Since 2021, Stockholm and London-based VC fund Oxx has been highlighting the work of young open-source software ventures that have the potential to become investor-friendly sustainable businesses. When it comes to marketing and growth potential, open-source businesses offer some very real advantages over peers working in similar segments. The problem is that in the early stages at least, they don’t offer up the kind of metrics that venture capitalists are looking for. Oxx’s research sets out to put that right.
As Oxx partner Bob Thomas sees it, open-source software ventures often start out as a result of frustration on the part of their founders. For instance, they encounter a problem that existing software tools don’t seem to address or solve. So, they create a tool and – in true open-source tradition – they invite other developers to contribute their own expertise. Those contributions might manifest in the shape of improvements or customizations for specific use cases or company systems. “They are oft
So what you get – at least in a best-case scenario – is a community of enthusiastic users and developers. The kind of community that will become ambassadors and advocates for the software tool in question. And as the software is commercialized, this community provides a platform for rapid growth.
“You might start by giving the tool away free,” says Thomas. “But as you commercialize you have two advantages. “The first is a community of developers who work with you to build new features, so you can develop the tool at low cost. And the second advantage is distribution.”
Thomas cites the example of an open-source database tool with 1,000 users. If the provider then builds a commercial addition to the tool, there is an existing well of potential buyers.
Under The Radar
The potential problem is that while open-source software providers may well have a community of loyal users, what they don’t tend to possess is a set of commercial KPIs of that kind that will whet the appetites of VC investors. In many cases, the traditional signifiers of commercial potential are not in place.
All of which brings us back to Oxx’s research. The company has designed its own metrics in a bid to identify the rising stars of the open-source sector.
Thomas outlines the problem and the solution. “A lot of open source developers put their tools on Github,” he says, referring to the platform that connects developers with users. “On Github you see a lot of stars,” says Thomas. “The problem is that the star rating doesn’t really tell you very much about the developers.”
Oxx assesses commercial potential by looking at the number of contributors. Put simply, if a project attracts between 50 and 100 contributors, it’s a good sign. There is, Thomas says, a strong correlation between the number of developers attracted to the tool and its longer-term commercial potential. The underlying reason is that this particular metric indicates a good product/community fit.
That sounds good in theory, but what about the real world? Well, Oxx has used its metrics to compile an annual list of rising stars. Members of its cohorts have enjoyed success in going on to attract venture capital.
Oxx identified 37 rising stars between 2021 and 2022. Of the 21 companies included in the first year cohort, 81 percent have raised more than $5 million from VCs and the collective total is around $1 billion. Fast forward a year and companies in the 2022 list have thus far raised $500 million in total. Across the two years, five of the listed companies are set to become unicorns.
This year, Oxx has identified 18 companies and based on its metrics, it expects to see a similar investment trajectory.
Thomas stresses that the purpose here is not to find prospects for Oxx. As he explains, the fund tends to invest at the scaleup rather than the startup stage. What the research does do is highlight the potential for open-source software in the business-to-business market.
For European companies, the B2B software market for specialist tools is global from day one, Thomas says. Using platforms such as Github businesses can attract users without necessarily having to invest face-to-face selling. As with product-led marketing, the open-source developer can grow by word of mouth.
So is open source a marketing silver bullet? Well, it’s probably not as straightforward as that. Moving from the stage where software is given away free to the point where it is paid for can be challenging. And then there is the IP question. What will third party contributors think when the product they’ve devoted their own time to for no reward is commercialized. Thomas says open source businesses should clearly define the terms on which third parties contribute at the earliest stage.
“But this needn’t be complex. Contractual templates are widely available. On Github they are a dropdown,” he says.
Perhaps, Oxx’s research shouldn’t come as a surprise. Founder newsletter Failory recently published a list of the top 15 open source unicorns with companies with valuations ranging from more than $4 billion to $1 billion. Clearly, open-source businesses can thrive. Oxx is aiming to make the potential winners more easily identifiable.