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Joseph (JJ) Jacks
Joseph (JJ) Jacks

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The COSS Monetization Reckoning Is Coming

Why am I writing this today, of all days? No real reason. It just struck me this morning to share the thought.

We now have an ALL TIME RECORD number (probably 100+) of COSS startups that have raised $5M+ (many have raised $10M+) in VC funding where the following two things are simultaneously True:

1) The COSS company has some early signs of open source momentum/traction as evidenced by GitHub Stars or project Downloads (by the way, both metrics are, on their own, deeply flawed as primary proxies for "company investable" heuristics).

2) The COSS company has no product IP nor clear product plans. Also, goes without saying, the company is "pre-revenue".

Most of these financings have NOT been publicly announced and no single firm has access to all the data (except maybe OSS Capital). In reality, my sense is that 2 out of 5 seed/pre-seed deals never get announced and perhaps the same is true for 1 out of 5 Series A deals. I'm being conservative.

This is a shocking new reality driven primarily by the meteoric rise of great COSS companies like HashiCorp, Elastic, MongoDB, GitHub, MuleSoft, Starburst, Confluent, GitLab and many others over the last 5 ~ years.

Everyone wants to find and seed invest in the next HashiCorp. If you miss that, funding the Series A is also a great idea, no?

Quite simply, over the last 2 ~ years, something on the order of 100+ pre-revenue and pre-product COSS companies have been seriously well funded with nothing more than a deck and a promising open source project. I cannot share this data publicly, but just know that it is accurate and that we have this data.

Basically every VC across all fund sizes under the sun who invests in "tech" (which is vastly digital, which is vastly software, which is vastly open source these days) is now a COSS startup investor.

Is this entirely bad? No. Is this entirely good? Also no. Let me explain...

Why is this "Bad":

-Founders who partner with VCs that do NOT understand the fundamentals of open source are going to be misled, distracted with having to educate their investors from scratch about very nuanced and complex things and their relationships will be extremely far from idealistic. Very few VCs (it is important to focus on the partner/individual at a given firm, not the firm itself.. given that literally only one firm on earth focuses on COSS exclusively) have a deep understanding of open source, let alone COSS, and many/most have zero-to-no track record of actually helping COSS companies successfully navigate their journeys from pre-revenue to PMF and beyond.

-Founders who raise meaningful capital from VC well before even possessing a basic understanding market dynamics will be forced to have full clarity on those issues in short order, and if they are not able to graduate and grow into investor expectations within 1-2 years at most, they will experience very painful misalignment conversations... which will cause them to betray social contracts and principles set in place with other key stakeholders in their open source ecosystems.

Why is this "Good":

-More COSS companies are getting funding than ever, enabling FOSS creators to transform into founders of well funded startups.

-Early-stage COSS companies can take this funding and invest it purely/largely in the growth of their FOSS communities, creating new abundance for the world in a positive-sum way.

-The VC world is learning faster than ever about the fundamental benefits of open source at the core of capitalism and business. This is a huge net positive.

Overall, I'm thrilled to see so much COSS funding and we inclusively cover all of it here on COSS Community via COSS Weekly and our data resources.

However, in these times of high capital abundance in the private startup/company equity investing markets, founders should be more careful than ever about deciding who they partner with... this is VASTLY more critical than naively optimizing for "max price for min dilution".

Discussion (7)

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Ben Halpern

The worst net outcome is probably that exuberance leads to an over-correction and a pull back on investment in this space at all... And IMO this wouldn't be the first time for COSS.

Maybe 6-8 years ago there were a lot of investments in stuff like JavaScript frameworks with companies built around them. Ionic comes to mind as an example as one that is still in existence. Many others flamed out.

And then for no apparent reason it seems like things went cold for a brief moment before the fundamentals took hold and investment flowed back in.

The tendency for these windows to open and close cyclically can't be good for the ecosystem. Such seems to be the nature of the global financial system.

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Joseph (JJ) Jacks Author

Great points! Obviously I’m extremely biased in that I believe COSS will be worth $2-3T+ as a category by 2030 and today it is 20X~ smaller than that, but there will still be a lot of “separation of wheat from chaff”.

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Ben Halpern

I'm with you.

Arguably there is no market-wide exuberance, just that people aren't sure who the winners are, so it's kind of a "spray and pray" mentality.

During the .com bubble: Many companies overvalued. The great ones like Amazon were radically undervalued.

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Lee Calcote

Thanks for sharing, JJ. Two sides of the coin here.

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Joseph (JJ) Jacks Author

Thanks for joining COSS Community! Please feel free to post and engage more 😍

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Guillaume

Out of curiosity, and maybe the answer is obvious, why "Most of these financings have NOT been publicly announced"? Is there a reason specific to OSS?

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Joseph (JJ) Jacks Author

This is case specific and founders are in control of when they decide to make funding announcements.