Sunday, November 3, 2024

Joseph Jacks bets on open source startups, a ‘paradox of philanthropy and capitalism’

Open source might be many things, but one thing it’s not is a business model — by most estimations, at least. However, that hasn’t stopped Joseph Jacks and OSS Capital from seeking some of the earliest-stage, open source startups and funding them through their formative years.

These include the likes of open source Qualtrics-alternative Formbricks, which raised a pre-seed round of funding last year. Elsewhere, there is Notion alternative AppFlowy; Jira alternative Plane; Calendly alternative Cal.com; Postman alternative Hoppscotch; and for those seeking an alternative to Okta, Cerbos is worth a look. The one thing they all have in common is that they are open source, and they have all raised cash from OSS Capital. But they also highlight the perennial struggle between the open source and proprietary domains, showcasing two diametrically opposing ideas — that of giving something away for free and that of making a profit.

“The cool thing, though, about these open source companies is they are inherently philanthropic, while at the same time capitalistic and pursuing business models that actually generate sustainable revenue outcomes,” Jacks said in an interview with TechCrunch. “And I think they’re very paradoxical, from the very beginning all the way to when they’re large companies.”

This juxtaposition of “philanthropy” and “business” is at the heart of OSS Capital’s investment thesis, according to Jacks — he believes there should be more open source in the world, and his way of “expressing that belief” is one built around this idea of capitalism.

“I think capitalism can promote positive and sustainable behavior much better than philanthropy can for positive and sustainable behavior,” Jacks said. “I believe that capitalism itself is the penultimate manifestation of philanthropy, and commercial open source networks and startups are the most well-suited type of capitalism toward accelerating open source innovation in the world.”

Open for business

Jacks founded one of the first commercial companies to spring up around Kubernetes, the containerized application platform spun out from Google in 2014. Kismatic, as Jacks’ startup was called, was acquired by enterprise software company Apprenda in 2016. Jacks also kickstarted the Kubernetes community conference KubeCon, which Kismatic donated to the Cloud Native Computing Foundation in 2016.

After Kismatic, Jacks co-founded cloud data management startup Aljabr, and though this company ultimately went nowhere, it was around this time that Jacks started blogging about his thoughts on open source companies.

“The fund wasn’t a big grand plan — it was a process of being really obsessed with these open source companies, and I started a blog series that eventually led to starting the fund,” Jacks said. “I didn’t have any VC or investing experience.”

And so OSS Capital was born in 2018, with Jacks the solo general partner (GP) and investor. OSS Capital has now raised three funds, each around $50 million in size, with plans to close a fourth by early 2026.

While most of its investments are at the seed stage, OSS Capital does some follow-on funding, including leading on a Series A round last year into W4 Games, which is commercializing the open source game engine Godot. It has also done some larger checks for follow-on rounds, though for that it has used a special purpose vehicle (SPV), which involves setting up an entity for single investments.

There are also a few exits to speak of, including the full-stack web framework Remix, which Shopify acquired in mid-2022 and which is now the recommended way for users building Admin apps on Shopify.

“It was a small outcome for us — we made a few times our money, but it’s had great outcomes for Shopify,” Jacks said.

W4 Games' founding team
W4 Games’ founding team. Image Credits:W4 Games.

To date, OSS Capital has made in the region of 80 investments, and earlier this week, Jacks announced that he would be transitioning his firm from an ERA (exempt reporting adviser) to an RIA (registered investment adviser) to fulfill regulatory requirements around crypto. While Jacks stresses he isn’t “diversifying into crypto,” they have made a handful of investments in the space over the past few years, including $40 million in capital put into Parallel Studios, Bittensor, and Coinbase CEO Brian Armstrong’s ResearchHub.

Today, OSS Capital counts a fairly extensive roster of limited partners (LPs) — mostly individuals, many of whom have connections to the world of open source software. These include Automattic CEO and WordPress co-creator Matt Mullenweg; Red Hat co-founder Bob Young; Cockroach Labs’ co-founder Spencer Kimball; and MongoDB co-founder Eliot Horowitz. Elsewhere, YouTube founders Chad Hurley and Steve Chen are also backers, as are Shopify founder Tobias Lütke, GitHub co-founder Tom Preston-Werner, and founding Google investor Ram Shriram.

OSS Capital also counts a handful of larger institutional investors, including Automattic, which has been its biggest corporate investor since OSS Capital’s second fund. Other notable names in the institution pot include Insight Partners and Summit Partners, both of which are renowned for their investments across the venture capital and private equity realms.

“I haven’t really pushed to get more of these institutional investors, or from the likes of nonprofits, foundations and endowments,” Jacks said. “I just haven’t spent time optimizing the design of the fund. The reason we have mostly individual investors is that they’re people that I really admire and I respect a lot — they understand what we’re doing, because they’ve built open source companies over the years.”

Open network

There are plenty of niche venture capital firms out there, focusing on everything from wildfires to oral health. Such vertical-specific investment philosophies might be an appealing proposition for early founders wanting deep industry expertise.

Didier Lopes, co-founder and CEO of OpenBB — often referred to as an open source alternative to Bloomberg Terminal — secured $8.5 million in a seed round of funding led by OSS Capital just six months after his project’s inception. And Lopes said that the insights and connections fostered through this initial tie-up opened doors.

“They recognized the time required to cultivate a strong and loyal community — their insights into how other startups navigate the balance between open source and commercial offerings was important for us to define our strategy going forward,” Lopes told TechCrunch. “But also, being able to connect us with open source leaders.”

This included introductions to angel investors, such as Red Hat’s Bob Young and AngelList co-founder Naval Ravikant, in addition to executives from companies such as Elastic and GitLab who now sit on OpenBB’s advisory board.

OpenBB co-founder and CEO Didier Lopes speaking at the Future of Finance and AI conference at Cornell
OpenBB co-founder and CEO Didier Lopes speaking at the Future of Finance and AI conference at Cornell. Image Credits:OpenBB

However, leaning into “open source” as an investment ethos flies in the face of a growing sense that overly permissive software licensing just isn’t compatible with building a sustainable long-term business. By way of example, developer tooling unicorn Sentry, in cahoots with several other startups, is putting its weight behind a new licensing paradigm dubbed “fair source,” a tacit acknowledgment that while open source as a concept remains popular, startups are wary of its commercial limitations.

“Open source isn’t a business model — open source is a distribution model, it’s a software development model, primarily,” Chad Whitacre, Sentry’s head of open source, told TechCrunch in an interview last month. “And in fact, it places severe limits on what business models are available, because of the licensing terms.”

Jacks, for what it’s worth, is fully on board with this sentiment. “I agree with him completely, it’s true,” he said. This is surprising, given that his VC firm is seemingly all-in on open source. The three-letter acronym in “OSS Capital” stands for “open source software,” in case there were any lingering doubts.

But this is where we get into the real nitty-gritty of commercial open source software (COSS), which is often less about critical components of the software stack such as the wildly popular Kubernetes, and more about trying to monetize fully fledged SaaS apps that use open source as a carrot-on-a-stick. The go-to model for many of these businesses has come to be known as “open core,” where the core functionality of the software is open source, but a significant portion of the utility is locked behind a premium, proprietary paywall. This allows customers to tinker, inspect, integrate, and self-host — but if they want hosting or bells-and-whistles enterprise features, they have to pay.

And this is where Jacks is at pains to point out why “open source” in itself isn’t what he invests in.

“There’s a fundamental difference between ‘open source’ and ‘commercial open source’,” Jacks said. “Open source is a licensing paradigm, a technology development paradigm, a philosophy — that is not what I invest in; OSS Capital does not invest in open source. We manage money for people to multiply their investment, and make them tons more money. And I do what I do because I’m also very interested in making tons of money.”

Buried in amongst all this is a bet — a big bet — that “open core” will ultimately win out over pure proprietary.

“My view is that this kind of [open core] approach will actually replace closed core SaaS companies,” Jacks said. “I’ve had this thesis from the beginning of the fund, and it builds on what Marc Andreessen said about software eating the world, but my take on that has been that open source is eating software faster than software is eating the world.”

And he’s not the only person who thinks this. GitLab CEO and co-founder Sid Sijbrandij launched Open Core Ventures (OCV) in 2020, and while it’s slightly different in that it’s adopting more of an incubator approach to building and investing in companies around existing open source projects, it has a similar underlying philosophy. Sijbrandij believes that “open core” startups will represent 80% of venture-funded startups in the future, though he concedes it may “take a long time” before we actually reach that stage.

“The power of open core comes from giving users the ability to contribute — open core provides a level of trust, agility, and speed you can’t get with closed-source software,” Sijbrandij told TechCrunch. “We’re seeing the open core model mature and more entrepreneurs wanting to start businesses under the model — open core is a broad space between completely proprietary and completely open source. We think that over time most companies will be somewhere on this spectrum, instead of on the extremes.”

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