and tech community but also the larger society greatly. But parallel to this, since 1999 when Red Hat first went public, Open source as a viable business model has been gaining traction. Many open source behemoths exist today.

Open Source Companies have traditionally been Infrastructure Companies — DevOps, Data or Analytics Platforms. But this is changing.

That so many application software companies exist — whose users might not all be techies who understand or contribute in code — is a testimony to the power of OSS’s community. It is the ultimate ‘building in public’ — along with your potential customer and with the ultimate feedback loop, feature by feature and module by module and also allows for feedback and product validations even before you build anything. It gives your product massive distribution by allowing the widest possible top-of-the-funnel, with a few contributors potentially becoming champions of the product in their respective organizations.

Over the last few years, there has been an increase in the number of newly founded startups deciding to go open-source and getting funded; venture capital firms focused on OSS startups being founded, indicating a growing consensus that open-source monetization is real.

While this is a trend that we will witness unpack in the coming years, I wanted to break down some learnings on Open Source startups and business models in this blogpost.

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Some of you might find it paradoxical, even bizarre, that I speak of both “Open source” and “Business Models” in the same breath, in the same sentence. Maybe open source to your mind is the non-profit parallel in the technology world, or a public good that monetizing it does not sit very well with you.

Via the course of this article, I hope to impress upon you that the two are not too much at loggerheads, that it is possible to have the community spirit and goodness of open source along with the commercialization of some parts of it, or for some user segments. That in some cases, some financial benefits might be helpful to keep the incentives of all stakeholders in an open-source project aligned — both contributors and users of OSS, and passionate developers who tinker and use the code and more-willing-to-pay enterprises who require more features from the project (perhaps in the form of support, enterprise-grade privacy, security, compliance, and reliability) — ensuring the sustainability of the open-source project itself. And sustaining open source projects is important to the society at large.

Like Dries Buytaert says,

I want to impress upon you that it might be possible to have the cake and eat it too.

You see, Open Source software is Free software, but “free as in freedom, not free as in free beer” — a phrase that’s been around since the 1990s indicating that “Free” here refers to “accessibility” and “liberty” — the freedom for anyone to use, copy, study, change the software or its source code in anyway — and not price. A better name might have been public software, in contrast with closed-source, proprietary or hidden software that OSS is not.

In fact the origin of the word “Copyleft License” — a type of OSS license that ensures that all derivative works or modifications of the original software must also be distributed under the same terms, that any software derived from or built upon copy-lefted license code must also be open-source — arose as a spinoff of the word “Copyright”.

With that context, let’s dive into some common Open Source Business Models.

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This refers to a business strategy where companies offer a “core” version of a product with limited features being open source and free, and others behind a paywall. Typically, features valuable to Enterprises — security, reliability and scale — are behind a paywall and charged for.

It’s a tricky line between keeping individual developers happy and charging their employers.

In fact, Github, a platform synonymous for so many with the term open source, has nailed this. It actually has only about 10% of all their repositories truly open source.

Another type of Open Core that is not Freemium involves exclusive rights to monetization. For example, Mozilla has the exclusive right to use the Firefox trademark and to set up paid search deals with search engines like Google, Yandex, and Baidu. In 2017 alone, Mozilla made $542M from searches conducted using Firefox which can further benefit it.

Another example is Automattic, the company behind WordPress. Automattic is the only company that can use WordPress.com and is in the unique position to monetize WordPress’ official SaaS service.

20 years ago, Eric S Raymond wrote an essay titled “The Cathedral and the Bazaar” based on his observations from the Linux Kernel development process contrasting two distinct styles of software development — one a software carefully and quietly crafted by individuals within an isolated, mostly secret development team (the Cathedral); and the other a chaotic, babbling Open source model that is miraculously a coherent marketplace (the Linux model, the Bazaar).

The OG business model, if you will, pioneered first by Red Hat for Linux but one that continues to be prevalent today, especially by consulting companies, is to offer support services over an open-source project for enterprises that need hand-holding through this chaotic marketplace, the Bazaar that open source can be. This can be technical with a dedicated support team helping with installations, configurations, troubleshooting, and maintenance. Or with identifying, patching or monitoring for security vulnerabilities.

Adjacent to offering support services as a business model but combining Software as a Service with Open Source, Open SaaS relies on a subscription pricing model and a selection of product features depending on the business needs being catered to. This is akin to building and selling SaaS products on top of an open-source project.

• Being paid to build features necessary for a particular customer
• Licensing model that monetizes commercial applications of a software
• Selling add-ons like courses and trainings to the community
• Donations pooled in from the community for contributors

While Open source culture and contributions thrive in organizations such as Red Hat, Github, Mozilla where Open source is key to the business model, the #1 and #2 in the OSCI (Open Source Contributor Index) are still Big Tech.

Big Tech has employees who contribute to open source projects as a part of their job responsibilities. While Open source is not a business model for these companies, this is still an important part of their strategy — for hiring talent from the open source community, having “influencer developers” who are associated with them hang out in the open source circles making the organizations that much more aspirational for other developers. While this allows Big Tech to nudge open source projects they care about in the directions best suited for them, it also helps these organizations be privy to innovations and trends happening outside them allowing them to co-opt them into the organization that much faster.

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In a following blog post, we will dive into some learnings on OSS startups, why startups might choose to go open source, with a focus on open source as a product vs GTM strategy, and more.

Meanwhile, if you are an open-source contributor, or startup founder, or have thoughts and feedback on this blogpost, we would like to hear from you. We want to learn from your experiences and help you in any way that we can. Please write to us at shobhankita.reddy@specialeinvest.com or dhanush.ram@specialeinvest.com.