Raising Series B for your Open Source company
Many investors equate starting an Open Source Software (OSS) company, to building a social network — you build the community, and then eventually figure out ways to monetize that. As a result, “what matters” during fundraising, could change significantly across different rounds. There is some really top-notch content and advice out there on what matters for OSS startups raising Seed & Series A (I stumbled upon this excellent post by Jordan Segall during my research). However, there isn’t much information for early-stage OSS startups who want to raise their first growth round.
Do community & OSS traction metrics still matter at Series B/C? How does their relative importance compared to revenue change from Series A to B? Are OSS companies analyzed almost like any another SaaS company at this stage?
On the other side of the table from an investor’s perspective, what might be some useful signals that GitHub data could reveal?
A few notes on methodology
To conduct this inquiry, I have relied mostly on publicly available data on OSS companies that recently raised Series B funding. Since the fundraising environment changed significantly in 2022 compared to mid-2021, I’ve only taken companies that raised in the past 18months. As much as possible, I’ve used data taken as on the announcement date (GitHub stars, forks, commits), or from their Series B pitch-deck. However, for some metrics (e.g. contributors), I couldn’t figure out a way to get historical data, and have used the latest info (as on 10th April, 2023). While directionally correct, the exact figures might be overstated due to this fact.
I looked at a sample of 15 companies (marked as OSS on Crunchbase, and a few identified from public news/announcement). Out of them, I eliminated 3 companies where there was no GitHub/GitLab repo.
The Decibel Open Source Terminal is a wonderful resource to access well-structured historical and current data about several OSS projects; I used it extensively during research for this article.
I’ve summarised the findings into 3 categories: Revenue, GitHub metrics, Community
A. Revenue & customer base
While only one in four startups raising Seed/Series A were making any revenue at all, almost 100% of the Series B companies were revenue-generating. In fact, revenues upward of $3M seem almost like a given for all Series B companies. Not only that, median ARR growth in these companies was ~200% YoY. It is interesting to note that this is actually in line with an expectation of a SaaS startup at a similar stage. Does this imply OSS company metrics like revenue, gross margin, CAC can be evaluated at similar benchmarks as Closed Source SaaS companies Series B onwards?
Whereas till Series A, having Lighthouse design partners was a critical criterion, Series B fundraising clearly demands Lighthouse paying customers.
“Open Core” seems to be the most popular monetization strategy, with almost 3 out of 4 companies opting for it. Presumably because only providing Hosting might raise concerns on defensibility against cloud providers who might use the open source framework and offer their own hosted service.
B. “GitHub metrics”
GitHub Stars, despite being commonly accepted as a Vanity metric, were still vital during Seed/Series A fundraises. Especially considering often there are few other indicators of positive customer feedback and revenue potential at that stage. The average recommended growth rate of Stars for Seed/Series A companies was ~10%. Interestingly, for companies that raised Series B, these growth rates slowed down significantly to an average of ~2.5% MoM growth. A strong indicator that the focus at this stage shifts sharply towards GTM and revenue generation instead. Also, surprisingly, growth rates don’t necessarily slow down as # Stars increase: Some of the highest starred repositories Strapi (45k+) & Supabase (36k+) clocked a >4% growth rate — much higher than the median.
Most companies still demonstrated at least a 1%+ growth rate, giving some comfort to investors that community-building efforts are still bearing fruit. The median Star count for Series B funded companies (7.1k) was also higher than for the Series A cohort (5.3k)
C. Community & Contributors
A thriving community is a strong indicator even at Series B.
The median discord/slack community members (~4000 members) is roughly 3x that estimated for companies raising Series A. Contributor-count on GitHub is also higher (125) for Series B companies, compared to the ~50 contributors for Series A. In fact, all but one of the Series B companies researched had >50 contributors. Since GitHub only displays max 100 contributors, a good proxy to view is # commits by the top 50th and 100th contributor.
There was also a huge variation in both # contributors, and # discord/slack members across companies. It is intuitive that companies like Airbyte that rely on community contributors for connectors should have a larger and more active base of contributors; as compared to OSS companies where the key advantage of open-source is that the buyer can view under-the-hood, and be assured of longevity of the solution. This is visible in the data, as Airbyte has much higher than median on # contributors (200+), and # commits by the top 50th and 100th contributor (52 & 14 respectively).
Another interesting metric to track here is forks/stars ratio: it is a reasonable proxy for how much is the community engaging/iterating on the repository, vs just using & liking it. While the median ratio is 12.5%, there is a wide variation here. Some companies like CodeNotary, Observable & Bit were at the 4–5% mark, there are also companies like Pimcore at 45%+!
There is also a clear correlation between # Contributors, and Forks (see the diagram below); reinforcing the obvious fact that Series B companies need to continue investing in building and nurturing their contributor base.
Observations & Conclusion
Overall, it feels like at Series B, OSS startups are assessed against similar benchmarks as closed-source companies when it comes to revenue & growth.
Additionally, OSS companies also need proof of continued community engagement, support & advocacy. This means targeting a reasonable (~1.5%+) month-on-month growth in Stars and Discord/Slack community, and evidence of strong engagement (growing base of contributors and commits, PRs). I am assuming this reflects in their CAC, and also LTV to a certain extent; but I could not find sufficient data to prove or disprove it so far (the good folks at Redpoint concluded otherwise at least from a GTM payback perspective. Might be worth exploring if there is a retention advantage which then leads to a higher LTV). I also wonder if these OSS companies would be able to continue growing T2D3 after their Series B, and more importantly, what is the modality of this growth!
One word of caution before I end this article: even though most of the data used for this analysis is quite recent, it might paint a slightly skewed picture, for two reasons -
- Some funding rounds in 2022 were still affected with the low-interest rate euphoria
- Many funding rounds could be announced at a significant lag (3–6months sometimes) to when the deal was actually closed
My recommendation would be to focus more on the qualitative conclusions from the analysis, and build in some buffers when it comes to actual numbers. Also, since every business is unique in their own right, the commentary around your metrics (why you took the decisions that you took, what have you learned from certain outcomes, and how have you structurally evolved the organization based on those outcomes) often matters more than the metrics themselves.
Massive thanks to Akash Bajwa for reading initial drafts of the post, and providing critical feedback. Do also check out his substack if you haven’t already!
