Open source software is a lot of things to a lot of people. For some people -- engineers, mostly -- it's a way to work on their passion, be involved in a community, and give something back to the world. For others -- business people, mostly -- it's a way to grow projects organically and sell software without actually investing too much in sales.
Today, we explore open source software (OSS) and its commercialization from yet another angle: the investment angle. There are a couple of venture capitals out there that seem to be ahead of the curve in terms of their understanding of, and investment in, commercial open source companies. Runa Capital is one of them, and we caught up with Konstantin Vinogradov, Runa Capital Principal, who shared his views, findings, and outlook for commercial OSS.
Investing in open source software
Runa Capital was established in 2010, and it supports founders who are building disrupting companies across three areas: B2B SaaS, deep tech (middleware, open source platforms, machine learning, and cloud infrastructure), and software for regulated industries (fintech, edutech, and digital health).
Runa Capital has a few investments under its belt, including some iconic OSS companies such as Nginx -- one of the two most popular web servers -- and MariaDB, a fast-growing SQL database. Runa's founders were involved in startups themselves, and Vinogradov described the people at Runa as tech-savvy -- most of them have backgrounds in software engineering and science. This, Vinogradov said, has led Runa to invest in open source companies from Day One, before it became mainstream:
"The common perception on the market was, well, how to make money off of something which is totally free and could be easily copied and so on. That has changed. Now the market understands how open source works. And open source companies can get quite high prices".
Vinogradov identified 2017 as the time when the tide shifted, and he believes there are a few reasons for that. It comes down to people caring more about decentralization, cost efficiency, and customization, which are all things OSS provides. He also identified what is now an obvious advantage of OSS: the fact that OSS projects that see adoption effectively sell themselves in a bottom-up fashion, bypassing costly and lengthy top-down sales to some extent.
Vinogradov also elaborated on the data sovereignty aspect, claiming it's a key driver for OSS adoption. We pointed out that while this seems to hold at first blush, transitioning from the pure-play open source version to the enterprise edition typically means transitioning to a SaaS approach, too. So, perhaps that argument does not hold?
Vinogradov thinks that a hybrid strategy, in which data never leaves the perimeter of the customer, is also viable. The idea is that the software works like SaaS, but it never has access to customer data. That was something of a novelty to us, and we were not sure how that would work, but Vinogradov pointed to a company in Runa's portfolio called Forrest Admin as an example.
The ROSS index
That's all fine and well, but the truth is, we approached Runa Capital and Vinogradov for something specific: the ROSS (Runa OSS) Index. Runa considers an active developer community to be instrumental for open-source businesses. The people at Runa look for promising companies with a fast-growing army of fans, and keep track of them at Github as part of their investment plans.
Initially, Vinogradov said, they were doing this internally only, for their own purposes. However, after a wave of interest from developers and investors alike, Runa decided to open-source their findings as an index. The ROSS index highlights the top-20 open-source startups by annualized growth rate (AGR) of Github stars at their repositories.
As anyone who has played a bit with OSS-related metrics knows, this is not a perfect proxy for growth, or for value. The people at Runa know this very well, and they also use more elaborate metrics internally. While Github stars are not a perfect metric for community evaluation for a number of reasons, they let Runa understand which OSS products were on top of developers' mind every quarter.
Runa collects data on Github repositories with 1,000+ stars and compares their metrics at the beginning and the end of every quarter. Afterwards, all repositories are manually filtered to only include startups. For purposes of the ROSS index, Runa defines startups as product-focused commercial organizations, with a product that has a meaningful connection with an open-source repository.
The organization also has to have been founded less than 10 years ago, raised less than $100M in total known funding, and must not have been acquired or gone public before the end of the target quarter. The ROSS index uses only public data from Github, Crunchbase, mass media, and other sources.
Hot open source startups to keep an eye on in 2021 -- in databases and beyond
Vinogradov mentioned he believes in specialized indexes as well, so very soon Runa will launch their first index for open source databases, where they are compared by active contributors, new contributors, and other meaningful metrics -- not only by stars. Elaborating a bit on different metrics and insights that can be derived based on these indexes was interesting.
The top database in the world right now, based on new contributors in the past 12 months, would be Clickhouse, Vinogradov said. In terms of total number of contributors, Spark SQL and Elasticsearch rank at the top. Speaking of databases and other products in the broader area of data management and machine learning, we wondered what Vinogradov's view is on the multitude of options that currently exist.
Could it be that there is a tad too much choice? Does he see consolidation happening? Vinogradov is of the "let 1,000 flowers bloom" opinion. The proliferation of so many different databases is because of the fact that there are so many different workloads, and it's hard to have a one-size-fits-all solution, according to Vinogradov. While leaders in specific database categories will exist, we should not expect to see any new Oracles emerging.
As far as funding goes, Vinogradov noted that it definitely helps, especially when talking about enterprise offerings. There are some examples of successful companies who have raised very little capital, but, according to Vinogradov, those are built mostly around consumer-oriented software offerings. If you want to sell to enterprises, a healthy amount of funding seems to be required.
Either way, the ROSS index is a valuable source of information for fast-growing OSS startups, and Vinogradov's views offer interesting insights from the investment point of view. We look forward to Runa Capital's special index on OSS databases, and we'll keep an eye on the ROSS index as it gets updated on a quarterly basis.