Karl Hughes

Karl Hughes

How Do Open Source Companies Make Money?

How Do Open Source Companies Make Money?

Since starting Draft.dev in 2020, I’ve had the opportunity to work with dozens of open source companies in the software development space. I’ve always found it fascinating to compare and contrast the various business models these open source businesses use, so in this post, I want to highlight some of the ways companies building open source software make profitable businesses.

Let’s start with a brief example…

The Story of Diaspora

More Awesome Than Money book cover

I recently finished More Awesome Than Money, a book about the college students who started Diaspora, an open source, privacy-focused answer to Facebook. As a business, Diaspora was never very impressive, but its message resonated. They raised over $200,000 from Kickstarter and ended up with over half a million users at their peak.

With such a successful launch, you’d think that Diaspora could buy enough time to figure out how to grow the project and make a viable business, but it’s not that easy. Being decentralized meant that they couldn’t really charge users (at least not all of them) and it worried traditional investors who wanted to see a plan for monetization. Additionally, the founders were inexperienced college students who struggled to retain good employees and managers.

The social network eventually met a slow, tragic end with one of the founders committing suicide and another heading back to college. The remaining founders ran out of money and while the codebase is still under active development, it runs as a non-profit that is largely supported by its contributors.

Want Great Content Like This for Your Site?

At Draft.dev, we create technical content for startups looking to reach software engineers. Stop begging your engineers to write blog posts and build a high-quality, reliable content engine today.

Learn More →

Why do People Write Open Source Software?

“People engage in creative endeavours because it satisfies some deep need within themselves to exercise creativity and solve problems often with little regard to the societal benefit.” - James Bottomley, Distinguished Engineer at IBM Research

To be honest, most open source projects aren’t started for money.

James Hickey, founder of the .NET Coravel project, which has over 2 million downloads and 2800 stars on Github, told me he started the project because it “seemed to me a missing piece of the .NET ecosystem.” While starting the project helped James solve his own problems and learn more about the language itself, Coravel also proved to be useful to many other programmers.

But maintaining a large open source project is a lot of work. While James has successfully monetized Coravel, many open source developers never make much money from their efforts. Let’s take a deeper look at why this is so hard and how some companies are overcoming the challenge.

What is an Open Source Company?

An open source company as any business whose primary product is open source software.

Open source software is distributed publicly, typically for free, but because maintaining software is a lot of work, many of the largest open source projects are supported and owned by for-profit companies.

Examples of Open Source Companies

A well-known example is Automattic, the parent company that maintains and distributes WordPress.org. While Automattic now runs several closed source software products in addition to the open source WordPress, they started primarily as an open source business.

WordPress is owned by Automattic, an open source company

Red Hat, the maintainer of one of the most popular Linux distributions, is another example of a large open source company. While they continue to build some free, open source solutions, they offer high-touch services and remote support to maintain the business.

Red Hat is an example of an open source company

Why Start an Open Source Company?

Strapi is also an example of an open source company. I recently asked Strapi’s Head of Marketing, Victor Coisne about why they give away the core Strapi product and he mentioned four things:

  1. The open source version of Strapi serves as the “top of the funnel” for other paid products,
  2. It helps increase adoption and virality, especially with developers,
  3. Open source tools tend to have a higher conversion rate because they ease adoption friction, and
  4. Being open source helps offset their support and R&D costs as the community of contributors also contribute to these areas.

Strapi is an example of an open source startup

The Challenge of Monetizing Open Source Software

Building a business around an open source project can be really hard. Emily Omier, who helps open source companies with positioning and commercial strategy, has built her business around helping open source companies address some of these challenges. She pointed out to me that the decision to make a project open source is not one that founders should take lightly:

“Not all open source companies start with an open source project that is then monetized…often the founders start with an idea, and decide that the best way to build the company they want to build is with an open source approach.”

She pointed out that one of the biggest challenges open source companies face is that by monetizing, they might seem like they’re trying to “wring dollars out of the open source community,” which is not a good approach. “Often the people who are good commercial customers would not be part of your open source community.”

Open source companies must understand the different drivers that contributors and potential commercial users have because they likely aren’t exactly the same.

Open Source Does Not Necessarily Mean Free

So if the source code in open source software is available to anyone on the internet, why does anyone pay for it? While much open source software is free, that’s not necessarily the case as many different licensing schemes are available.

I’m not a lawyer, but I’ve built enough software to understand that just because code is available on the internet doesn’t mean you’re necessarily allowed to use it any way you want. Similar to how images are subject to copyright even though they can be viewed online, code is also copyrighted by default. You can’t just copy a nontrivial codebase and use it in your application without permission.

Some open source licenses come with restrictions. For example, some require you to make any software you build with their code open source as well. Others are open source, but not free for for-profit enterprises to use.

Now, let’s not be naive. Once software is out in the public domain, some people will steal it, and they’ll likely get away with it. So, most open source companies choose not to use a license as their primary means of monetizing their software.

Let’s take a look at some of the ways open source companies can successfully monetize, and some examples of companies that have used these strategies successfully.

6 Ways Open Source Companies Can Make Money

“[There have] only been two successful models for monetizing open source. One is the public cloud model (…offering open source as a service) and then [there is] Red Hat’s model, which is to be a significant contributor and offer on-premises [software] and drive roadmaps for customers.” - Jim Whitehurst, CEO at Red Hat

While Jim might be right about there being two primary business models for open source software, I think there are enough variations that it’s worth mentioning a few more. I’ve worked with several open source companies in the past (as a contributor, service provider, and consultant), and I’ve seen six ways that they can make money:

1. Donations

Donations power many open source projects

While not typically used by large for-profit companies, some individual developers make pretty good money by taking donations for their open source work. Patreon, GitHub, and Buy Me A Coffee are all popular platforms that allow individuals and businesses to help support open source projects that they use or want to see maintained.

The downside to this model is that it’s really hard to build predictable, sustainable income from it. Some people will heavily use and benefit from updates while never paying the creators, and this frustrates those who do support the project. If you’ve ever asked your boss if you can start paying for some of the free, open source software you use at work, you know how tough this can be to sell.

“I think this model works best for smaller-scope projects which are not designed to grow over time,” Victor Coisne told me.

2. Hosted Version of the Product

While donations probably won’t take your open source company far, open source projects allow you to run their software on your own servers for free, but they’ll charge you for a hosted version. For example, you can deploy n8n.io to an AWS or DigitalOcean machine and keep it running on your own, or you can sign up for their hosted version and avoid the hassle of maintaining servers.

While this tactic won’t work for every open source project, it’s a very popular option. It offers a clear delineation between the paid and free versions of the product, and can be bundled with other features like support and training. The downside is that your margins are never going to be very high. If you charge too much, users will be able to justify the cost of maintaining their own servers.

3. Paid Support or Courses

Red Hat’s model of open source software financed by paid support contracts and on-premise configuration takes more human hours, but it allows them to improve the user experience dramatically. When companies look at the cost to troubleshoot open source software, it’s usually a better deal to sign up with the people who made the software rather than learn it themselves.

If you want to make your software more accessible, you can sell training at a lower cost than hands-on management and support. For example, The Linux Foundation helps maintain hundreds of open source projects and makes money through its training courses.

4. Open Core

Adam Wathan started Tailwind UI as an open source CSS library in 2017. After two years, he went full-time on the project and has now made $2 million in revenue from the project.

While Wathan’s story is exceptional, it highlights how a free, open source project can make real money by charging for extras (in Adam’s case it’s premade UI components). I would call Tailwind an open core product because while the framework and features are all free, you can support the project and save yourself time by buying extras.

Some open core projects do this by charging for features that larger customers are more likely to need like advanced user management, specialized integrations, or SAML access (there was a good thread on Indie Hackers about this model recently). This is a solid strategy if you know enterprise users will need certain things that individuals and small companies won’t.

5. Dual Licensing

Similar to the open core model, some open source projects offer a dual license. This might allow a small, independent developer to use the software free, but companies using it for a profit must pay a license fee. For example, Qt offers a dual license:

“Qt for Application Development is dual-licensed under commercial and open source licenses. The commercial Qt license gives you the full rights to create and distribute software on your own terms without any open source license obligations…Qt for Application Development is also available under GPL and LGPLv3 open source licenses.”

Companies can decide which license is appropriate and pay Qt as needed. While some companies might abuse this license structure, lawyers will look at things like this in detail if the company ever decides to sell or go public.

6. Selling Other Products

As in Automattic’s case, they offer a free, open source product (WordPress.org) and a suite of related and unrelated proprietary products to generate revenue from. This model is easiest to manage if your other products support the open source one, but some companies raise money from venture capitalists to fund the open source tool’s growth while they figure out other products to build.

The downside to this model is that building and maintaining multiple products is a lot of work. Small teams will find this distracting and it might mean the open source product suffers.

Combining Monetization Models in Open Source

The reality is that many open source companies use multiple monetization channels. Jonathan Reimer, Co-Founder of Crowd.dev told me that they make money from offering a hosted version of their tool and an open core model. “Both of these come with additional features,” he told me. “The key value driver is the intelligence that we add to the data (enrichment, sentiment analysis, conversation detection, etc) in our paid versions.”

Crowd.dev homepage

Learning More

For Fun and Profit book cover

If you’re interested in building a profitable open source project and you want to learn more, I’d suggest a few resources:

Note: This piece was first written in 2021, but updated in 2023 with input from several clients and friends in the industry. If you have your own resources or recommendations, I’d love to hear them. DM me on Twitter or Linkedin.

Read more like this in Entrepreneurship