Open source projects are taking over the world of software development. In the past two years, the market size of acquisitions, mergers and IPOs based on open source software businesses has exceeded 80 billion US dollars, and the pace of venture capital investment in this field is also increasing day by day.

From the creation of the GNU project at MIT in 1983 to the launch of Github in 2008, and IBM's $34 billion acquisition of RedHat, attitudes towards open source have undergone tremendous changes over the years: open source software was once considered a cheap version of closed source software , and now open source software has been seen as a superior alternative that offers higher quality, better support, and more flexibility.

As decision-making power continues to shift to developers, companies large and small are more willing than ever to incorporate open source software and all its benefits into product software. In fact, most of the newly developed application code bases are composed of open source components. Tidelift, which manages open source components, reported in a recent survey that 92 percent of developers surveyed said they built applications that included open source components.

As strong believers in developer-centric business, we've been following the development of open source software closely and are excited by the pervasive win-win situation in these businesses, the value that open source generates for the community and the enterprise.

How Open Source Creates Value

Over the past few years, open source software has gradually displaced some of the closed source incumbents as enterprises have replaced critical infrastructure with better open source software. And it's only going to grow as we see big software giants trying to take on new competitors that don't spend hundreds of millions of dollars on marketing, but leverage broad and Vibrant user community to penetrate the market. In addition, new technological changes are getting faster and faster, so even established players in open source projects are beginning to be replaced by younger, more dynamic emerging projects.

We see the same trend spreading across the software stack. Open source is not limited to software infrastructure and data analytics, but is penetrating into areas that have traditionally been entirely dominated by closed source software. WordPress, for example, has created an open-source alternative to content management systems, and new open-source projects are popping up in areas such as closed-source communication apps (Slack), data visualization tools (Tableau), and security solutions (Splunk).

From the birth of the first generation of companies to the gradual maturity, the business model of open source projects has also undergone some interesting changes. Less than a decade ago, open source was almost considered unprofitable. Many investors and industry experts have said that open source is nice to try, but unless you can provide irreplaceable support services, you can't build a real business around open source.

However, innovative business models continue to evolve, and many of today's top open source software companies adopt an "open core" business model (note: some products are free under the Open Core model, while commercial licenses are used for premium versions or add-ons, such as community Edition and Enterprise Edition), in which the company keeps all core functionality of the product open source but only charges for a small set of high-end, closed-source features. It's one of the best business models we've seen for open source projects.

Once these open source companies start the profit engine, coupled with the promotion of a strong basic community, ARR (Note: Annual Recurring Revenue, annual recurring revenue, is also a key indicator of SaaS or business usage with long-term subscription agreements) grows from $1 million Getting to $100 million can come faster than some of the fastest growing traditional SaaS businesses.

Here is a comparison of the growth rates of three of the top 100 open source companies on the Cloud and the fastest growing SaaS companies:

From a recently announced investment in infrastructure monitoring solution Netdata, to Cypress, a leader in front-end testing, ScyllaDB, a NoSQL database, and HashiCorp, a leader in infrastructure management, Bessemer has been increasing its investment in open source software projects over the past few years .

But with 37 million public code repositories on GitHub today, how do we invest in the idea of ​​finding the needle in the haystack of countless open source projects to find the potential for the next multi-billion dollar project?

Six Frameworks for Open Source Investing

After meeting with hundreds of open source project founders, analyzing 10,000 of the top public repositories on GitHub, and compiling data on the most successful open source software companies of all time, we share Bessemer's framework for making open source investments.

1. Team

Like any venture, the team is the primary factor. The flexibility of open source allows almost anyone to take an existing project and form a team around it, and you can even see several different teams popping up around the same project at the same time.

We've found that the most successful open source companies are often led (CEO or CTO) by the founders of the original project, although this is not always the case. But this situation often means a higher success rate: the influence of the founders of the project on the project can help attract talent. More importantly, their familiarity with the project and their thinking on the project vision bring a decisive advantage to the founders of the project.

It would be even better if these creators could build a community around the project of active contributors and maintainers, who are often employees of the company, though not commercially focused. This not only reduces the burden on project founders, but also builds the most relevant and valuable talent pool for the company's first batch of talent construction, and makes the product roadmap of open source software more clear and controllable. Building a community not only gives a project an advantage in attracting and building a strong team, but also enables the project's business to grow faster, which is an added advantage over other efforts.

2. Origin

Open source projects can come from anywhere. GitHub exists to allow almost anyone to push a project to the web and form a community of developers around it. In addition to individual developers, tech giants such as Google, Facebook, Microsoft, and Netflix have been frequently open-sourcing their internal projects, resulting in some popular open-source software technologies, including Kubernetes, Go, and Visual Studio Code. Likewise, some of the most advanced research institutions and universities are also major players in contributing to open source projects.

Open source tools released by tech giants rarely spin off standalone businesses, and while technologies such as Kubernetes have driven massive changes in cloud infrastructure, they haven't achieved massive commercial success, at least not yet. (Perhaps the widespread popularity prevents participants from building businesses on top of projects released by these giant companies?) While there are already ecosystems and companies built around these solutions, when the technology is moving in many different directions, Dominance is not an easy task. .

One might also think that starting with the founders to form the team and then build and launch an open source based business is a more natural path to success. And we've found that the opposite is true, and we've seen the most compelling companies come from individual developers who start an open source project to solve their immediate challenge, and then later build a meaningful business. In fact, more than half of the projects in the top 50 open source companies were started before dedicated companies were formed.

On average, the top open source software companies are launched three and a half years after the public launch of the underlying open source project, by which time the project itself has gained significant traction.

This is mainly because projects are often built to solve one problem, and if one developer searches around and can't find an existing solution, there are likely thousands of such people looking for the same thing. When a project founder can get his project widely adopted, the market reaction is usually a good indicator of the wider business value the project builds. This is a wonderful feature of open source business - before "taking the plunge" and forming a company around the project, you can join a group of beta testers, test the product's market fit, and then build on the nature and operation of the community. mode, you will have a very good profit path.

3. Early Adopters

Users are always an important indicator of the success of a project. The more users who adopt the project grow, the more promising the project's development prospects will naturally be. However, there are currently countless open source repositories serving a variety of different audiences, from backend developers to frontend designers, and each project category has its own unique open source ecosystem.

If a project is in the hands of thousands of developers, its profit model will be very different from that of some hot tech companies developed by teams of engineers.

As investors, we prefer the latter, as early adoption by top tech companies increases the likelihood of subsequent widespread adoption. There is no doubt that any adopter can start a company by providing services, and if early adopters use recognizable domain names in their email addresses, we can also verify the commercial potential of the project by monitoring this information.

4. Project Ownership

Most standard open source code allows anyone to try to build their own company and product on top of an existing project. Although open source code is the greatest source of value and growth for open source projects, it also means that any project may have a small number of teams. Compete to provide services, hosting, or build features to projects.

When meeting with open source companies, we always try to understand how much control the team has over the direction of the underlying open source project. There are already some successful businesses built on top of the project, yet there is no real "control" of the project roadmap or commits. The best-case scenario here is when the team has sufficient authority to guide the project's roadmap, prioritize features, and approve commits. This doesn't stop others from "forking" the project, that is, copying the code base and autonomously following the direction of the fork. The emergence of multiple vendors heralds a hot market opportunity that could produce multiple winners, such as Cloudera, Hortonworks, and MapR, all of which serve Hadoop. But without a clear project leader, a project can be pulled in different directions by many different actors, diluting the power of the group.

profit

5. profit

One of the most strategic decisions for open source companies is how to design their monetization strategy to properly capture value from the right customers without restricting open source products. Historically, many open source businesses have been built on the basis of providing support, services, and SLAs (Note: Service Level Agreement, Service Level Agreement, such as RedHat). To this day, most open source businesses operate under the "open core" model, in which all core functionality of the product remains open source, but only for a small fee for premium features. The best open source companies tend to keep as much functionality as possible in the open source version and only monetize a small percentage of their user base, usually less than 5%. This helps encourage wider adoption of the open source version by the open source community, which then turns active users of the open source version into major users of the paid product.

The key to getting monetization right is identifying the most competitive feature set in the enterprise edition that triggers enterprise customers to upgrade to the premium edition when the product is adopted at scale, while still maximizing the value of the open source edition to the community.

6. Community

Community engagement is the lifeblood of an open source company. Community feedback and engagement is critical to guiding the project's development course, fixing bugs, building new features, increasing adoption, and providing support. However, projects that achieve large-scale community engagement are rare. Of the 37 million public repositories on GitHub, we analyzed the top 10,000 (ranked by contributor activity), and fewer than 500 met the criteria for "massive" community engagement, equivalent to about 1 in 80,000 projects Projects are able to reach this scale.

Even rarer are open source projects focused on commercializing the project. Of the top 500 open source projects, fewer than 100 are related to venture-backed projects. This is changing though, and as more and more open source developers start new companies, we wanted to provide some benchmarks to measure things like project community engagement.

Measuring success for something as qualitative as a community is not easy, especially given all the different stakeholders and relevant metrics.

We are most concerned with the number of community users and contributors, because they are the group with the most insight into the size of the community. That's why we rarely pay attention to numbers like Github Stars, which like other vanity metrics tend to spike with big press releases, and because they don't reflect ongoing engagement.

Whereas "users" and "contributors" denote groups that actively participate in and depend on the project. Users are difficult to measure since most projects have limited telemetry data on users. Contributors only represent a small subset of users, so this group is easier to measure, and this group of users tends to engage more deeply with the project by investing time in providing feedback in the form of issue comments, or occasionally contributing code to the project. .

In most open source projects, the vast majority of development work is done by a very small number of core maintainers, so we don't use the number of contributors as a measure of a project's development capabilities. Instead, we use it as the A proxy indicator of how much adoption a project is gaining.

We define this as any user who creates a Github issue, makes a comment, pull request, or commits within a given month. If an emerging open source project can sustain more than 100 contributors per month, they will be at the top of the industry, and if the project has more than 250 contributors per month, it is close to the achievement of the most active project ever. In fact, only 6% of the top 10,000 projects maintain 250 contributors per month for 6 months or more.

As investors, we know that these metrics only tell a small story, so we certainly don't dismiss companies with limited contributor activity. However, active community involvement is a key component of most successful open source projects, so we prefer to invest in businesses that are based on a strong community.

For more detailed content on the part of community participation, please refer to another article of BlockMania "Dry goods丨How to evaluate the community participation of open source projects》。