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Growth Metrics for Open Source Companies: A Guide for Investors

Updated: Feb 19



Open source companies operate on a unique business model. Unlike proprietary software companies that derive revenue from selling licenses or subscriptions, open source companies typically offer their core software products for free and earn money through related services, such as consulting, support, or premium features. As a result, traditional growth metrics may not always provide a complete picture of an open source company's health and potential. In this article, we'll delve into the growth metrics specific to open source companies that investors should consider.



Community Engagement and Growth: The strength of an open source project often lies in its community. A vibrant and growing community indicates that the project is gaining traction, which can lead to increased adoption and commercial opportunities.


Metrics to Watch:


  • Number of Contributors: A growing number of contributors indicates an active community.

  • Pull Requests and Issues: The number and frequency of pull requests and issues can indicate community involvement and the pace of development.

  • Forum and Mailing List Activity: Active forums or mailing lists suggest that users are engaged and seeking help or discussing the project.


Commercial Conversion Rate: While open source software is freely available, companies often offer premium versions or related services for a fee. The conversion rate from free users to paying customers can indicate the commercial viability of the project.


Metrics to Watch:


  • Number of Free vs. Paid Users: A higher proportion of paid users can indicate strong value in the premium offerings.

  • Growth Rate of Paid Users: This indicates how effectively the company is monetizing its user base.


Revenue from Services: Many open source companies derive significant revenue from services like consulting, training, or support. Monitoring the growth in this revenue stream can provide insights into the company's ability to monetize its expertise.


Metrics to Watch:


  • Service Revenue Growth: Year-over-year growth in service revenue.

  • Percentage of Total Revenue from Services: A higher percentage might indicate a strong service-oriented business model.


Adoption in Enterprises: Enterprise adoption can lead to larger deals and longer-term contracts, providing stability for open source companies.


Metrics to Watch:


  • Number of Enterprise Customers: A growing number of enterprise customers can indicate market traction.

  • Average Contract Value: The average size of deals with enterprise customers. A growing ACV can suggest increasing value perception among enterprises.


Partnerships and Integrations: Open source projects that integrate well with other popular tools and platforms can see increased adoption.


Metrics to Watch:


  • Number of Official Partnerships: Partnerships can extend the reach and utility of the open source project.

  • Integration with Popular Platforms: Integrations can make the project more attractive to potential users.


Project Forks and Derivatives: A high number of forks or derivative projects can indicate the project's influence in the open source ecosystem. However, it's essential to ensure these forks aren't competing directly with the original project.


Metrics to Watch:


  • Number of Forks: Indicates interest and potential adaptations of the project.

  • Notable Derivative Projects: High-quality or popular derivatives can boost the original project's reputation.


Examples:


  • Red Hat: One of the most successful open source companies, Red Hat (acquired by IBM) offered enterprise-level support for its Linux distribution. Investors would monitor the growth in the number of enterprise contracts and the average contract value as key growth metrics.

  • Elastic: The company behind Elasticsearch, an open source search and analytics engine. Elastic offers premium features and support, so monitoring the conversion rate from free users to paying customers would be crucial for investors.

  • MongoDB: MongoDB is a popular open source NoSQL database. While the core database is free and open source, the company offers a range of commercial products and services, including MongoDB Atlas (a fully managed database service) and Enterprise Advanced (which includes features like advanced security and auditing).

  • Docker: Docker provides containerization technology, which has revolutionized the way applications are developed and deployed. While the Docker engine is open source, the company offers premium versions like Docker Enterprise for businesses with added features and support.

  • OpenBB: OpenBB is a leading open-source investment research software platform that gives access to high-quality financial market data and analytical tools. While the OpenBB Terminal is free and open source, the company offers paid PRO version with added features and support.


Investing in open source companies requires a nuanced understanding of their unique growth drivers. By focusing on the metrics outlined above, investors can gain a clearer picture of an open source company's potential and trajectory. As the open source movement continues to grow, recognizing these metrics will become increasingly essential in the investment landscape.



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