Are Open Source companies well worth (re)discovering?
Entrepreneurs who create B2B digital services most often favour a proprietary model. But this is only one of the possible options for software vendors: Open Source and its monetizable version (known as “Open Core[1]”) also deserve to be considered.
Europe is in a good position
With a community of more than three million developers on GitHub, Europe has a larger base of Open Source contributors than the United States. Ireland, the Netherlands and Portugal are among the ten countries with the highest annual growth in the number of contributors on this benchmark platform. As for France, it is among the top ten countries that use Open Source, behind Great Britain and Germany, but ahead of Russia and Brazil.
In Europe, there are many success stories in the sector: from the pioneer MySQL, launched in 1995 by the Swede David Axmark and bought in 2008 by Sun Microsystems for a billion dollars, to Elastic, created in the Netherlands in 2012 and listed on the Nasdaq since 2018 (valued at six billion dollars at the time of its listing). Other examples include Canonical (Great Britain), SUSE (Germany), JetBrains (Czech Republic) and ForgeRock (Norway).
A new generation is now building the sector’s future successes: Netdata (real-time monitoring, launched in Athens), Rasa (Open Source machine learning, launched in Berlin), Snyk (IT security, based in London), Containous (cloud computing, launched in Lyon), Camunda (process automation, based in Berlin) and of course one of Bpifrance Digital Venture’s portfolio companies, Strapi, provider of a headless content management system (CMS).
However, adopting a geographical approach to talking about Open Source is not necessarily the most relevant: the main advantage of the model — which may also explain its current success in Europe — is being able to cross the borders and disregard the specificities of each country to scale quickly in the context of a scattered market, thanks to the multiplier effect of the community. With Open Source, the development of the software and its functionalities is decentralized, even if the vendor who created it does the bulk of the work.
When used properly, this model brings together a community of committed users around its product who contribute to the project and participate in its success, while acting as a barrier to entry for potential competitors. The community becomes a driving force for improvement and adoption of the product and gives it an international dimension very early on. Naturally, tools for developers (infrastructure, database solutions, API management…) are particularly well suited to Open Source: the contributors are also the first users of the software.
The model is also of interest because it appeals to demanding customers with high expectations in terms of personalization and security. E-commerce, content management and data processing tools are therefore sectors which are more open to this model. Indeed, since the software code is open, each user can modify it and customize it down to the last detail, which is usually not possible with proprietary tools.
The new generation of Open Source software thinks about monetization strategy very early on
A common misconception about Open Source is that there is no associated business model. Nothing could be further from the truth. Although Open Source software is based on three main principles (free redistribution, access to the source code, the possibility of creating derivative works), these do not exclude the possibility of generating income. In fact, the larger the user community, the more options there are for monetization.
Some vendors of open source projects are paid through creating a web agency around the project, providing user support or selling training courses. Others set up a marketplace for additional paid features (“plugins”) for which they earn commission. In addition to the initiator of the Open Source project, the entire community of developers can also find opportunities for monetization. Wordpress, with its vast web of dedicated agencies, hosting solutions and plugin developers, is a good example.
Nevertheless, the most profitable model for publishers is still “Open Core”: the core of the software is offered in open source, supplemented by an “Enterprise” version, for which a fee is charged, with the addition of functionalities necessary for large accounts or a targeted group of users. In simple terms, it is in fact a “freemium” type system.
Unlike their predecessors, the new generation of open source projects integrate these monetization strategies very early on, adopting a more centralized approach than in the past: the company at the origin of the project largely retains control of it and offers its customers a SaaS-type solution very early on, based on an “Open Core” model.
Despite all these opportunities, the issue of generating income remains the main challenge of Open Source. Moving from a free model to its monetization is often difficult to do without offending the community. In many cases, the added value that customization brings is not relevant to users. As for the provision of services model, it has scalability constraints that rarely make it compatible with the expectations of VCs — even if this did not prevent Red Hat from being sold to IBM for 32 billion dollars. It is also necessary to be vigilant about the type of licence chosen and whether there is a risk of contamination.
VC’s view on OSS opportunities?
An investor’s expectations of an Open Source start-up differ according to its stage of development: although community growth and development potential are the main indicators considered during the seed phase, monetization needs to be given much more consideration — if not already begun — when discussing Series A and B. The difficulty being that Open Source does not fit into the framework of the classic indicators considered by investment funds… other aspects must therefore be valued, such as the strategic value of the developed product.
The way opened by the French founders of Strapi could serve as inspiration. After a seed investment by Bpifrance Digital Venture in 2018, via the F3A fund, which was used to develop the community and invest in R&D, the startup raised 3.7 million euros from Accel and Stride in October 2019, then a further 9.1 million euros in May 2020 from Index Ventures and independent investors, specialists in Open Source, with the aim of rolling out a fee-based “Enterprise” version based on the Open-Core model.
Their content management and distribution tool is now used by both business (international groups, media and startups) as well as individual users (for their blogs), while relying on a community of hundreds of contributors, having published more than 4,000 projects related to Strapi on GitHub. Will this success story encourage new initiatives among French entrepreneurs?
If you are an entrepreneur working on open-source technologies in France, don’t hesitate to contact us!
[1] A business model that consists of offering a limited version of open source software in terms of functionality while marketing proprietary add-ons for a fee.
