The 3 phases of successful open software companies

While open source describes a software development methodology, at the DC Dublin we want to talk more about a new go-to-market and company-building philosophy based on the 3P model of Accel.
 

This presentation is based on our experience in the last 2 years developing the Open Social Distribution for Drupal 8 by our company GoalGorilla. It is inspired by the recent articles published by Jake Flomenberg, Partner @Accel, David Hillis @Ingeniux, Dries @Acquia and others on the rise of a completely new generation of open source companies.

This session contains valuable lessons for any startup or Drupal agency thinking about building (SaaS) products:

• Why open software companies did not work well in the past, and what has changed now.
• How customers are driving the changes taking place now in open software development.
• How to pivot your Drupal service company to a products company using the the 3P’s to build a sustainable open software company.
• How we applied the 3Ps for the our company in Open Social distribution project.
• Why the opportunity for open software companies is now bigger than anything before.
• Lessons learned from 2 years Open Social project that lead to the alpha release on Drupal.org in june 2016 and our way forward.

History: Low Margins and Less Innovation in Open Source

The first generation of open software companies map failed to reach venture scale because they offered customers a wider buffer of options, at lower prices. Ironically, greater control in the hands of the customer decreased market opportunity. Because these businesses were 100% open source the first generation of companies were only able to charge for support and services.

Not only did this business model have inherently lower financial margins, since profits relied on customers needing support, companies had no motivation to innovate and improve upon their product.

3 Customer-driven changes in Open Software

We’re witnessing a big shift in how software is consumed. Open source is not a philosophy or a business model: open source is a critical software feature.

Accel’s Tech Council hosts 15 Fortune 500 CIOs and identified the following trends:

1. The Need for Speed and Control - demand for innovation and rapid delivery means enterprises need more agility than ever before.
2. Everything is Web Scale - Enterprises are delivering solutions to a global, ever-connected base of users.
3. Developer Power and Network Effect - Open software can absorb learnings and requirements far faster than a proprietary vendor, while simultaneously hardening security and stability.

Open software is not about cheaper alternatives to proprietary on-premise software. It is about creating new markets. It’s innovative, it’s developer-driven and it’s the next wave of software adoption.

The Cloud levels the Playing Field

The cloud completely changed open-source and commercial software. Now more than 78% of enterprises run on open source and fewer than 3% indicate they don’t rely on open software in any way, according to a survey by Black Duck Software.

Software is becoming a service and IT infrastructure a utility. While software distribution can be almost free, services always cost money. Both commercial and open-source software companies need to adapt to the new tech economy and move to service-oriented business models. In the cloud economy open-source and commercial software essentially have the same business model.

Open-source companies are providing SaaS licenses, and commercial vendors are abandoning expensive upfront licenses, support and maintenance agreements.

The 3 Phases of Successful Open Software Companies

We witnessing the rise of a completely new generation of open source companies. Open software companies are primed to build meaningful businesses — and drive large economic outcomes.

According to Accel (they are one of the most prominent venture capital investors and were early investors in companies like Facebook, Dropbox, Slack, Etsy, Atlassian, Lynda.com, Kayak etc.) open software companies are constructed differently and pass through 3 stages, the 3P’s. Companies that nail all three, can build a large business.

 

1. The Project phase — developing an open source project and a vibrant community around it.

2.  The Product phase — laying the groundwork for packaging and deploying a monetizable version of the project. 

3. The Profit phase — doubling down on a core customer-base and builds the business to scale.

The Next Wave in Software is Open Software

“I want to build a billion dollar company.” - Dries

With open innovation, software developers are able to innovate collaboratively at a massive scale, without vendor lock-in. The new generation of open companies have learned from the mistakes of the previous one, and instead of de-incentivizing innovation they encourage it every step of the way.

Today “open” means also more than open source. Open means that a platform can easily be extended and integrated with other applications. Web services, frameworks and APIs are application specific, not license-model specific.

In this short period, ‘open’ has grown from the “new” model to the “only” model.

The opportunity for open software companies is bigger than anything before as the software industry migrated from mainframes to client-server, then SaaS/PaaS and now - to what Flomenberg names; the age of Open Adoption Software.

This is Not an Answer to all our Problems

While open software companies drive adoption much faster than their fully proprietary counterparts, being openly adopted is not the end of history.

It’s very important that we thoughtfully decide which parts of our product will be open and which parts won’t. There is a risk in going too open and fail to monetize sufficiently. See also my previous talk at DrupalCon New Orleans on Selling Drupal Modules & Distros.

Let’s make this one of the debating points after the presentation!

 

Sources:

• Open Social case - https://www.drupal.org/node/2754275
• 3Ps of Open Software Companies - https://medium.com/accel-insights/the-rise-of-open-innovation-the-3p-s-for-building-a-durable-open-software-company-3bc6e0ec6fa7#.yug7v2i5i
• The New World order for Open Source - https://techcrunch.com/2016/06/13/the-new-world-order-for-open-source-and-commercial-software/
• The next wave in open adoption software - https://techcrunch.com/2016/06/19/the-next-wave-in-software-is-open-adoption-software/
• Dries Blog - http://buytaert.net/the-long-path-to-being-understood