Speedinvest Blog

Why Open Source Software is the Future of SaaS

December 21, 2022

Over the past few years, open source has become a clear alternative to closed-source software solutions. Whilst initially criticized by the larger tech community, companies simply can’t do without open source software (OSS). Like it or not, OSS is increasingly shaping enterprise software architectures. 

According to GitHub’s Octoverse 2022 report, over 90 percent of companies are leveraging OSS, with 94 million developers on GitHub and 413 million open source contributions in 2022 alone. The number of open source projects have exploded over the past few years. A great resource on this is the Cloud Native Computing Foundation (CNCF) market map to keep track of the ecosystem.

Tim O'Reilly is the founder and CEO of O'Reilly Media who popularized the term "open source" in the late 1990s. On this topic, he said: 

“Empowerment of individuals is a key part of what makes open source work, since in the end, innovations tend to come from small groups, not from large, structured efforts.”

It's in that spirit that we're diving into why nearly every company will need an OSS strategy. We’ll also discuss who the key players in the space are and what is required to successfully launch an OSS project. 

The importance of implementing an OSS strategy

Implementing an OSS strategy has become increasingly important for a number of reasons: 

  1. 99 percent of today’s software is built with at least one OSS component and 75 percent of the public cloud workloads are powered by Linux. 
  2. Future software stacks will be open and rapidly evolving, and OSS will play a material role in being the building blocks for everything from operating systems and programming languages to middleware and dev tools.
  3. Open source has a distribution advantage and is fueling a positive feedback loop where big tech is building big open source communities. This attracts other companies to follow OSS strategies, which encourages more people to contribute.
  4. Decision-making power continuously shifts to developers and they are drivers for implementing OSS in the technical architecture (we’ve previously written about it here).  

Given the clear benefits and overarching potential of OSS, large corporations have naturally transitioned towards integrating OSS capabilities into their current product offering. Critical to ever-changing market dynamics, corporates have increasingly identified OSS as a potential lever to improving and democratizing their product offering.

And while these projects are free to the public and not monetized directly, they are incredibly valuable assets to the sponsoring company. With thousands of developers contributing, these tech giants benefit from free developer input and direct user feedback as well as building social capital. This allows organizations to build better software, faster.

In this context, a number of large technology companies (think Facebook, Google, and Microsoft) have initiated open source projects. Below, you can see the most successful ones based on contributors. 

OSS projects and frameworks by bigtech companies

The state of Open Source Software

The rise in companies initiating open source projects, especially in Europe, has solidified the current state of European OSS. Looking at the European Commission’s Open Source Software Strategy (2020-23), open source technologies are said to have injected €65-95 billion into the European economy. In global terms, the OSSC index estimates that OSS companies have accumulated a staggering market capitalization of $200 billion.

Projected revenue of open source services

So how is open source creating value?

The current trend of enterprises replacing closed-source software with open source alternatives is likely to carry on in the coming years. Replacing existing critical tech infrastructure with newer and more performant alternatives will continue as the benefits of open source become increasingly apparent.

Software giants struggle to compete with newer and more agile open source competitors who leverage their huge communities of engaged users to penetrate the market bottom up. These startups are moving much quicker and are making a sizable market impact thanks to the increasingly low barriers of adopting cloud services. We believe this trend will only intensify. 

Historically, open source was known for its infrastructure or developer platform projects. But over the past decade, it was expanded into applications, fueling the modern data or AI stack.

The landscape is changing rapidly and projects are constantly evolving to keep up with the latest technology. This also means that newer, faster-growing open source projects are replacing older open source projects. In other words, the graphic below will be completely different in a year's time.

Open source companies

The OSS playbook

You’re probably wondering what the OSS playbook looks like. What are the elements and processes that make companies like Airbyte and GitLab so attractive to customers and investors alike? Here are the key elements we recommend looking out for:

Identify a large and hard problem

Find technical problems that require deep systems knowledge and time to solve. This will naturally provide the largest value for developers and will contribute to a quick time-to-wow effect. 

Community-led Growth

"Try before you buy" is the name of the game when it comes to open source projects. Everyone wants to sample a project before committing to the cost. The benefit of open source projects is the community and their inherent distribution advantage. They reduce the barrier for potential users to find, try, and adopt them.

In addition, the size and activity of an open source project’s community is a great indicator of its success. Significant activity and interest show that the project is likely solving a difficult problem that only a few are able to solve.

Moving from "try to buy" and from test to production

Open source companies need to find ways to identify and attract potential paying customers from among the thousands of free users of their projects. The challenge is how to convert free users into paying customers.

A free offering is table stakes and developers often start using the product in the dev/test environment. However, it’s crucial to move to production where the tech is used to power business-critical applications.

Network effects

Open source projects have baked-in flywheel effects. The more people using a project, the easier it is to attract contributors, which leads to better projects––and that attracts more customers. 

Similar to other business models, such as marketplaces, network effects lead to a natural moat. The first project reaching critical mass is oftentimes also the winning one. 

Open source is on the rise and the majority of future companies will be software companies. Hence it is inevitable that companies of any size sooner or later will need to think about how they add open source software into their roadmap. 

In the second part of this series, we will dive into open source software alternatives to closed-end software. Then, we’ll take a look at the fastest-growing ones and why they are growing so quickly. Stay tuned!

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