Over the past two decades, some of the biggest success stories in tech have been the SaaS giants. The top five SaaS companies by market cap—Salesforce, ServiceNow, Shopify, Workday, and Atlassian—have seen tremendous growth in value since their IPOs, with multipliers ranging from 7x for Workday to a whopping 54x for Shopify.
SaaS stock values reached all-time highs in the spring of 2020 as investors surveying the economic wreckage of COVID-19 appeared to double down on SaaS and cloud investments, judging them to be increasingly essential in the “new normal” of a distributed, at-home workforce. As the global recession continues to churn markets, SaaS and cloud stocks have seen their share of ups and downs—at times seeing losses that more than doubled those of the S&P 500 index. Overall, however, tech stocks have led the market’s recovery since its steep plunge in March—and among tech stocks, SaaS and cloud companies have performed particularly well. The result, Nasdaq reports, is that “investors are feeling SaaS-y.”
Venture investment in SaaS and cloud-based companies has followed the same trend on display in the public markets. But as SaaS and cloud stocks continue to push higher, some venture investors are turning their attention to the companies facilitating the second wave of SaaS and cloud development: developer-centered tech companies that leverage open-source code to speed scalable development.
The Origins of the Commercial Open Source Movement
Open source software has existed for decades. Familiar exponents of the technology are the Firefox open-source web browser, and Linux, the open-source operating system. Both programs are developed and maintained by foundations that emerged from the open-source technology movement that dates to the early days of the internet and the Silicon Valley utopianism of the late 1980s and early 1990s. Increasingly, however, commercial enterprises have realized the utility of open source software. Commercial open-source software (COSS) companies still monetize implementation, maintenance, and support for their software. But they do not charge for licensing.
Aside from the cost benefit they offer to consumers, open source platforms allow adopting developers to trade ideas and showcase their skills and solutions to common problems. COSS proponents and open-source developers believe that this community aspect of open-source development leads to better products. If anyone can contribute to improve the code, the theory goes, then a platform built on open-source code can rapidly evolve to enhance the end-user experience and decrease redundant labor otherwise wasted on finding solutions to shared problems. In theory and increasingly in practice, an open-source software with a critical mass of adoptees will be better—i.e., less flawed with bugs—than a proprietary commercial software alternative.
Large enterprise software companies were long resistant to using open source code because they believed more money was to be made in proprietary software. This bias is giving way as the tech landscape evolves to a new level of maturity and saturation. Microsoft, IBM, and Apple have all joined pioneers like Adobe in shifting toward open-source development of their core products. As the Linux Foundation proclaimed in 2019, “It is almost impossible to find a technology startup today that does not rely in one shape or form on open source software to boot up its operation and develop its product offering. As a result, we are operating in a space where open source due diligence is now a mandatory exercise in every M&A transaction.”
Market factors account for part of this transition: open-source platforms are proven to have a lower total cost of ownership for adoptees, i.e., consumers. Particularly for smaller businesses, nonprofits, and individuals, open-source software is more cost effective. For all businesses, open source software poses less platform risk than proprietary software, including SaaS. The industry’s most talented engineers also prefer to work with open-source code, as it allows them greater mobility throughout the industry, as well as heightened visibility and recognition for any innovative solutions they devise which go on to achieve wide adoption.
In 2020, open source software has experienced an unprecedented surge of interest, in large part due to the centrality of open-source code to collaborative efforts to fight the COVID-19 pandemic. Joseph Jacks, partner at OSS Capital, which invests in commercial open source ventures, told Trusted Insight that COSS is “the next SaaS” in terms of its potential to change the landscape of tech development—and generate huge multiples as it does.
Riding the Fintech Wave
One industry poised for open-source innovation is a sector already bustling with activity and bursting with funds: fintech. Fintech was booming before the pandemic, which has only accelerated demand for digital financial services. The combined market caps of the four biggest payment services—Mastercard, Visa, Square, and Paypal—has now risen above $1 trillion, eclipsing the $900 billion total combined market caps of the six biggest Wall Street banks (JP Morgan, Bank of America, Wells Fargo, Morgan Stanley, and Goldman Sachs). For perspective, the total market cap for U.S. banks is around $2 trillion.
Venture-backed fintech companies are projected to post the biggest exits over the next five years. And the fintech powerhouse runs on software. One of the biggest challenges facing fintech companies and their legacy counterparts is data security. And in this regard, venture-backed COSS companies are leading the way into a new future of distributive, open-source models for security. While “open-source” and “data security” might not sound like logical companions to a data novice, the modular approach to software development enabled by open-source development means that developers are better able to specialize in specific components and functions rather than entire systems. This leads to stronger code overall. But more importantly, the community of developers that surrounds any widely adopted open source platform helps to ensure that vulnerabilities that could lead to a data breach or a malfunction are identified and corrected more quickly: code modules that are widely adopted are the most widely examined and tested for flaws, as new developers continually build on open-source code already in use.
A startup to watch in this sector is OpenFin, which describes itself as “the OS of finance.” OpenFin has $47 million in total funding, as of its series C. According to the company, OpenFin is “deployed by thousands of industry apps to over 1500 sell-side and buy-side firms.”
Increasing COSS adoption in fintech has even led to the establishment of the Fintech Open Source Foundation (FINOS), a nonprofit whose purpose is “to accelerate collaboration and innovation in financial services through the adoption of open source software, standards and best practices.” FINOS believes that the adoption of open-source technology is essential to the growth of the financial sector. Its members include the developer platform GitHub, as well as legacy players in banking such as Deutsche Bank, Citigroup, and JP Morgan.
Why LPs Should Take Notice
Limited partners investing in tech should be rightfully skeptical of any claims regarding the Next Big Thing. But some of the COSS sector’s internal metrics suggest that developer-centric COSS startups will yield a fair number of eye-popping IPOs a few years down the line.
First is the funding. Several venture-backed COSS companies have already reached Series E megafunds. SiFive ($190M total funding), Redis Labs ($247M total funding), Confluent ($456M total funding), Automattic, ($697M total funding) and Databricks ($897M total funding) are a few of of the COSS companies now awash in cash and expected to make big exits. They also represent a broad range of applications: SiFive is an open-source platform for semiconductor chips, Automattic is a blogging platform, and Confluent is an event streaming platform.
Another index for estimating the opportunity set that has emerged in COSS is the success of platforms dedicated to open-source developer support. In September 2020, open-source security platform Snyk raised a mega-round of $200 million, bringing its total funding to $450 million. Valued at $2.6 billion, Snyk isn’t the flashy sort of unicorn: the company offers a suite of tools designed to help open-source developers identify and correct security flaws. Snyk promises to “modernize the security industry by empowering developers to integrate security into the complete software development lifecycle.” Its products enable developers to find and fix security vulnerabilities in open-source platforms like the container-orchestration system Kubernetes and the infrastructure-as-code platform Terraform (developed by Google and HashiCorp, respectively). As of the September announcement, Snyk had 1.5 million users in its developer community. That’s a serious number, considering that the total population for adoption is limited to software developers.
COSS might not be “the next SaaS.” But it’s certainly worth the attention of LPs looking to invest in promising early-stage ventures. For those interested in conducting their own diligence on potential opportunities, COSSMedia offers a spreadsheet of seed and early-stage ventures leveraging open-source practices to speed software development and facilitate scalability across a variety of tech platforms. For LPs who plan to quiz their managers about the opportunity set in COSS, it’s definitely worth a look.
SaaS stock values reached all-time highs in the spring of 2020 as investors surveying the economic wreckage of COVID-19 appeared to double down on SaaS and cloud investments, judging them to be increasingly essential in the “new normal” of a distributed, at-home workforce. As the global recession continues to churn markets, SaaS and cloud stocks have seen their share of ups and downs—at times seeing losses that more than doubled those of the S&P 500 index. Overall, however, tech stocks have led the market’s recovery since its steep plunge in March—and among tech stocks, SaaS and cloud companies have performed particularly well. The result, Nasdaq reports, is that “investors are feeling SaaS-y.”
Venture investment in SaaS and cloud-based companies has followed the same trend on display in the public markets. But as SaaS and cloud stocks continue to push higher, some venture investors are turning their attention to the companies facilitating the second wave of SaaS and cloud development: developer-centered tech companies that leverage open-source code to speed scalable development.
The Origins of the Commercial Open Source Movement
Open source software has existed for decades. Familiar exponents of the technology are the Firefox open-source web browser, and Linux, the open-source operating system. Both programs are developed and maintained by foundations that emerged from the open-source technology movement that dates to the early days of the internet and the Silicon Valley utopianism of the late 1980s and early 1990s. Increasingly, however, commercial enterprises have realized the utility of open source software. Commercial open-source software (COSS) companies still monetize implementation, maintenance, and support for their software. But they do not charge for licensing.
Aside from the cost benefit they offer to consumers, open source platforms allow adopting developers to trade ideas and showcase their skills and solutions to common problems. COSS proponents and open-source developers believe that this community aspect of open-source development leads to better products. If anyone can contribute to improve the code, the theory goes, then a platform built on open-source code can rapidly evolve to enhance the end-user experience and decrease redundant labor otherwise wasted on finding solutions to shared problems. In theory and increasingly in practice, an open-source software with a critical mass of adoptees will be better—i.e., less flawed with bugs—than a proprietary commercial software alternative.
Large enterprise software companies were long resistant to using open source code because they believed more money was to be made in proprietary software. This bias is giving way as the tech landscape evolves to a new level of maturity and saturation. Microsoft, IBM, and Apple have all joined pioneers like Adobe in shifting toward open-source development of their core products. As the Linux Foundation proclaimed in 2019, “It is almost impossible to find a technology startup today that does not rely in one shape or form on open source software to boot up its operation and develop its product offering. As a result, we are operating in a space where open source due diligence is now a mandatory exercise in every M&A transaction.”
Market factors account for part of this transition: open-source platforms are proven to have a lower total cost of ownership for adoptees, i.e., consumers. Particularly for smaller businesses, nonprofits, and individuals, open-source software is more cost effective. For all businesses, open source software poses less platform risk than proprietary software, including SaaS. The industry’s most talented engineers also prefer to work with open-source code, as it allows them greater mobility throughout the industry, as well as heightened visibility and recognition for any innovative solutions they devise which go on to achieve wide adoption.
In 2020, open source software has experienced an unprecedented surge of interest, in large part due to the centrality of open-source code to collaborative efforts to fight the COVID-19 pandemic. Joseph Jacks, partner at OSS Capital, which invests in commercial open source ventures, told Trusted Insight that COSS is “the next SaaS” in terms of its potential to change the landscape of tech development—and generate huge multiples as it does.
Riding the Fintech Wave
One industry poised for open-source innovation is a sector already bustling with activity and bursting with funds: fintech. Fintech was booming before the pandemic, which has only accelerated demand for digital financial services. The combined market caps of the four biggest payment services—Mastercard, Visa, Square, and Paypal—has now risen above $1 trillion, eclipsing the $900 billion total combined market caps of the six biggest Wall Street banks (JP Morgan, Bank of America, Wells Fargo, Morgan Stanley, and Goldman Sachs). For perspective, the total market cap for U.S. banks is around $2 trillion.
Venture-backed fintech companies are projected to post the biggest exits over the next five years. And the fintech powerhouse runs on software. One of the biggest challenges facing fintech companies and their legacy counterparts is data security. And in this regard, venture-backed COSS companies are leading the way into a new future of distributive, open-source models for security. While “open-source” and “data security” might not sound like logical companions to a data novice, the modular approach to software development enabled by open-source development means that developers are better able to specialize in specific components and functions rather than entire systems. This leads to stronger code overall. But more importantly, the community of developers that surrounds any widely adopted open source platform helps to ensure that vulnerabilities that could lead to a data breach or a malfunction are identified and corrected more quickly: code modules that are widely adopted are the most widely examined and tested for flaws, as new developers continually build on open-source code already in use.
A startup to watch in this sector is OpenFin, which describes itself as “the OS of finance.” OpenFin has $47 million in total funding, as of its series C. According to the company, OpenFin is “deployed by thousands of industry apps to over 1500 sell-side and buy-side firms.”
Increasing COSS adoption in fintech has even led to the establishment of the Fintech Open Source Foundation (FINOS), a nonprofit whose purpose is “to accelerate collaboration and innovation in financial services through the adoption of open source software, standards and best practices.” FINOS believes that the adoption of open-source technology is essential to the growth of the financial sector. Its members include the developer platform GitHub, as well as legacy players in banking such as Deutsche Bank, Citigroup, and JP Morgan.
Why LPs Should Take Notice
Limited partners investing in tech should be rightfully skeptical of any claims regarding the Next Big Thing. But some of the COSS sector’s internal metrics suggest that developer-centric COSS startups will yield a fair number of eye-popping IPOs a few years down the line.
First is the funding. Several venture-backed COSS companies have already reached Series E megafunds. SiFive ($190M total funding), Redis Labs ($247M total funding), Confluent ($456M total funding), Automattic, ($697M total funding) and Databricks ($897M total funding) are a few of of the COSS companies now awash in cash and expected to make big exits. They also represent a broad range of applications: SiFive is an open-source platform for semiconductor chips, Automattic is a blogging platform, and Confluent is an event streaming platform.
Another index for estimating the opportunity set that has emerged in COSS is the success of platforms dedicated to open-source developer support. In September 2020, open-source security platform Snyk raised a mega-round of $200 million, bringing its total funding to $450 million. Valued at $2.6 billion, Snyk isn’t the flashy sort of unicorn: the company offers a suite of tools designed to help open-source developers identify and correct security flaws. Snyk promises to “modernize the security industry by empowering developers to integrate security into the complete software development lifecycle.” Its products enable developers to find and fix security vulnerabilities in open-source platforms like the container-orchestration system Kubernetes and the infrastructure-as-code platform Terraform (developed by Google and HashiCorp, respectively). As of the September announcement, Snyk had 1.5 million users in its developer community. That’s a serious number, considering that the total population for adoption is limited to software developers.
COSS might not be “the next SaaS.” But it’s certainly worth the attention of LPs looking to invest in promising early-stage ventures. For those interested in conducting their own diligence on potential opportunities, COSSMedia offers a spreadsheet of seed and early-stage ventures leveraging open-source practices to speed software development and facilitate scalability across a variety of tech platforms. For LPs who plan to quiz their managers about the opportunity set in COSS, it’s definitely worth a look.