How viral open-source startups can build themselves into enterprise-IT powerhouses

Because open-source software is free and easy to use, it can spread virally through organizations, from the bottom up, in ways that old-style, proprietary software cannot. Other startups find that their inexpensive, easy-to-implement technology can spread through companies because people find multiple ways to use it once it’s there. This all mirrors current trends in software development inside enterprises, which stress agility, speed and the use of on-demand, low-cost cloud computing. Need a new database to make it work? A more-efficient sales and R&D model Once open-source technology gains a foothold in an organization, it’s also often easier for startups to sell paid versions of their products to the customer, compared to traditional vendors. Open source is a relatively easier sell than the cumbersome, top-down sales model of proprietary software, for a couple of reasons. First, because the technology is already embedded inside many organizations, many companies deeply depend on open source to run critical software applications. JFrog*, whose popular open-source tools aid with software development and management, also finds plenty of customers willing to pay for more-sophisticated versions of its product. Lower cost drives more usage, and expands the addressable market Finally, once companies start using open-source tools — both free and paid — a virtuous cycle of increased usage develops: Because these tools, even the paid ones, are so much cheaper than traditional software, companies use more of them. *Denotes a current or past Battery investment.

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Dharmesh Thakker is a general partner at Battery Ventures and a former managing director at Intel Capital.

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In the last several years, hordes of new enterprise-IT upstarts have popped up in Silicon Valley, with some drawing lofty valuations from investors. They’re driven by new, more-advanced technologies in areas such as databases, software development, networking and cloud computing. And many are taking aim at old-school, IT incumbents like Dell, EMC, Oracle and IBM.

But will these new companies ever be as valuable as those big names?

It’s a legitimate question, mainly because of another technology trend that’s driving the current enterprise-IT renaissance: free, “open-source” software. Increasingly, almost all new enterprise-IT companies are incorporating open-source software into their products. They’re responding to demand from the big companies who buy their products, from banks to healthcare companies to consumer-product giants, who now favor open-source because of its lower cost, flexibility and agility. At an event we held this past spring, Goldman Sachs’ technology chief said his bank always considers open-source products first when evaluating new technologies. He even quipped that “open source is eating Goldman Sachs.”

This presents a financial conundrum for enterprise-tech startups, because open-source software is, at its core, free. Companies have to get creative to wring revenue and profits from open-source; they do so by selling more-expensive, feature-rich enterprise versions of their products, or charging for maintenance and service, among other models.

Still, on average, the cost of using an open-source product is three to four times cheaper than its proprietary counterpart. And, as we wrote earlier this year in TechCrunch, to date there have been very few landmark exits (IPOs or outsized M&A events) involving purely open-source companies — indicating Wall Street may still be skeptical about the business model.

So, can the open-source business model ever create the kind of stratospheric market values that the proprietary software and hardware companies of the 1980s and 1990s did? We think the answer is actually yes — for three reasons.

It’s spreading like a virus!

Because open-source software is free and easy to use, it can spread virally through organizations, from the bottom up, in ways that old-style, proprietary software cannot. This is because more-traditional software often requires licenses for specific users upfront. So there’s generally a big, expensive contract signed at the very beginning of an engagement. With open-source, technology gets a free foothold and then sticks around if it proves useful enough for people to pay for it (which is often). Software developers also love tinkering with their tools, which they can easily do with open source.

Open-source startup Docker, which sells “containerization” technology for software developers, is a good example of viral adoption by DevOps engineers, and is gradually loosening the grip more-established vendors like VMware have in some organizations.

Other startups find that their inexpensive, easy-to-implement technology can spread through companies because people find multiple ways to use it once it’s there. InfluxData*, which…

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