How open source software took over the world

It was just 5 years ago that there was an ample dose of skepticism from investors about the viability of open source as a business model. The common thesis was that Redhat was a snowflake and that no other open source company would be significant in the software universe.

Fast forward to today and we’ve witnessed the growing excitement in the space: Redhat is being acquired by IBM for $32 billion (3x times its market cap from 2014); Mulesoft was acquired after going public for $6.5 billion; MongoDB is now worth north of $4 billion; Elastic’s IPO now values the company at $6 billion; and, through the merger of Cloudera and Hortonworks, a new company with a market cap north of $4 billion will emerge. In addition, there’s a growing cohort of impressive OSS companies working their way through the growth stages of their evolution: Confluent, HashiCorp, DataBricks, Kong, Cockroach Labs and many others. Given the relative multiples that Wall Street and private investors are assigning to these open source companies, it seems pretty clear that something special is happening.

So, why did this movement that once represented the bleeding edge of software become the hot place to be? There are a number of fundamental changes that have advanced open source businesses and their prospects in the market.

David Paul Morris/Bloomberg via Getty Images

From Open Source to Open Core to SaaS

The original open source projects were not really businesses, they were revolutions against the unfair profits that closed-source software companies were reaping. Microsoft, Oracle, SAP and others were extracting monopoly-like “rents” for software, which the top developers of the time didn’t believe was world class. So, beginning with the most broadly used components of software – operating systems and databases – progressive developers collaborated, often asynchronously, to author great pieces of software. Everyone could not only see the software in the open, but through a loosely-knit governance model, they added, improved and enhanced it.

The software was originally created by and for developers, which meant that at first it wasn’t the most user-friendly. But it was performant, robust and flexible. These merits gradually percolated across the software world and, over a decade, Linux became the second most popular OS for servers (next to Windows); MySQL mirrored that feat by eating away at Oracle’s dominance.

The first entrepreneurial ventures attempted to capitalize on this adoption by offering “enterprise-grade” support subscriptions for these software distributions. Redhat emerged the winner in the Linux race and MySQL (thecompany) for databases. These businesses had some obvious limitations – it was harder to monetize software with just support services, but the market size for OS’s and databases was so large that, in spite of more challenged business models, sizeable companies could be built.

The successful adoption of Linux and MySQL laid the foundation for the second generation of Open Source companies – the poster children of this generation were Cloudera and Hortonworks. These open source projects and businesses were fundamentally different from the first generation on two dimensions. First, the software was principally developed within an existing company and not by a broad, unaffiliated community (in the case of Hadoop, the software took shape within Yahoo!) . Second, these businesses were based on the model that only parts of software in the project were licensed for free, so they could charge customers for use of some of the software under a commercial license. The commercial aspects were specifically built for enterprise production use and thus easier to monetize. These companies, therefore, had the ability to capture more revenue even if the market for their product didn’t have quite as much appeal as operating systems and databases.

However, there were downsides to this second generation model of open source business. The first was that no company singularly held ‘moral authority’ over the software – and therefore the contenders competed for profits by offering increasing parts of their software for free. Second, these companies often balkanized the evolution of the software in an attempt to differentiate themselves. To make matters more difficult, these businesses were not built with a cloud service in mind. Therefore, cloud providers were able to use the open source software to create SaaS businesses of the same software base. Amazon’s EMR is a great example of this.

The latest evolution came when entrepreneurial developers grasped the business model challenges existent in the first two generations – Gen 1 and Gen 2 – of open source companies, and evolved the projects with two important elements. The first is that the open source software is now developed largely within the confines of businesses. Often, more than 90% of the lines of code in these projects are written by the employees of the company that commercialized the software. Second, these businesses offer their own software as a cloud service from very early on. In a sense, these are Open Core / Cloud service hybrid businesses with multiple pathways to monetize their product. By offering the products as SaaS, these businesses can interweave open source software with commercial software so customers no longer have to worry about which license they should be taking. Companies like Elastic, Mongo, and Confluent with services like Elastic Cloud, Confluent Cloud, and MongoDB Atlas are examples of this Gen 3.  The implications of this evolution are that open source software companies now have the opportunity to become the dominant business model for software infrastructure.

The Role of the Community

While the products of these Gen 3 companies are definitely more tightly controlled by the host companies, the open source community still plays a pivotal role in the creation and development of the open source projects. For one, the community still discovers the most innovative and relevant projects. They star the projects on Github, download the software in order to try it, and evangelize what they perceive to be the better project so that others can benefit from great software. Much like how a good blog post or a tweet spreads virally, great open source software leverages network effects. It is the community that is the source of promotion for that virality.

The community also ends up effectively being the “product manager” for these projects. It asks for enhancements and improvements; it points out the shortcomings of the software. The feature requests are not in a product requirements document, but on Github, comments threads and Hacker News. And, if an open source project diligently responds to the community, it will shape itself to the features and capabilities that developers want.

The community also acts as the QA department for open source software. It will identify bugs and shortcomings in the software; test 0.x versions diligently; and give the companies feedback on what is working or what is not.  The community will also reward great software with positive feedback, which will encourage broader use.

What has changed though, is that the community is not as involved as it used to be in the actual coding of the software projects. While that is a drawback relative to Gen 1 and Gen 2 companies, it is also one of the inevitable realities of the evolving business model.

Linus Torvalds was the designer of the open-source operating system Linux.

Rise of the Developer

It is also important to realize the increasing importance of the developer for these open source projects. The traditional go-to-market model of closed source software targeted IT as the purchasing center of software. While IT still plays a role, the real customers of open source are the developers who often discover the software, and then download and integrate it into the prototype versions of the projects that they are working on. Once “infected”by open source software, these projects work their way through the development cycles of organizations from design, to prototyping, to development, to integration and testing, to staging, and finally to production. By the time the open source software gets to production it is rarely, if ever, displaced. Fundamentally, the software is never “sold”; it is adopted by the developers who appreciate the software more because they can see it and use it themselves rather than being subject to it based on executive decisions.

In other words, open source software permeates itself through the true experts, and makes the selection process much more grassroots than it has ever been historically. The developers basically vote with their feet. This is in stark contrast to how software has traditionally been sold.

Virtues of the Open Source Business Model

The resulting business model of an open source company looks quite different than a traditional software business. First of all, the revenue line is different. Side-by-side, a closed source software company will generally be able to charge more per unit than an open source company. Even today, customers do have some level of resistance to paying a high price per unit for software that is theoretically “free.” But, even though open source software is lower cost per unit, it makes up the total market size by leveraging the elasticity in the market. When something is cheaper, more people buy it. That’s why open source companies have such massive and rapid adoption when they achieve product-market fit.

Another great advantage of open source companies is their far more efficient and viral go-to-market motion. The first and most obvious benefit is that a user is already a “customer” before she even pays for it. Because so much of the initial adoption of open source software comes from developers organically downloading and using the software, the companies themselves can often bypass both the marketing pitch and the proof-of-concept stage of the sales cycle. The sales pitch is more along the lines of, “you already use 500 instances of our software in your environment, wouldn’t you like to upgrade to the enterprise edition and get these additional features?”  This translates to much shorter sales cycles, the need for far fewer sales engineers per account executive, and much quicker payback periods of the cost of selling. In fact, in an ideal situation, open source companies can operate with favorable Account Executives to Systems Engineer ratios and can go from sales qualified lead (SQL) to closed sales within one quarter.

This virality allows for open source software businesses to be far more efficient than traditional software businesses from a cash consumption basis. Some of the best open source companies have been able to grow their business at triple-digit growth rates well into their life while  maintaining moderate of burn rates of cash. This is hard to imagine in a traditional software company. Needless to say, less cash consumption equals less dilution for the founders.

Photo courtesy of Getty Images

Open Source to Freemium

One last aspect of the changing open source business that is worth elaborating on is the gradual movement from true open source to community-assisted freemium. As mentioned above, the early open source projects leveraged the community as key contributors to the software base. In addition, even for slight elements of commercially-licensed software, there was significant pushback from the community. These days the community and the customer base are much more knowledgeable about the open source business model, and there is an appreciation for the fact that open source companies deserve to have a “paywall” so that they can continue to build and innovate.

In fact, from a customer perspective the two value propositions of open source software are that you a) read the code; b) treat it as freemium. The notion of freemium is that you can basically use it for free until it’s deployed in production or in some degree of scale. Companies like Elastic and Cockroach Labs have gone as far as actually open sourcing all their software but applying a commercial license to parts of the software base. The rationale being that real enterprise customers would pay whether the software is open or closed, and they are more incentivized to use commercial software if they can actually read the code. Indeed, there is a risk that someone could read the code, modify it slightly, and fork the distribution. But in developed economies – where much of the rents exist anyway, it’s unlikely that enterprise companies will elect the copycat as a supplier.

A key enabler to this movement has been the more modern software licenses that companies have either originally embraced or migrated to over time. Mongo’s new license, as well as those of Elastic and Cockroach are good examples of these. Unlike the Apache incubated license – which was often the starting point for open source projects a decade ago, these licenses are far more business-friendly and most model open source businesses are adopting them.

The Future

When we originally penned this article on open source four years ago, we aspirationally hoped that we would see the birth of iconic open source companies. At a time where there was only one model – Redhat – we believed that there would be many more. Today, we see a healthy cohort of open source businesses, which is quite exciting. I believe we are just scratching the surface of the kind of iconic companies that we will see emerge from the open source gene pool. From one perspective, these companies valued in the billions are a testament to the power of the model. What is clear is that open source is no longer a fringe approach to software. When top companies around the world are polled, few of them intend to have their core software systems be anything but open source. And if the Fortune 5000 migrate their spend on closed source software to open source, we will see the emergence of a whole new landscape of software companies, with the leaders of this new cohort valued in the tens of billions of dollars.

Clearly, that day is not tomorrow. These open source companies will need to grow and mature and develop their products and organization in the coming decade. But the trend is undeniable and here at Index we’re honored to have been here for the early days of this journey.

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Lightspeed hires 5 new partners from Slack, Twitter and more

Lightspeed Venture Partners, one of the best-performing VC firms in Silicon Valley, is closing out 2018 with a slew of new hires.

The firm has brought on five additional investing partners: Jana Messerschmidt, Ashley Brasier, Merci Victoria Grace (pictured above), Jerry Ye and Jay Madheswaran. Neetzan Zimmerman, a former senior editor at Gawker, has also joined as vice president of growth, as first reported by Forbes.

The additions are 50 percent female, a good move for Lightspeed, which like many VC firms, has been long short on female partners. Founded in 2000, Lightspeed has had just two female partners, Nicole Quinn and Natalie Luu, who joined in 2016 and 2018, respectively.

Two of its newest hires, Messerschmidt and Grace, are particularly active advocates of women in tech, too.

Jana Messerschmidt, one of Lightspeed’s newest partners

Messerschmidt joins from Twitter, where she was vice president of global business development and platform. She’s also held business and engineering roles at Netflix and DivX, and is a co-founder of #Angels, a group of early-stage investors focused on getting more women on cap tables. Messerschmidt already has a number of consumer tech companies in her portfolio, including Bird, Winnie, Carrot, TruStory and Cameo.

Brasier, also tapped to support Lightspeed’s consumer investing practice, joins straight out of Stanford Business School. Before that, she was a manager at on-demand services marketplace Thumbtack, where she ran the events and weddings category.

On top of that, Lightspeed has poached Slack’s head of growth Merci Victoria Grace, who’s also a founder of Women in Product, a community for women in the field that has grown to 5,000 members since 2015. She’ll join the firm’s enterprise team.

Ye, a founding partner and former head of data science at SignalFire, a data-focused venture firm, will support Lightspeed’s growth team and will help support the firm’s data science practice. Madheswaran, for his part, will specialize in open source and cloud software. He was most recently at Lightspeed portfolio company Rubrik, where he was a founding engineer and head of product engineering.

Finally, the firm has brought on Zimmerman, the former Gawker editor, as VP of growth. Until recently, he was a senior director of audience and strategy at The Hill. Previously, he was editor-in-chief of Whisper, a Sequoia-backed AI-enabled storytelling platform.

The hiring news comes hot off the feels of Lightspeed’s $1.8 billion fund announcement. The pool of capital is the 18-year-old firm’s largest to date.

Lightspeed, the first institutional investor to throw support behind Snap, has also written early checks to MuleSoft and Stitch Fix, which both completed successful IPOs this year.

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Workato raises $25M for its integration platform

Workato, a startup that offers an integration and automation platform for businesses that competes with the likes of MuleSoft, SnapLogic and Microsoft’s Logic Apps, today announced that it has raised a $25 million Series B funding round from Battery Ventures, Storm Ventures, ServiceNow and Workday Ventures. Combined with its previous rounds, the company has now received investments from some of the largest SaaS players, including Salesforce, which participated in an earlier round.

At its core, Workato’s service isn’t that different from other integration services (you can think of them as IFTTT for the enterprise), in that it helps you to connect disparate systems and services, set up triggers to kick off certain actions (if somebody signs a contract on DocuSign, send a message to Slack and create an invoice). Like its competitors, it connects to virtually any SaaS tool that a company would use, no matter whether that’s Marketo and Salesforce, or Slack and Twitter. And like some of its competitors, all of this can be done with a drag-and-drop interface.

What’s different, Workato founder and CEO Vijay Tella tells me, is that the service was built for business users, not IT admins. “Other enterprise integration platforms require people who are technical to build and manage them,” he said. “With the explosion in SaaS with lines of business buying them — the IT team gets backlogged with the various integration needs. Further, they are not able to handle all the workflow automation needs that businesses require to streamline and innovate on the operations.”

Battery Ventures’ general partner Neeraj Agrawal also echoed this. “As we’ve all seen, the number of SaaS applications run by companies is growing at a very rapid clip,” he said. “This has created a huge need to engage team members with less technical skill-sets in integrating all these applications. These types of users are closer to the actual business workflows that are ripe for automation, and we found Workato’s ability to empower everyday business users super compelling.”

Tella also stressed that Workato makes extensive use of AI/ML to make building integrations and automations easier. The company calls this Recipe Q. “Leveraging the tens of billions of events processed, hundreds of millions of metadata elements inspected and hundreds of thousands of automations that people have built on our platform — we leverage ML to guide users to build the most effective integration/automation by recommending next steps as they build these automations,” he explained. “It recommends the next set of actions to take, fields to map, auto-validates mappings, etc. The great thing with this is that as people build more automations — it learns from them and continues to make the automation smarter.”

The AI/ML system also handles errors and offers features like sentiment analysis to analyze emails and detect their intent, with the ability to route them depending on the results of that analysis.

As part of today’s announcement, the company is also launching a new AI-enabled feature: Automation Editions for sales, marketing and HR (with editions for finance and support coming in the future). The idea here is to give those departments a kit with pre-built workflows that helps them to get started with the service without having to bring in IT.

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Docker inks partnership with Mulesoft as Salesforce takes a strategic stake

Docker and Mulesoft have announced a broad deal to sell products together and integrate their platforms. As part of it, Docker is getting an investment from Salesforce, the CRM giant that acquired Mulesoft for $6.5 billion last spring.

Salesforce is not disclosing the size of the stake it’s taking in Docker, but it is strategic: it will see its new Mulesoft working with Docker to connect containerized applications to multiple data sources across an organization. Putting the two companies together, you can connect these containerized applications to multiple data sources in a modern way, even with legacy applications.

The partnership is happening on multiple levels and includes technical integration to help customers use the two toolsets together more easily. It also includes a sales agreement to cross-sell one another’s products and services and to work with systems integrators and ISVs, who help companies put these kind of complex solutions to work inside large organizations.

Docker chief product officer, Scott Johnston, said it was really about bringing together two companies whose missions were aligned with what they were hearing from customers. That involves tapping into some broad trends around getting more out of their legacy applications and a growing desire to take an API-driven approach to developer productivity, while getting additional value out of their existing data sources. “Both companies have been working separately on these challenges for the last several years, and it just made sense as we listen to the market and listen to customers that we joined joined forces,” Johnston told TechCrunch.

Uri Sarid, Mulesoft’s CTO, agrees that customers have been using both products and it called for a more formal arrangement. “We have joint customers and the partnership will be fortifying that. So that’s a great motion, but we believe in acceleration. And so if there are things that we can do, and we now have plans for what we will do to make that even faster, to make that even more natural and built-in, we can accelerate the motion to this. Before, you had to think about these two concerns separately, and we are working on interoperability that makes makes you not have to think about them separately,” he explained.

This announcement comes at a time of massive consolidation in the enterprise. In the last couple of weeks, we have seen IBM buying Red Hat for $34 billion, SAP acquiring Qualtrics for $8 billion and Vista Equity Partners scooping up Apptio for $1.94 billion. Salesforce acquired Mulesoft earlier this year in its own mega deal in an effort to bridge the gap between data in the cloud and on-prem.

The final piece of today’s announcement is that investment from Salesforce Ventures. Johnston would not say how much the investment was for, but did say it was about aligning the two partners.

Docker has raised almost $273 million before today’s announcement. It’s possible it could be looking for a way to exit, and with the trend toward enterprise consolidation, Salesforce’s investment may be a way to test the waters for just that. If it seems like an odd match, remember that Salesforce bought Heroku in 2010 for $212 million.

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GoodTime raises $5 million to bring artificial intelligence into the interview process

GoodTime, the algorithmically enhanced interview process management platform, has raised $5 million in a new round of funding led by Bullpen Capital.

The company uses natural language processing to link interview candidates with the right interviewers inside an organization. The idea is to make the hiring process run more smoothly for large organizations and give overworked human resources staffers a new organizational tool in their toolbox to build better staffing processes.

To do this Ahryun Moon, Jasper Sone and Peter Lee, the co-founders of GoodTime, have built a tool that uses the calendar as its organizing principle. The idea is that the sooner interviews can be booked with the right people, the better it is for an organization.

Staffing is about more than just setting up an interview, though, so GoodTime also factors in relevant information about both an applicant and an interviewer including data like gender, ethnicity, and relevant university and previous work-history information.

Recruiting coordinators can manage the entire process and make it as frictionless as possible for companies — and in this competitive hiring environment, companies may run the risk of losing out if they can’t pull the trigger on a potential applicant quickly enough.

It’s a problem that GoodTime’s chief executive, Moon, knows all too well. As a former recruiting coordinator at Mulesoft, Airbnb and Dropbox, Moon is well-versed in the problems of recruiting professionals.

She even managed to convince her former employers at Airbnb and Dropbox to adopt the new platform. Those companies have seen their applicants confirm interviews within three hours by using the platform and seen their time-to-hire rates reduced by 40%, according to a statement from the company.

GoodTime, which was seed funded last year with a $2 million investment from Walden Ventures and Big Basin Capital, managed to attract the education and staffing focused investment GSV Accelerate, and Array.vc to its latest round. GoodTime is also a graduate of the Alchemist Accelerator program. 

Based in San Francisco, GoodTime currently has 18 employees on staff and has reached profitability on the strength of its existing customers.

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