Making Money from Open Source
Part 1: Turning Project-Market Fit into Product-Market Fit
By: Robby
Imagine you’re the creator of an open source project. You release your project on GitHub, follow it up with a Hacker News post, and within a few months, surpass 1,000 stars. Woohoo! You start thinking, “maybe I should start a company!”
At Cowboy Ventures, we regularly meet founders whose companies start like this. We’re huge believers in open source and the product, support, and distribution benefits that come from building a company in a bottoms-up, community-centric way. It’s the reason we started the Open Source Startup Podcast (along with our friend and co-host Tim Chen!) and invest in a number of open source companies. But not all projects are destined to become revenue-generating, venture-scale companies, and moving from project to scalable company can be a tricky evolution. To that end, we hope this post will help project creators understand if their project-market fit can turn into product-market fit.
Project-Market Fit vs. Product-Market Fit
For open source founders, understanding how project-market fit differs from product-market fit is crucial. Project-market fit is the degree to which your project satisfies a need for a group of contributors and free users. Signals that support project-market fit include adoption, user contributions, and community engagement.
Product-market fit adds a paid component. For an open source company, product-market fit is the degree to which the paid products tied to an open source project satisfy a need for a group of paid users. And to build a “venture scale” company, the revenue you’ll need to generate with your paid product over time has to be big — hundreds of millions of dollars big.
Over the past 20 years, open source has been a great starting point for building venture-scale companies. In 2012, Red Hat became the first open source company to generate over $1B in annual revenue. Many other large and highly revenue-generating companies started out as open source projects as well including HashiCorp, Elastic, and MongoDB. These companies had projects AND products that satisfied a market need.
Early Signs of Product Potential
At Cowboy, we invest when companies are at the seed or pre-seed stage. That typically means pre-revenue, and often pre-product. If we’re meeting with open source founders and assessing whether their project has company potential, there are certain things we pay close attention to¹:
1/ High-Quality Users: These are users with access to budget with high potential to pay over time. They work at growing or large companies and have budget for new products. For instance, if your users come from mid-market software companies and your project helps them save hundreds of engineering hours, the ability to monetize them is high. Conversely, if your users are all hobbyists, their ability and willingness to pay will be low.
Open source database system Vitess, which the company PlanetScale has monetized, had early users and community members from companies like Slack, YouTube, and Square. This gave PlanetScale CEO Sam Lambert confidence that the project had product and company potential².
2/ Influential Users: These are users who influence new tool adoption. They are well-known, typically vocal, and early proponents of new technology. They often work at companies known for hiring top technical talent, such as Uber, Google, or Airbnb. They may also write about technology trends and have big online followings.
At HashiCorp, they called these users “tastemakers.” On the Open Source Startup Podcast, HashiCorp CTO Armon Dadgar said, “in any given market, there are people who are the true tastemakers, and lead what other people wind up doing…we spent a lot of time with the tastemakers.” Some example tastemakers include Charity Majors, Gergely Orosz, Kelsey Hightower, and Mitchell Hashimoto.
3/ Large Addressable Market: There is billion-dollar+ spend potential in the category the project is in. For example, HashiCorp’s most popular project, Terraform, is in the Emerging Cloud Infrastructure market, which is $2B+. Gitlab’s initial target markets — Search, Content Analytics, and Cognitive Software — were a combined $3B market at the time.
At Cowboy, we look for projects operating in large, multi-billion dollar markets where there is an opportunity to build highly revenue-generating companies. Some additional markets where we see high revenue potential are the Security Analytics market, the Observability market, and the AI Operations market³.
4/ Regular, Sticky Usage: The project is integrated into day-to-day user workflows, with automated regular usage. The highest quality usage is often in production environments. Operating in a production environment means if the project was taken away, it would disrupt experiences for end users. It’s an incredibly sticky place for a project to live.
Many popular open source projects run in production environments including open database system Vitess, open search Elasticsearch, and infrastructure-as-code project Terraform.
5/ Momentum: The project has a lot of momentum, as demonstrated by high GitHub engagement metrics (thousands of stars, issues reported on a daily basis), regular Slack or Discord channel engagement (daily support requests, new high-quality users joining daily), and/or user-generated content reviewing the project. The overall interest in a project helps with marketing, drives new users, and builds trust in the validity of the open source project.
Across metrics, we look for early signs of momentum. For example, below you can see the growth in GitHub stars at Supabase as they started to gain serious traction in mid-2020.
At Cowboy, we’re looking for projects that have most, if not all, of the above characteristics. For project owners, taking an honest look at where your project stands can help determine whether your project is showing signs of product, and company, potential.
On the Open Source Startup Podcast, we’ve talked with 70 founders to learn how leading open source companies like HashiCorp, MongoDB, and Vercel took project-market fit and turned it into product-market fit. From these conversations, it’s become clear how important both parts are to building a successful open source company.
Our team at Cowboy loves working with open source founders on their product and GTM strategies. If you’re an open source founder thinking about GTM, or an open source project creator looking to start a company, we’d love to chat. Find me at robby@cowboy.vc or DM me on Twitter!
Next, we’ll be releasing part 2 of the “Making Money from Open Source” series which will cover business models. Stay tuned!
— — — — —
¹True open source companies that start as open source projects, with monetization and a paid product coming after.
²Hear more from Sam Lambert on his decision to join PlanetScale on the Open Source Startup Podcast.
³Market size data sources: security analytics & observability market sizes from Statista and AI Operations market size from Grandview Research.
