Oxx’s Bob Thomas explains why venture capitalists may struggle to spot sustainable open source software companies
Since 2021, Stockholm and London-based venture capital fund Oxx has been highlighting the work of open source software startups that have the potential to become sustainable, investor-friendly businesses. When it comes to marketing and growth potential, open source companies offer very real advantages over their peers working in similar segments. The problem is that at least initially, they don’t offer the kind of metrics venture capitalists are looking for. Oxx’s research aims to remedy this situation.
As Oxx According to his partner Bob Thomas, open source software projects often start because of the frustration of their founders. For example, they encounter a problem that existing software tools don’t seem to solve or resolve. So they create a tool and – in the purest open source tradition – they invite other developers to contribute their own expertise. These contributions may manifest in the form of enhancements or customizations for specific use cases or business systems. “They are often
So what you get – at least in the 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 could start by offering the tool for free,” says Thomas. “But when you market, you get two benefits. “The first is a community of developers who work with you to create new features, so you can develop the tool at a lower cost. And the second advantage is distribution.
Thomas cites the example of an open source database tool with 1,000 users. If the vendor then creates a commercial add-on to the tool, there is a pool of potential buyers.
Under the radar
The potential problem is that while open source software providers have a loyal user community, they typically don’t have the kind of set of business KPIs that would whet the appetite of venture capitalists. In many cases, traditional indicators of business potential are not in place.
This all brings us back to Oxx’s research. The company designed its own metrics in an effort to identify rising stars in the open source industry.
Thomas presents 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 to users. “On Github, you see a lot of stars,” says Thomas. “The problem is that the star rating doesn’t tell you much about the developers.”
Product/community fit
Oxx assesses commercial potential by looking at the number of contributors. Simply put, if a project attracts between 50 and 100 contributors, that’s a good sign. According to Thomas, there is a strong correlation between the number of developers attracted to the tool and its long-term business potential. The underlying reason is that this particular metric indicates good product/community fit.
This sounds good in theory, but what about in the real world? Well, Oxx used his measurements to put together an annual list of rising stars. Members of his cohorts were successful in attracting venture capital.
Raising capital
Oxx has identified 37 rising stars between 2021 and 2022. Of the 21 companies included in the first-year cohort, 81% have raised more than $5 million from venture capital firms and the collective total is around $1 billion of dollars. Fast forward a year and the companies on the 2022 list have raised $500 million in total so far. Within two years, five of the listed companies are on track to become unicorns.
This year, Oxx has identified 18 companies and, based on its metrics, it expects a similar investment trajectory.
Thomas emphasizes that the goal here is not to find prospects for Oxx. As he explains, the fund tends to invest at the scale-up stage rather than the start-up stage. The research highlights the potential of open source software in the business-to-business market.
For European companies, the B2B software market for specialized tools is global from day one, says Thomas. Using platforms like Github can attract users without necessarily having to invest in face-to-face sales. As with product-focused marketing, the open source developer can grow through word of mouth.
So, is open source a silver bullet for marketing? Well, it’s probably not that simple. Moving from free software to paid software can be difficult. And then there is the question of intellectual property. What will third-party contributors think when the product they devoted their unrewarded time to comes to market? Thomas says open source companies should clearly define the terms under which third parties contribute from the start.
“But it doesn’t have to be complex. Contract models are widely available. On Github, they appear as a drop-down list,” he says.
Perhaps Oxx’s research shouldn’t come as a surprise. Founder’s Newsletter Failure recently released a list of the top 15 open source unicorns with companies ranging in valuation from over $4 billion to $1 billion. Clearly, open source businesses can thrive. Oxx aims to make potential winners more easily identifiable.