Open Source and Making Money
“It’s hard to make money when you give the shit away” – Dave Kellogg
Dave Kellogg wrote a great blog post on the subject of making money in open source, and how challenging it is. He chose the Hortonworks S-1 filing as the fodder for the story, but really, this could have been written about any of several open-source or even SaaS IPOs over the years.
While Hadoop and big data are unarguably huge trends driving the industry and while the future of Hadoop looks very bright indeed, on reading the Hortonworks S-1, the reader is drawn to the inexorable conclusion that it’s hard to make money in open source, or more crassly, it’s hard to make money when you give the shit away.
This is a company that, in the past three quarters, lost $54M on $33M of support/services revenue and threw in $26M in non-recoverable (i.e., donated) R&D atop that for good measure.
That’s pretty tough. My conclusion from this is that open source software companies need to think harder about how to make money. I look at companies like WP Engine, and Alfresco – both of whom make it work in different ways – and clearly there are other ways to make it work besides hemorrhaging money.
Mr. Kellogg goes on to point out that if you’re giving software away, you better have good services margins (not -35%). He goes into a great analysis of pros and cons for Hortonworks. Generally he agrees that it is a massive opportunity, but takes issue with how they ignore some of the most basic ways to make money.
He concludes with two major critiques of Open Source in general:
- The market is too small. Because open source compresses the market size by 10-20x. “That’s why there is no Red Hat of Lucene or Solr, despite their enormous popularity in search. For open source to work (as in, make money), you need to be in a huge market.”
- People don’t renew at a high enough rate. The risk is that the product is so good, people don’t need support: “The risk is that the value of your extensions decreases over time and/or customers become self-sufficient. This was another problem with Lucene. It was so good that folks just didn’t need much help and if they did, it was only for a year or so.”
When we look at BP3’s offerings for BPM, this is exactly why we’re focused on creating value-added software and support services (addressing point number 1), and secondly, why we’re so laser focused on customer experience, to address renew rates (point number 2). When we look for role models, e.g. WP Engine, they also have a maniacal focus on customer success and experience. A great renewal rate makes up for a lot of other factors.
This is probably the most critical section of the prospectus. We know Hortonworks can grow. We know they have a huge market. We know that market is huge enough to be compressed 10-20x and still have room to create a a great company. What we don’t know is: will people renew? As we discussed above, we know it’s one of the great risks of open source.