Here’s why investors are throwing money at startups that give away their software for free

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From mergers and acquisitions to massive amounts of funding, commercial open source software companies made a splash last year.
Confluent, Neo4j, HashiCorp and GitLab are just a few examples of commercial open source software startups that raised major rounds of funding.
Investors are excited about open source because it’s what developers want, and it’s what customers want.
Although these startups give away some of their software for free, their business model also makes marketing, sales, innovation and attracting attention from investors easier.
Still, some startups are wrestling with how to deal with cloud providers profiting from their work, and investors predict more changes to come in this space.

Last year was open source software’s long-awaited spotlight moment, and the flash of excitement is now spreading to a broad group of startups betting that the business of giving software away is ready to explode.

A series of high-profile open source deals filled the calendar in 2018, as Salesforce acquired Mulesoft, Microsoft acquired GitHub, VMware acquired Heptio, IBM announced it would acquire Red Hat, Cloudera and Hortonworks merged and Elastic went public.

OSS Capital founder Joseph Jacks, whose venture capital firm focuses on open source startups, reckons that there was roughly $70 billion in mergers and acquisitions, private equity and IPOs involving open source last year. And he estimates that there’s been another $2 billion in funding for commercial open source startups in the past year, as startups like Confluent, Neo4j, HashiCorp and GitLab raised money.

“That’s an astronomically huge number,” Jacks said. “We’ve never seen that much activity, commercially speaking, from a business perspective. We’ve never seen that much activity in open source.”

Although open source software has been around for decades, the technology is suddenly hitting its stride as a business.

Despite creating software that they give away for free, these startups have a recipe for success that they’re continuously improving and refining, along with a hungry clientele that’s clamoring for more. The developers and engineers that open source software is aimed at now enjoy more influence and clout within their companies than ever before.

And many of the open source companies make bank. According to Jacks, who tracks these companies, there are now 40 commercial open source software companies that generate $100 million or more in annual revenue. Four years ago, only eight companies were in that club.

In the coming year, investors expect more growth in these types of startups, as well as more M&A, private equity, IPO’s and funding in that space.

“We’re as interested as ever in open source startups,” Daniel Levine, partner at Accel, told Business Insider. “We keep seeing it as a viable business model. There have been great results in the open source world recently in terms of acquisitions and companies going public. I think for a long time, we were always surprised at how little interest there was.”

Investors are excited because customers are excited

Levine says that many investors grew up during a time when Microsoft was spreading the word that open source …read more

Source:: Business Insider


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