Survey: Open-Source Distribution of AI-Native Products

by Reid Christian and Chiraag Deora

If AI is the thing, open-source software (OSS) can be how. There has been plenty of equity value created from open-source businesses in recent years, such as Confluent, Elastic, MongoDB, and HashiCorp, and we continue to feel that there is more opportunity to come.

Similarly, since the release of ChatGPT, generative AI has driven excitement across the software stack by leaning on foundation models (e.g., OpenAI, Meta LLaMa, Stability AI) to deliver incredible results. The applications of these foundation models, ranging from code generation to gaming to customer support, have been covered in depth over the past several months and it’s likely that many founders will plan to distribute their AI-native product through open-source. The question then becomes, how should you go about it?

Though AI has become the next big wave in technology, our perspective is that the business plan of a generative AI-native OSS business shouldn’t be much different from some of the successes we’ve seen previously. Some OSS AI projects will package and productize effectively, and become the next tech unicorns. However, if history is any indicator, many others will fail to transition from project to product.

Over the past decade, we’ve seen a range of approaches to building OSS businesses including large public companies and currently private companies. Red dots indicate when relative financing rounds were raised.

The difference between these two outcomes isn’t random. Success in OSS product development is possible if you recognize the signals and mobilize at the right time.

We surveyed a group of leading OSS company executives ranging in size from early to late stage. We combined their feedback with our combined experiences investing in OSS startups (Vercel, Kong, Confluent and others) to offer recommendations to founders looking to scale their OSS AI project into a venture-scale business.

1. Don’t rush community building

Most successful OSS startups layered on enterprise features after establishing a thriving open-source community. This means most of these companies were not overnight successes. In our survey, 69 percent of respondents said it took two or more years of community building before they turned on monetization. Some other prominent examples, Confluent, MongoDB, and Elastic, spent nearly three years commercializing before releasing a monetized offering.

It’s vital to build momentum around a project before pushing a commercial product. A thriving community will tell you the tools and features users would be willing to pay for and act as a stakeholder in the project’s success.

Here are a few methods for fostering community around an OSS project:

• Align with a developer evangelist to communicate the value of your project to the broader market.
• Promote your project on popular developer community platforms such as Discord, Slack, HackerNews, and ProductHunt.
• Create and distribute content targeted at developers evangelizing the platform (blog posts, video demos and tutorials, webinars, etc.).

2. Community PMF doesn’t mean commercial PMF

Community virality doesn’t necessarily translate to commercial product-market fit (PMF). An OSS platform needs to ship product that addresses the needs of their community, and then push that product onto the community at the appropriate time. Oftentimes, this requires putting the product out in market and allowing early monetization to be driven by community virality. This is why 62 percent of the OSS executives we surveyed said they made their first sales hire a year after turning on monetization for their OSS project.

There are a few signals that you’ve achieved community PMF, and are ready to turn on monetization:

1. You see a clumping of open-source users at enterprise organizations leveraging your tool for production use cases. This could become the foundation for an enterprise contract.
2. Members of your community request features beyond what is currently available in the open source.
3. Users are actively participating in community platforms to assist each other with issues they are facing, so the project owner is not as relied upon.

3. Many resources will be dedicated to monetization, but don’t forget community

No matter the size of the company, community building should always remain important. Forty-four percent of respondents said they dedicate 0–50 percent of their resources towards cloud product development, which implies a significant amount of resources still dedicated towards community development.

Most startups that achieve scale in OSS shift at some point to focus primarily on their cloud product and enterprise selling, and deprioritize managing the open source. While it’s challenging to manage both, our view is that it’s worthwhile for founders to stay close to their community as they grow. A vibrant OSS community fosters network effects, informs further product development, and can serve as a bulwark against macro upheaval.

4. It’s possible to launch an OSS business from a community you didn’t start, but it’s rare

The majority of successes we’ve seen from open source-led businesses are when the project creators also run the business. The original team has credibility with users and can ensure the product roadmap of both the open source and commercial entity aren’t at odds with one another. However, this approach is not mandatory.

For companies that are not the original owner of the OSS project, the top priority should be to align with the project’s team and cultivate a strong influence within the community. Otherwise, the project can grow away from the company over time. Even worse, the open source project could open source the valuable features the company is commercializing, making their business redundant.

5. Learn OSS business models

Finally, to scale an OSS platform, it helps to understand the deployment mechanisms with which OSS platforms have monetized historically:

1. Support services: A branded wrapper around the open source software to help relieve the burden of managing OSS at scale (e.g., Helptio, Rancher Labs).
2. On-premises deployment: Company installs and manages OSS on client servers (e.g., Cloudera, GitLab).
3. Fully cloud-managed: Company manages data and control plane of software on behalf of clients.
4. Hybrid: Company manages open source software but client maintains control of their data.

Also note the various reasons OSS startups have failed to monetize, including:

• Failure to transition to the cloud.
• Change in language preferences.
• Poor execution around commercialization.
• Emergence of competition from commoditized offerings.

Takeaways for AI Founders

To summarize, here are our key takeaways for founders looking to scale their OSS AI project:

• In the early days, all that matters is nurturing the growth of your OSS community.
• Use community feedback and historical outcomes to infer when and how to monetize.
• Once you’ve achieved community PMF, investing in sales at the right time can drive commercial PMF.
• As you scale, it’s common to dedicate more resources to product, but community can still be a moat for large enterprises.
• Launching a business from an OSS project you don’t own requires a significant amount of influence and coordination with the founding team.

Most importantly, keep in mind that one size does not fit all. AI is a new and rapidly evolving technology, and while history can provide guidance for founders, new playbooks will need to be written.

At CRV, we believe OSS will play a huge role in the coming AI revolution. If you’re a founder building in OSS AI, we’d love to talk.

To get in touch, visit our website.