Open Source is Taking Off
It's just getting started
Why am I incredibly bullish about open source software startups?
Well, I’m old enough to remember doubting Facebook’s ability to monetize. Oops.
Over the years, I’ve learned that there’s an Iron Law of Internet Monetization:
When online engagement outpaces monetization, monetization catches up.1
So…
Where is there the most engagement with the least monetization on the Internet?
As a software investor, the answer that jumps out is open source software (OSS).
For years, OSS has been widely used, but rarely monetized. According to the Linux Foundation:
It has been estimated that Free and Open Source Software (FOSS) constitutes 70-90% of any given piece of modern software solutions.
The vast majority of the most popular OSS projects make little or no revenue.
This is slowly changing - in the past few years the licensing and business models around OSS have dramatically matured.
Today, a number of the highest growth publicly-traded software businesses are OSS - and many of the top private software startups are OSS as well.
VCs have noticed: in 2021, roughly $13b was invested into OSS startups.
While $13b is significant, it’s a tiny share of the global $643b invested by VCs in 2021.
I’m willing to bet heavily that:
VCs will soon be allocating much more than 2% of their capital to OSS startups.2
Some might point out that OSS culture still retains an anti-commercial ethos.
Yet the same was true of the software market in its early days.
Those days are now in the distant past, and the software market has grown exponentially. OSS is poised to have a similar growth trajectory.
Why is this so?
Like all laws about humans, there are many reasons why & they’ve vary based on one’s perspective. An economist might say it’s because capitalism.
As an investor focused on human actors, I think the more interesting reasons are:
It’s much harder to get attention on the Internet than to monetize attention on the Internet.
If you are capable enough to get attention, you are capable enough to monetize it
This isn’t to say OSS will kill non-OSS software - but I think OSS will steadily gain share amongst the growing market for b2b software for the next few decades.