4 minute read / Apr 2, 2021 / saas /strategy /trends /
The Identity Crisis Facing Open Source Companies in the Cloud
Open source software marries the decentralized community of the Internet with the ambition to build great things. Databases, application servers, streaming technologies, application deployment, and container management - many modern tools were born open source. But the clouds are rolling in for open source companies (pun intended). Today, open source software faces an identity crisis: what does it mean to be an open source company in the cloud?
Imagine you’ve co-authored a massively successful open source project and you’re on the cusp of commercializing it. You face a critical decision. This decision will impact the business for the next 24 months and beyond. It will determine your price point, your roadmap, your hiring plan, your revenue, and consequently your fundraising prospects. The decision reversible, but not without pain and difficulty, and likely 3 to 4 quarters of work. What is that decision?
Do you support on-premises deployments or launch a managed service (aaS)?
This is a challenging, hand-wringing, sleepless-nights decision for many open source companies.
On one hand, the previous generation of open source companies did start out supporting on-premises. With that strategy, they’ve built huge businesses. And for good reason. The open source user base already uses, deploys, and contributes to the project.
This great allure of open-source software, that customer base is already using the product, is the leverage in the model. Sales teams and marketing teams’ task is self-evident. Convert the faithful to the contracted faithful. Those sales cycles are fast and the contract sizes are large, which means cash in the bank.
The name-brand contracted logos become the lighthouse accounts who respond to reference calls, proselytize the gospel on stage, and bolster the social proof of both the open source and commercial efforts. It’s enterprise-first selling.
On the other hand, the future is in cloud.
Most customers prefer a managed service. So should the company commercializing open source software should. Managed services are homogeneous rows of boxes in a well-run factory. On-premises deployments are messy factory floors littered with half-opened boxes skewed helter-skelter and crocodiles lurking in dark places. Services offer one platform to everyone. On prem means managing 100 on-premises deployments with varying configurations, hardware, and network topologies; not to mention security postures.
Second, a managed service provides defensibility with the proper open source license. If an open source project is successful, the startup commercializing it will want to defend it from the monoclouds, who will inevitably compete at some point.
Third, expansion is exceedingly easy. Customers effortlessly expend more after they’ve exhausted their entitlement.
But what does it mean to be open source in the cloud? Open source isn’t a differentiator in a managed service - or least much less of one. So, how will the company differentiate in the future vs potential closed source competition?
And this GTM strategy means tacking the mid-market first, because not many large enterprises will trust their infrastructure to a fledgling service.
Building an on-prem company means hiring field sales teams, solutions architects, field marketers. aaS companies demand a different set of acronyms: SRE (site reliability engineers) and PLG (product-led growth) marketers. The Venn diagram intersection of those skill sets is a null set. Picking one means hiring a specialized team that will have limited to no ability to cross-over.
So open source companies have two paths in front of them:
- Start on-premises and evolve to managed service. Capture more revenue sooner but face the transition from on-prem to cloud, and that entails later.
- Forgo the on-premises and provide the managed service immediately. Wait a longer to generate meaningful revenue, but be cloud-ready first, and tackle the competitive differentiation sooner.
There’s no universal answer. But there are factors to consider when deciding:
- where is the the traction today, in the mid-market or the enterprise?
- how competitive is the space today and in the next 3 years?
- what differentiators does the product offer beyond open-source? and does the buyer care?
- how important is it to the business to generate revenue sooner rather than later?
Every open source company will face this decision of when to become a cloud company. It will define the next two years of the business and nearly every aspect of the business and especially call into question: what does it mean to be open source?