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Open-Source Startups – Business Models

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Open-Source Startups – Business Models


Teamwork takes on a whole new meaning in open source startups. Even the best companies are not without software glitches. For example, recently Elon Musk’s electric car company Tesla was forced to recall nearly 12,000 vehicles due to a software glitch. Although it seems like a utopia to create a company without technical failures, open-source companies are close to it because they involve the efforts of not only their employees but also the user community.

What are open-source startups?

Simply put, an open-source startup is a startup based on open-source software projects. The source code of the project is available to everyone and can be modified by others. Examples include Red Hat, Confluent, and MySQL.

Open source is especially beneficial for startups in the ever-changing technology landscape. You can get help from experienced developers that you might not be able to afford otherwise. You can also open up your project to a range of possibilities, thus contributing to technological progress. Alternatively, you can use another project’s open-source code for your own. This way, your in-house software developers can save development time and focus their efforts on innovation instead.

Your open-source startup might be about data storage and processing, or creative projects a la Adobe.

How Open-Source Startups Work: 5 Business Models

An open-source startup needs a large community of user base and credibility to succeed. Because most open source software is free (with the exception of premium services), having a large user base and credibility increases your chances of getting paying consumers.

As Cloudera Founder and Chief Strategy Officer Mike Olson points out, “Open source is a really important component of strategic thinking. This is a great distributed development model. It’s an ingenious, low-cost distribution model—and they have a ton of benefits. But you need to think about how you’re going to get paid.”

To do this, as a rule, open-source startups use five business models:

Support Model

Using this model, open-source startups provide “support” in the form of deployment services. You can offer users training, bug fixes, and other maintenance or internal support services.

This model boasts a low rate of return as it involves a lot of manual work. In addition, large companies may not want to pay a third-party company to manage some additional services.

Given this, if they expect to use your services for the long term, they will hire their own team to replicate this model. However, this model can be a good starting point for your startup as it will help you build contacts.

Fully Managed Services

This is another popular business model where a startup offers a fully managed version of its project. For example, Databricks is an open-source cloud company that provides a fully managed data analytics and storage platform.

Thus, users do not need to worry about its operation or even about preparing backups. Another popular example is the WordPress blogging site.

Open core

As one of the most popular models, an open core startup offers most of its code as open-source (available for free), while some of the code is proprietary (paid), i.e. owned by the enterprise. So, the limited version of this software is free and requires community participation.

The proprietary part of the code is maintained by the engineers and developers of the company and does not involve the participation of the community. In addition, both open source and proprietary codes are presented in two different documents, so users have to switch between them to navigate the codes.

Restrictive Licensing

Some companies require users to comply with certain licenses, such as the General Public License (GPL) and the Affero General Public License (AGPL), in order to use their software, thus adding an element of exclusivity. These licenses require users to attribute copyright when copying source code.

In addition, any work they share with others must comply with the same terms and conditions. Sometimes they have to pay for patent rights. So whenever they distribute their software, they also transfer the patent rights. While these restrictions may provide legal protection to the user, they may also be very limited in their application.

Hybrid Licensing

This model is an improved iteration of the open core model. Here, open-source and proprietary code is present in a single, unified code. This makes it easier for the user to navigate through the final code without having to jump from one document to another. In addition, users can comment on their own code if they find any problems, even if they cannot change the code themselves.

Companies often use a combination of all of the above models. Jay Kreps, CEO of the open-source data streaming platform Confluent, concludes: “A key aspect of such data products created by technology developers is that they must have a combination of bottom-up adoption and SaaS (Software-as-a-Service) from top to bottom, and success requires both of these things to work well.” All in all, starting an open-source software development startup will promote both innovation and profitability if done right.

Source | Strateginext

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