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Recent open-source IPOs GitLab and Confluent

For the last year, Ive been writing about open-source companies and a wave of developer-centric software companies that are upending the traditional enterprise software marketand will soon collectively be worth more than $1 trillion in combined market capitalization. That day is getting closer ever since GitLab and Confluent went public. The recent IPOs of these two open-source companies portend some larger trends that all software founders and investors should pay attention to. Most importantly, developers are in the drivers seat (and they love open source), and secondly, open source can be highly profitable with the right business models.

Why do GitLab and Confluent today have fully-diluted market caps of approximately $20 billion and $30 billion, respectively? They both sit at the center of a massive societal shift where every company is becoming a software company. Its not enough to deploy the latest enterprise software; the most successful companies today create their own unique software and combine free and commercially-available platforms in unique ways to achieve competitive advantage. And this is the case for organizations in every industry, from transportation and pharma, to education, government, finance, insurance, entertainment, retail, and beyond.

There are five main reasons public open-source software companies are worth billions of dollars and that more are poised to go public at similar valuations.

Strong developer love

With every company becoming a software company, they all need to hire armies of software developers. And in this environment, developers are in the driver's seat. They dictate which platforms they want to use for coding and DevOps, and they mostly want to use open source. Developers love open-source tools because they are nimble, creative, and collaborative in nature, allowing teams to work together around the world and contribute back to community projects. Thus, open-source software companies like GitLab and Confluent, as well as HashiCorp, MongoDB, Elastic, Databricks, and others, are very popular among software developers, who in turn recommend the enterprise versions of these companies products to their bosses. This bottoms-up adoption of open source in the enterprise has driven huge revenue gains for the largest open-source companieswhich all offer commercial versions of their software with added functionality such as security, compliance, quality control, and collaboration.

Huge future customer growth

Whats more, open source is a self-perpetuating growth machine, driving sustainable long-term value for open source companies. As developers worldwide continue to standardize on open-source tools, viral use of these platforms among other developers growsand trust in them increasesmaking it standard practice for more and more companies to adopt the enterprise versions of open source products. Viral uptake of open-source tools has created unstoppable customer growth for open-source companies, and it will only continue to snowball.

Incredible customer retention

When companies adopt paid versions of open-source software, its usually because their developers have been successfully using the free version for quite some time. That means once customers start paying for an enterprise open-source product, they are likely to stick with it. This dynamic causes open-source companies to have high net dollar retention; in other words, once they get customers, those customers stay, and they renew at larger and larger amounts as their own companies grow and engage more fully.

Rise of the cloud

Many open-source companies are now succeeding with a cloud model where they host and manage their own software and provide it as a service to customers. Five years ago, most open-source software was on premise with users first downloading the free public open core, and then later paying to download and largely self-manage a commercial enterprise offering on their own servers. Now, the cloud service model is taking over. GitLab, for example, recently reported in its most recent S-1 that its fully-hosted cloud offering, which they call SaaS, grew from 9% of ARR to 16% between fiscal 2020 and 2021, representing year-over-year SaaS ARR growth of 202%. Confluent has recently reported annual cloud revenue growth of 245% and MongoDBs cloud revenue now represents over half of total revenue. Expect cloud to continue to grow in prominence for open-source companies.

Self-reinforcing product development

The very nature of open source is that it invites collaboration. Developers contribute their expertise (for free) back to the open-core projects that serve as the underlying frameworks for commercial open-source products. For open-source companies, these contributions benefit all current and future customers because their products get stronger and more closely aligned with developer needs. GitLab had about 1,000 contributors to its open core project in 2020 and doubled that number in 2021; each of these contributors adds value to GitLabs foundational technology platform.

Well likely see more open-source companies go public. Companies such as Databricks, Snyk, Grafana, Kong, and Vercel are growing rapidly and represent an intriguing IPO pipeline over the coming years. All in all, with the headwinds behind them, open-source companies that can win the hearts and minds of developers should be well-positioned for growth and eventual public-company success.

HashiCorp, Kong, and Vercel are GGV Capital portfolio companies.

Read the original post:
Open Source IPO Boom: What GitLab And Confluent Show Us About The Future Of Software - Forbes