Open source is eating software faster than software is eating the world, but coming up with a brilliant idea that gains traction constitutes just one part of the process. Turning the project into a business that generates revenue in the long term can present one of the hardest obstacles.

On the Hacking Open Source Business podcast, Joseph Jacks aka JJ (Founder, OSS Capital) joins Avi Press (Founder and CEO, Scarf) and Matt Yonkovit (The HOSS, Scarf) to share what you need to know before starting a commercial open source software (COSS) company and how you can set yourself and your project apart in a way that attracts investor funding. As an investor who exclusively focuses on open source startups, JJ provides a VC perspective on what he looks for when evaluating investment opportunities. 

What follows is a guide based on their conversation aimed to help you best prepare and position your COSS company to raise funding while continuing to contribute to the open source community. Note that you can build a strong business off open source while still keeping open source projects as open source. It doesn’t have to be either/or.

What is open source software, and where is it headed?

Before we dive in, let’s start with a brief introduction on the definition of open source. You can think of it as a rights-driven, discrimination-free framework for computer source code. Fundamentally, open source indicates that any entity can see, modify, distribute, and commercialize the source code. 

Of course, some open source licenses exist that fall under those basic tenets yet contain some variation in the treatment of trademarks, attribution, patents, and/or reference rights. 

Today, you may encounter a newer branch of open source licensing called source available, which serves as a hybrid between open source licensing and fully proprietary software licensing. An example includes the Server-Side Public License (SSPL) used by MongoDB and Elastic, which generally focuses on calling out and restricting the monetization of software under the license. You can use the license for your projects and applications as long as they do not compete with the company providing the SSPL software or services.

You may also come across the Business Software License (BSL), sometimes called eventual open source, which means that the code is source available initially, so only a single company can monetize, control, and contribute to that code base, but it eventually becomes open source after a period of time. Only a small fraction of companies choose to go this kind of route, though its usage has grown.

Although some think that source-available licensing seems to be trending, JJ predicts that in the future, companies will increasingly view source-available licensing as an inflection point toward open source and orient themselves in that direction. They will realize that much of their code is non-business differentiating and that they can still bring in the same revenue going open source, as users are ultimately more interested in the product experience. Users pay for the services and products that they love out of convenience—they do not spend money on software to access the source code. According to JJ, source code does not actually contain any unique value to begin with. 

Because open source accelerates and magnifies innovation while ensuring accountability due to greater competition and collaboration, consequently benefitting everybody in the end, JJ believes that, if anything, it will continue to catch on.

In addition, the millions of open source projects out there usually fall under one or both of the following categories: 

1. Software that reads or writes data, acting as a system of record
2. Software that proxies data at the network persistence tier, like a message bus—some kind of middleware abstraction interfacing with essential data

When a technology qualifies under at least one of these domains, you can be more confident that it carries the potential to become the foundation of a valuable, well-established COSS company.

What do COSS companies that get investments have in common? 

Cal.com, Hoppscotch, and NocoDB are just three companies within OSS Capital’s portfolio. You’ll find that software at the application level and infrastructure tooling or general tooling for developers appear as common patterns across many of the companies that OSS Capital backs. Another theme: They offer the open source version of X. 

So does OSS Capital seek out open source projects largely because they branch off some massively popular proprietary software? Rather, OSS Capital looks to systematically identify people who are genuinely motivated to create a solution that solves a specific problem in a way that is meaningful to them. “X, but make it open source” may frequently result, but it is not usually the original motivation of a project.

For example, Peer Richelsen, the main founder of Cal.com, formerly ran a recruiting startup. He realized that Calendly lacked some critical features that would help smooth out the process of coordinating and interacting with a vast number of candidates. As a proprietary software, Calendly could not be customized by someone like him, but he could not find an open source version of Calendly or better alternatives. This compelled him to build a better solution himself.

A similar story goes for the NocoDB Founder Naveen Rudrappa. He developed a tool that lets you build REST and GraphQL APIs on top of MySQL to address a pain point that he personally faced. He desired a user-friendly interface that could interact with those databases at the application layer without requiring custom infrastructure and a binder between the application and database. The idea of a simple process for writing data to a database such that the information resembles a readable spreadsheet led to the discovery of an untapped market.

Successful COSS companies are also apt to try numerous avenues in order to secure their first customer, whether it’s charging for services, plugins, an enterprise version, a managed API, or a fully managed service. In GitLab’s case, they have 3–4 monetization approaches based on a defined set of personas. Depending on whether they’re catering to a buyer (executives or decision makers with purchasing power) or a practitioner (end users of the product), GitLab leverages the appropriate method and model for monetization, keeping in mind the target persona’s predilections.

As you can see, a common thread among thriving COSS companies comes down to the fact that real solutions worth putting money toward solve real problems, and you have to find a way to convert your target users into loyal customers.

Key metrics that investors care about

Perhaps you have those boxes checked, but you want to know what additional factors investors take into account. 

Quantitative metrics: Measuring growth for open source

Growing your user base, install base, and community is paramount. Seeing steady growth of 20–30% month over month is good, but maintainers and business owners also need to watch for changes in growth rates even over small periods as they can indicate something else that needs to be looked at.

One point of clarification: Rate of growth should tie to external contributors, not stars on GitHub. The former makes an immediate impact and can steer the momentum of a project, whereas the latter actually bears little weight. It may provide some sense of developer excitement, but it is just a lean sense when what you really want to know are adoption and usage. Drawing on physics as an analogy, Mitchell Hashimoto (Co-Founder, HashiCorp) has likened putting stars on GitHub into the potential energy bucket versus the kinetic energy bucket. Contributor metrics are the baseline, but an open source company that strives to commercialize at the next level will inevitably need access to advanced download and adoption metrics as well, such as the ones provided by Scarf.

Secondary metrics for consideration include rate of development, rate of execution (i.e., commits made in the repository daily, weekly, or monthly), and rate of iteration or improvements.

Qualitative metrics: Evaluating teams

The less obvious and harder-to-measure metrics have to do with qualitative components. Businesses depend on individuals and reflect their creators, but people are not as straightforward as mathematical terms. Understanding the motivations, goals, personality, tendencies, and preferences of those leading a project truly matters. Investment companies look for humble, self-aware, mission-driven, and intellectually curious leaders who are sufficiently skilled and technical enough to bring a product to market. They look for leaders who can grow, learn, and evolve with the company as it matures.

Fortunately with open source, it is much easier to gauge commitment, consistency, and interest in a project over time by the nature of the data available. You’ll know if a person is intrinsically motivated because they’ve volunteered to contribute significantly to a project even without compensation. People who authentically and persistently care are the kinds of people who will draw in investors.

Time will always tell if a partnership pans out, but VCs don’t have the luxury of even a short timeline to find that out. It normally takes 7–10 years to see how a company fares, making the private equity investment process even more selective. 

If you ask yourself whether your product will generate billions of dollars within 10 years, what would your honest answer be? Even for our own selves, it can be challenging to envision such a trajectory, so imagine what it takes to convince another party, namely an investor. 

The most important factor 

If JJ had to choose one factor that pushes a business over the edge toward success in its early stages, it would indeed come down to the person leading the charge:

• Do you have what it takes to create a business from zero to 100?
• Do you have what it takes to grow into a leader who can inspire others and run an organization? 

If your answer is “no” to one or both of those questions, do not fear. Most people would respond similarly as first-time founders, but getting to a place where you can say “yes” can certainly be learned.

What happens once a project gets an investor’s attention?

Interestingly, none of OSS Capital’s core investments involved pitch decks. Instead, OSS Capital prefers to keep active eyes on the open source community, monitoring launches and activity that appear objectively interesting, which then catalyzes them to reach out and introduce themselves over email, Twitter, or LinkedIn. 

In return for funding a project with millions of dollars, the creator maintains control of the company and gets to build a project and surrounding community that can be developed and sustained more systematically. OSS Capital encourages and suggests projects to stay open source licensed perpetually, which they believe makes for a better world and more scalable development of the product.

Telemetry: The biggest challenge for open source companies

Once you’ve raised funding, you’ll likely encounter the most commonly faced challenge of rising COSS companies: collecting data. Open source projects traditionally start out on GitHub, which only provides limited information on the activity and engagement surrounding a project. It’s nowhere near as robust as the insights you would gain from building a proprietary product. With a proprietary product, you would typically capture a user’s details and track interactions or feature usage after the user has signed up for a freemium account by providing an email or something of the like. With open source, you can’t understand how or where the product is running, at least not in an out-of-the-box way. This fractures the feedback loop between end users and the product’s developers.

To minimize that gap, many COSS companies have leveraged Scarf to gain insights that help them build a more tailored product and connect the data that they need from an environment to their own assets and domains. Thus, the standardization provided by Scarf makes it easier for companies to establish telemetry by saving them the trouble of creating their own from scratch. Companies can simply focus on creating better software for all.

Take heed

With open source comes innovation, commoditization, and new market dynamics and characteristics that serve as a bedrock for exciting business opportunities. 

However, wildfire open source adoption does not guarantee commercial success. Garnering millions of downloads or recruiting thousands of contributors does not equate to a capacity to monetize. As you transition from an open source project to offering a product or product experiences, you still need to figure out a system for turning users into customers.

To get to that point, it is important to first acknowledge that:

• The definition of open source is not evolving. Source available licensing shows up more now, but open source isn’t going anywhere. It is still a great path with plenty of runway, and the opportunities are not just limited to the cloud.
• Starting an open source project that solves a specific problem, often one that you personally relate to, makes a difference. It’s less about the narrative and more about genuinely caring about resolving an issue at hand. The heart and person behind an effort have the power to carry it through the startup stages and take it from zero to full bloom over the course of 10 years. 
• Metrics for open source are undoubtedly tough, but that doesn’t negate their necessity. Investors evaluate COSS opportunities based on growth of external contributors and equally, if not more importantly, based on the people leading the project. Investors will only provide funding if they believe in the people just as much as they back a project. 
• Telemetry is a shared challenge endemic to the industry, but you can and should address it. Various companies rely on Scarf to overcome this barrier, because knowing who your users are and how they’re using the software results in improved products that benefit everyone. 

We hope you found this guide a useful start for transforming your open source project into a viable business. To hear the whole conversation with JJ, you can watch the full episode on YouTube. We also encourage you to subscribe to the Hacking Open Source Business podcast, get started with Scarf, and in the meantime, stay tuned for more to come!