Everyone wants to invest in open-source startups now

Welcome back to The TechCrunch Exchange, a weekly startups-and-markets newsletter. It’s broadly based on the daily column that appears on Extra Crunch, but free, and made for your weekend reading. Want it in your inbox every Saturday? Sign up here.

Ready? Let’s talk money, startups and spicy IPO rumors.

Happy weekend, everyone. I hope that your week wasn’t too hectic and that you are getting a good recharge in. That said, we have a lot to talk about.

Something that has been cropping up more and more in my inbox, SMS folder and Twitter DMs are venture rounds from startups with an open-source backbone. Essentially, startups have roots in an open-source project, often with the progenitors of that open tech inside the company itself.

A good example of this at the very end stage of the startup world was Confluent. The company went public this week to pretty good effect, pricing above its IPO range and later appreciating further. Confluent is predicated on the open-source tech Kafka, which you’ve probably heard of.

The Exchange caught up with Mike Volpi of Index Ventures, an early backer of Confluent, on the company’s IPO day. During our chat, we got to nibble on the open-source (OSS) startup world, which Volpi said changed dramatically in recent years. From his telling, venture investors back in 2015 weren’t too hyped about open-source startups, arguing that there already was one (Red Hat), and that that was going to be roughly about it.

If we did our math correctly, Index wound up with a stake worth in excess of $1 billion in Confluent at its IPO price. So, the haters were wrong about OSS.

That said, Volpi added that while he’s as bullish on open-source-focused startups as before, the market has become increasingly picked over as more investors pile into backing the model. That inventors are putting more money to work in the space is not a surprise if you’ve been reading startup funding coverage. BuildBuddy is an example that I wrote about last December. Ron covered Tecton and Airbyte recently.

The trend of venture interest in OSS has been building for some time. Hell, VCs wrote about an explosion of open-source startups for TechCrunch back in 2017. But the Confluent IPO and the recent wave of funding rounds for startups in the space seem to indicate that market appetite for such companies has reached a new, higher plateau. (If you are building an OSS-focused startup and recently raised capital, say hi.)

More on Confluent’s IPO

The Exchange also spoke with Confluent CEO Jay Kreps on his company’s IPO day. A few notes from that chat are worth our time. Here are our key takeaways:

  • Investing is never going back to “normal”: That venture capitalists were able to start doing deals over Zoom was only so surprising. After all, you’d expect your average VC to be somewhat technology savvy. But Kreps said that his IPO roadshow worked well over digital channels, and that he was able to talk to more folks, more quickly than if he had been jet-hopping around the country for face-to-face meetings. If the even more conservative public-market investor set is fine with Zoom, digital pitching is a done deal.
  • Public markets are still burn friendly: Confluent is a quickly growing software company that is not yet profitable. Its IPO reception is a good indication that losing money remains perfectly acceptable in today’s market. Per Kreps, if you have a huge market — he reckons that Confluent has a $50 billion market to attack — and can show that capital is being invested — CEO code for not being utterly torched by an inefficient business model and cost structure — then losses are just fine. This matters for Q3 IPO hopefuls who have more growth than net income. Which is most of them.
  • Even public investors like open source: The Exchange also asked Kreps about being an open-source company approaching the public markets. Was it a positive or negative? A positive, per the CEO, adding that technology has a history of being built around open standards, which means that OSS fits neatly into historical trends. And he added that because open-source projects can have strong organic momentum, it can help public investors see future growth at the corporate level. Neat.

OK, how about even more open source news?

Hope you like open-source software news, because I have even more for you. Earlier this month, Prefect raised a $32 million Series B. I didn’t get to cover the round when it happened, but did catch up with the company this week for a quick chat.

The company is based around the PrefectCore, an open-source project. PrefectCore helps companies make sure that their data inflow is set up correctly, focusing on things like scheduling, monitoring, logging and so forth. The company calls this sort of work negative engineering; it falls into a dead space of sorts. No one really wants to work on it, per the startup.

Notably, Prefect, instead of offering a hosted version of its open-source project, instead sells a monitoring service. It thinks that hosting OSS projects is a somewhat old-hat way of monetizing such projects. So, instead of selling hosting or feature-gating, the company’s commercial product is an API that tracks what PrefectCore is managing. If it reports all green lights, good shit, you’re in swell shape. If not, you have an issue.

But what matters is that Confluent shows that OSS startups can reach a huge scale and become big IPOs. And Prefect indicates that there may be even more ways to skin the OSS cat when it comes to making money off open-source software.

So, expect more OSS VCs deals to land this year.