Open-source software is a facilitator for change and progress in the IT industry, and its significance cannot be overstated. There has been a massive increase in private investment dollars flowing into the sector in recent years. In this article, we examine whether recent valuations are reasonable and whether the open-source model offers the ROI that venture capitalists seek.
What Is the ROI of Open-Source Software for Organizations?
Open-source software (OSS) has become the lifeline of IT and development organizations for the vast majority of startups, as well as the vast majority of today’s enterprise organizations.
Few people today doubt the importance of using open-source software as a launching pad. But what about contributions to the world of open source?
The problem with stimulating open source contributions is not a lack of interest; rather, it is a time constraint and organizational culture. It takes time to prepare an internal tool for wider distribution, inculcate and maintain a community around it, and handle contributions to the software.
However, organizations that take a proactive stance to give this time to their developers, benefit from Open source—not just as users, but as contributors.
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The Benefit for Your Organization
You have a fantastic team of developers who are immersed in projects that support your business goals. And isn’t that what you’re spending on them to do? In our experience, programmers who also contribute to the open-source community provide extra benefits to the organizations for which they work.
Add New Features to Software
Useful software that is released as open-source and well managed can attract contributions (in code, paperwork, and visibility) from other programmers and peer organizations. This contribution may add new functionalities to your software; it also serves as a testing ground for hardening and improving it in ways that far exceed what most organizations can achieve with closed-source internal projects.
Recruit Better
Contributing to OSS is an excellent recruiting tool. Prospective developers will be attracted to your company if your team produces high-quality, widely used OSS projects. The code’s quality is on display for all to see, as is your company’s culture, as evidenced by how your team communicates with the OSS community. Both are important factors in luring highly qualified engineers.
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The Benefit for Developers
The benefits of Open-source software developers are similar to the benefits of your organization. The following are some examples of this:
- Simply put, OSS allows you to improve your software by utilizing thousands of eyes rather than dozens. Software evolves as a result of widespread use and contribution. Excellent examples of this winning approach? Linux, WordPress, and Drupal.
- Engineers can use OSS contributions to advance their careers. “10X Engineers” are no longer lone developers churning out tons of code. They can gain credibility by contributing to the discussions and processes that surround code writing, earning the recognition of others in the broader community. They shine when they collaborate with product managers, communicate with other stakeholders, and translate between business needs and technology deployments.
How to Monetize OSS?
Open-source software is, by interpretation, free. This, of course, provides obvious benefits to consumers. While it is obvious that providing free software benefits consumers, it still costs money to develop. Few businesses can survive solely on donors and sponsorships.
And, with increased competitiveness from proprietary software vendors, rising R&D expenditures, and ever-increasing marketing demands, offering a “free” product necessitates a long-term path to market success.
As a result of the foregoing, a common structure associated with OSS projects is as follows: A commercial entity that is the “parent” of the OSS project provides customer support, performs product maintenance, and specifies the product strategy. The following are the main monetization strategies that have sprung up as a result of this.
Additional Fees for Enterprise Services, Assistance, and Consulting
The traditional model is aimed at big enterprise users with sophisticated requirements. DataStax, MySQL, Hortonworks, and Red Hat are a few examples.
Freemium
A custom licensed product built on top of the OSS may generate a large revenue stream, but it incurs significant R&D costs and takes a long time to develop. Cloudera, for instance, offers the basic version for free but charges users for Cloudera Enterprise.
The SaaS/PaaS Model
The modern method of monetizing open-source software that assumes centralized hosting of the software and transfers the cost of maintenance to the provider. SugarCRM, Elastic, Databricks and GitHub are some examples.
The vast majority of open source projects have traditionally adopted the support and consulting monetization strategy, but at their heart, all of these frameworks allow an organization to generate income on their “bread and butter” and nourish the development team as required.
Growth of Venture Capital Investments in OSS
The massive inflows of VC/PE money into the industry have been an intriguing recent phenomenon. Back in 2004, just nine OSS companies had generated venture capital, but by 2015, this had risen to 110, with over $7 billion generated from venture capital funds.
The huge addressable market that Open-source organizations benefit from underpins this development. OSS, like other “platform” plays, enables firms to quickly gain more customers, with the hope that at a certain point in the future, they will be able to utilize this expansion by starting to tack on suitable monetization frameworks to start converting their user base into revenue and profits.
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Conclusion to Does Open-Source Software Create Better Long Term ROI
To summarize, while venture capital dollars have been pumped into OSS entities in recent times, there are serious suspicions that such investments would offer a good ROI if the money-making models used to focus primarily on the classic support and consulting model.
The most logical solution to this conundrum may be to shift to SaaS as a business model. SaaS enables one to reach a wider range of SME clients while increasing margins through improved product offerings. Whatever happens, the sheer volume of venture capital invested in open source companies indicates that smarter monetization approaches will be required to keep the OSS dream alive. Contact us today to gain insight into does Open-Source Software create Better Long Term ROI.
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