Ann Schlemmer, CEO at Percona.
Building a business is hard work. It takes a strong product, great timing and a market that is receptive to what you have to offer. It also takes a fair amount of luck. According to the Bureau of Labor Statistics, around 20% of companies fail in the first 12 months, 48% of companies make it to five years old and only about 35% make it to 10 years.
How can you succeed in this industry if you want to build a company based on open source? Under the software licenses defined and approved by the Open Source Initiative, users can take that software and use it for their own ends without restriction. So, how can you build a company when you effectively give your product away?
A Harvard Business Review study from 2009 titled The Founder’s Dilemma (subscription required) looks at the decisions leaders have to make when starting a new business. It ultimately concludes that taking venture capital funding and controlling your own company are incompatible. The trade-off that entrepreneurs ultimately make really comes down to control. For open-source companies, this can lead to some very tough decisions.
Developing Technology Companies And Competition With Open Source
In the technology industry, the typical approach to building a company is based on venture capital, where investors provide capital in return for a share of the business. This share will then return that investment through a sale to another company or by listing on a public stock market. One significant success can pay for the tens or hundreds of businesses that don’t succeed. According to 2020 research in the Journal of Financial Economics, 13.7% of companies achieved an Initial Public Offering, while 42.8% achieved an exit.
Under this model, giving up some of your company can provide working capital to accelerate growth. At the same time, you also give up some of the control you have as a founder. In the open-source sector, taking funding can lead to more conflict between your aims around community development and support and your goals to build a fast-growing and profitable company.
While open source is an effective way to build a community, it is not a business model in its own right. There can be serious consequences to the perception that you may be cutting off project access in favor of your commercial version. Over the past few years, I have seen multiple companies with VC backing turn away from the open-source model and adopt other software licenses. These changes are often driven by a need to capture more share of an addressable market rather than to see other companies use that software or where the competition is the open-source project itself.
Building Successful Open-Source Companies
While venture capital funding is one approach to success, it is not the only model that can succeed. To build a company committed to open source, you may find that you can’t blitz scale your way to success with outside funding.
The alternative approach is to scale up sustainably based on your own revenues. This model allows you to retain control and make decisions with your community in mind rather than just your commercial requirements. It also puts the emphasis on finding a business model that is sustainable from the first days of a company.
Typically, open-source companies succeed in the market by selling services. This can involve getting expertise from the people that build the software, help to implement or provide integration support specific to a company’s needs. However, this can be hard to scale as it relies on people.
To build a sustainable and profitable business model, many companies adopt a software as a service (SaaS) model. Rather than selling a software license, you charge a monthly fee for access and hide the management side away from customers. One common model is to offer a branded cloud service that combines the project with delivery and management in one simple package. Companies are typically happy to consume this, as it takes away the operational overheads that they would otherwise have to manage.
However, this approach is also available to other companies, as they can take advantage of the open-source software for themselves. You may find yourself competing against other companies that are willing to charge less. Also, these companies may not have the development resources, community support and management overheads that you have to provide. Providing a distinct service around open source in the cloud is, therefore, something that you may have to constantly innovate around if you wish to charge a premium price.
For companies that rely on consulting and services revenue, you also need to show that your customers’ needs are your main priority. In other words, look at all the software options and recommend the best solution for that customer, whether it is your open-source software or not. By demonstrating your commitment to the customer, you can build more long-term revenue opportunities.
Based on my own company’s experiences, I recommend embracing open-source community principles wholeheartedly. This may include supporting multiple open-source projects and delivering advice to address specific needs. By being independent, you can make decisions that best suit customers. Even as a bootstrapped company with no outside investment, you can avoid having to make short-term sacrifices versus shareholder value.
When you have investors to support, they may push for decisions that go against the needs of the community. As an open-source company, you need to maintain your profitability and your community. It may take longer, but if you want to avoid outside financial support and instead reinvest your profits, you have potential options to retain control over your destiny. It may be hard at times, but growth at any cost doesn’t need to be the goal.
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