The Money In Open-Source Software

It’s no secret that open-source technology — once the province of radicals, hippies and granola eaters — has gone mainstream. According to industry estimates, more than 180 young companies that give away their software raised roughly $3.2 billion in financing from 2011 to 2014. Even major enterprise-IT vendors are relying on open-source for critical business functions today. It’s a big turnaround from the days when former Microsoft CEO Steve Ballmer famously called the open-source Linux operating system “a cancer” (and obviously a threat to Windows).

Despite the growing popularity of open-source software, though, many open-source companies are not financially healthy. Just like eyeballs didn’t translate into actual online purchases during the first dot-com era in the late 1990s, millions of free-software downloads do not always lead to sustainable revenue streams. Make no mistake, open-source software is a brilliant delivery model to drive user adoption, and it’s poised to drive increasing market value in the coming years. But it’s not a business model on its own.

Just how challenging is it to build a big, profitable open-source business? Consider this: Besides the ongoing success of Red Hat — the company now boasts a $14 billion valuation, built over 20 years — and MySQL’s acquisition by Sun for $1 billion in 2008, there are few other landmark exits in the history of open source. But success, for entrepreneurs and investors alike, is possible. Based on our experience working with open-source names, including Mirantis*, Cloudera*, MongoDB* and others, we have isolated some key lessons for entrepreneurs to consider as they build open-source communities and sustainable businesses in parallel; the two don’t have to be mutually exclusive...