Over the last years, people have moved from innovating in secret labs to innovating in the open, and open-source became the way to define industry standards. Today, I am pleased to have Joseph Jacks on the podcast to explore the open-source world. Joseph is the founder and General Partner of OSS Capital a fund that exclusively focuses on early-stage commercial open source companies.
In the episode, we discussed:
- Why open source as a focus for investment,
- Why invest in projects and not teams,
- Commercial open source companies are more capital efficient,
- More and more people contributing to open source, extrinsic and intrinsic motivations,
- The one leader’s trait that really matters,
- And so much more!
Listen to the episode:
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Here is the transcript of the episode:
Alexis
This is Le Podcast on Emerging Leadership. I am Alexis Monville. Over the last years, people have moved from innovating in secret labs to innovating in the open, and open-source became the way to define industry standards. Today, I am pleased to have Joseph Jacks on the podcast to explore the open-source world. Joseph is the founder and General Partner of OSS Capital, a fund that exclusively focuses on early-stage commercial open source companies.
Hey Joseph, how would you describe your role to someone you just met?
Joseph
Well, I invest in entrepreneurs building companies around open source technology, and if you don’t understand or if you’ve never heard of open source. It’s basically a way of licensing a piece of software a piece of technology in a way that anyone can use or download or modify or really participate in the commercial opportunities around that technology and so it kind of gives you this permissionless dynamic a lot of people think of that as free. Free to use, free to modify.
Alexis
Interesting so investing in entrepreneurs, how does it work. Are you doing that by yourself?
Joseph
That’s essentially what I do. I have a venture capital fund. There’s a part of the world called private equity. So there’s public equity. A lot of people might be familiar with public stocks like if you look at Apple or Microsoft or Walmart or whatever public company that’s kind of called public equity and you can buy and sell shares of those companies as an individual retail investor in whatever country you happen to be living in. You have a few dollars sitting around and then there’s the world of private equity where private companies manage their businesses without the scrutiny and regulation of being a publicly traded company. So private companies operate with a lot less public oversight and government oversight but at the same time, they really produce, I believe, the vast majority of innovation and economic breakthroughs in the world. And so in the technology industry, there’s a part of the private company sector called startups and you know there’s a lot of different definitions for the word startup and sort of what that means. But startups essentially refer it to a group of people could be one person building some type of technology that solves a critical problem. An interesting problem for the world and addresses some critical pain points, could be around automation, could be around giving people more insights into some information or data, making some business processes more efficient, a lot of different things. And there’s a specific type of startup that I focus on investing in and it’s a startup where the creator Is focused initially on building an open source technology of some kind and so typically is a project that is built towards addressing some problem for developers and or is built in the open transparently and allows people to see the technology in its entirety. You can read basically the entire ingredients and source code around that technology if you’re interested and want to you can actually modify and change that technology yourself.
Joseph
For example, if you’re a consumer of an early product that might launch on Kickstarter or maybe a big company. Maybe a new Apple product or something and you wanted to be able to contribute and change and modify that product or technology in some kind of way. It would really be either impossible or very very difficult to do that unless that technology was open source. The interesting thing about the startups that I invest in through my fund which is basically a venture capital fund. We invest money on behalf of others, limited partners. It’s really all of my money and also other people’s money that I manage and basically, our fund makes investment decisions in early-stage startups that basically fit our investment thesis and so. Going back to our investment thesis, we basically identify and develop a point of view around open source technologies that we think can really be the basis for overtime very large and impactful businesses.
Alexis
So tell me about the pivotal moment that led you to start OSS capital?
Joseph
Well, I was previously an entrepreneur for a number of years I started a couple of startups that really resemble our thesis and there were companies building a business, building a commercial opportunity. For the founders and investors of those businesses as well as the ecosystems they were operating in around some open source technology of some kind and so I developed a pretty strong understanding of this approach for a few years just as an entrepreneur. And I also got to know a bunch of people in the venture capital industry and in that kind of category of asset management and a lot of the observations that I developed around that motivated me to start OSS capital and so specifically what I learned there were a few structural things that I learned about venture capital. The main ones is that venture capitalists, very few of them have a clear focus mandates. In other words, if you were to survey maybe the top ones or even maybe the top 50 capital funds, they really just, the extent to which you can get a sense of their focus boils down to “we like to invest in great people building great companies” and so it’s really difficult to get a sense of what they actually focus on. At least from my standpoint that’s one aspect I was always kind of confused by. When you learn about open source in the context of building a product or a business it’s really the fundamental thing. It’s kind of you’re building the entire product or business around some core open source technology. What I developed as a point of view over many years from working at pretty early open source company called Talend which originally started in France and worked at a couple of other companies after that were fully proprietary software businesses is, and I developed the point of view that though those companies were different kind of they’re just like a different species of company right? There’s sort of unique on their own, on a lot of different dimensions. Not just one dimension but many many dimensions and those observations really stuck with me and so the combination of first noticing that there was very little focus in venture capital as an issue and then that combined with there’s really kind of No one types of technology companies. There’s ones that are just a fully proprietary technology behind the scenes and you’re commercializing and monetizing that somehow as compared to a sort of a type of company where the core technology behind the company is an open source project of some kind is a very different kind of company. I really started to believe and just that belief kind of continued to intensify over the years that building a commercial open source companies or open core orientiented companies and we really have to kind of invent new language to really describe why these companies are very different in many different aspects but basically those observations, the fact that I felt, and I still really largely feel that venture capital has very little focus and then being that open source companies are really fundamentally different and maybe they deserve their own unique kind of focused structure, really motivated me to start out as capital. I guess the one piece that gave me the confidence to do it was I felt at the time and maybe I feel this slightly less. So now I still probably feel this a little bit but maybe a healthy dose. I felt extremely unqualified to try to basically, solve this problem in a way that would require basically starting my own venture fund and going out and raising money from people and making investments and proving out the thesis. Until I noticed that no one else was really doing it. I had sort of made some assumptions that other people might jump into this and build a fund focused exclusively on investing in open source founders. But after getting to know a bunch of folks in the venture world, it quickly became apparent that was most likely not going to happen, not because people didn’t feel like it was a good idea. Good idea or not but really that required a very deep amount of conviction and belief that open source companies are sort of categorically different, qualitatively different and could actually grow into a large meaningful category on their own over time right? And so this is like 2017 2018 kind of timeframe. So yeah, that’s basically why I started the fund and yeah been a fun journey since then.
Alexis
Yeah, then I can imagine. It’s different If you’re a fund and you want to invest in IP and you don’t you don’t have any Ip or not the way that people think about Ip in the more traditional way. So it’s of course a default focus and I like the fact that draw really focus on something or gone he wanted to say something.
Joseph
Yeah, that’s true.
Ah, no, no, no I think you’re exactly right? it requires a change in mindset and to revisiting a lot of previous assumptions and points of view on on how intellectual property works for sure.
Alexis
Um, so tell me what you are looking for when you meet with startup founders.
Joseph
Well, I don’t meet with any startup founders. Really I mean I focus exclusively on this world of open source technology and it’s interesting like most of our investments I would actually say probably 95% of our investments have been made by developing point of view. And then secondarily developing a thesis around a project that exists in the world and then sort of a none step contacting the creator of the project introducing ourselves. And telling them that we really like what they’re doing really a lot of the hard work and probably most of the hard work is in developing conviction that the person or the people the team behind creating the project are also the right people to start a company that you know can raise millions of dollars and go and potentially build a large business and so we spend a lot of time investigating whether the creators of the project can also be potentially great founders of building a company. And a lot of the time we don’t believe that’s true and we just don’t invest. But sometimes when the stars align then we invest. It’s quite different from the traditional venture capital approach where you’re sort of getting pitches all day and you’re sitting through pitch meetings and you’re taking introductions or whatever like we’ve certainly been introduced to a handful of people and we made some investments that way but I would say the vast majority of the time is we’re really just looking at a lot of data in the open source world developing a point of view about which markets are getting disrupted over others. And which categories can be created at what points in time we’re looking at changes in the software industry, the rates of growth in different areas like new categories that exist that didn’t exist before and we really start to kind of understand does open source have an advantage in a particular area for whatever reason and if it does the really interesting thing about open source is there’s so many implementations it’s kind of this cambrian explosion of implementations and approaches that starts to happen. Once it’s pretty clear something could work. Have a lot of people really trying to work on proving that out in the open source world. So a big part of our job is really just trying to understand from separating all the signal and the noise what stands out. What’s actually really interesting from a growth standpoint, from an engineering quality standpoint. There’s a lot of things that you can determine and understand by really just looking at Github and looking at the data. That is publicly available really to anyone and so it’s actually extremely fascinating doing what we do as a private seed stage venture capital investor has a lot of similarities to the way hedge funds manage public equity investments, at least in terms of the way they do some of the initial diligence I would certainly say it’s very different terms of how we hold the investments. We hold them for a very long time and we never we’re not selling and trading in and out of them like hedge funds, but the data-driven aspect is very intensely prominent in the way we actually, basically develop an investment thesis and a point of view about specific investment.
Alexis
Yeah, it’s’s really interesting to see that. Of course, it’s building the open so you can do the due diligence by yourself. So How do you help those project people to go from the project to building a company.
Joseph
Well a lot of the time I would say almost all the time when we lead or are the co-lead of a round we are involved when the company is incorporated or we actually help incorporate the company. And so it’s pretty much at the very earliest of the stages like when the project is at a point where the creators have decided and they’re interested in building a business around the open source technology and they appreciate that the purpose of that business is to invest and continue to grow the open source technology and just really continue to do what they’ve been doing the main things that we are helpful with when we make an investment are kind of multifaceted but I’d say the main things would be the formation of the team of the people that basically comprise the company and join the company. The formation of an understanding of a business plan and a monetization strategy whether that’s executed immediately or over time over the course of many years. We help a lot with thinking about competitive market dynamics understanding the broader ecosystem understanding kind of how the ecosystems coming together. A lot of people would maybe say this is the main contribution that we bring is we really make sure that it’s not only on an advisory basis. But a co-investment basis that other really great individuals who’ve built hugely successful open source companies from the last thirty you know 15 20 30 years actually come along the journey with us. It’s not that we like to be alone and we don’t mind being alone and we have a lot of you know, very high conviction in pretty much every investment that we make but, we really want to create a mechanism for doing knowledge transfer. We talked about this a couple of days ago but we have this kind of network of people that join us as angel investors in rounds a lot of them are our investors in our fund a lot of them are just advisors to companies that we’ve worked with. And they’re really great people I mean they’re individuals who basically from the idea stage and as founders built really amazing companies like Red Hat, Confluent, Github, Mongodb, Elastic, many really great open source companies that you think of today. A lot of those people can be really valuable and helpful, partners to new founders that are really just trying to figure out a lot of things that they’re encountering for the first time but other people may have already developed different points of view and and have encountered in the past already. So we really try to do this kind of knowledge transfer process where bringing other people onboard as co-investors as Angels and as advisors in really any kind of capacity really just to help these founders that we work with be more successful in whatever they’re dealing with whether it’s like hiring or building their community in a certain way or, even raising their next round of funding or should they raise the next round of funding. You know the different points of view on different other investors just a lot of different topics and so. Those are the kinds of things that we tend to help with early On. Because the companies are so early they’re all sort of facing similar challenges around like how to how to manage the growth of their communities, how to make their first or 10 hires, how to think about Market dynamics and their business Model. We tend to kind of cross-pollinate a lot of the ideas across the portfolio and also connect the founders with each other so they can kind of learn from each other as well and it’s actually reasonably easy to do that because all the companies are, kind of somewhat somewhat homogenous and similar and at least in terms of their fundamental structure. They’re all building companies and businesses around some core open source projects. They tend to learn from each other pretty pretty rapidly.
Alexis
Oh yeah I love that idea of leveraging the the power of the community to really build other companies I like that I read on your website that commercial open source software companies are 50% more capital efficient. Did I read that correctly? How would you explain that?
Joseph
Yeah, that’s something that we put up on our website. Actually our website currently today I think today’s June Thirtieth 2022 I think it’s the same website, we’ve actually had on on the internet since September Twenty Eighteen so we’re we’re actually pushing out a brand new website pretty soon I wouldn’t say that to correct the statements on the website. I think they’re all pretty accurate. Still 50% I think is low as a rough estimate. There’s a reason why I really deeply believe that open source businesses, commercial open source businesses are more capital efficient than other types of businesses and really the main reason is the following. So like if you think about a company that is building a totally proprietary product in isolation, in a cave, or in a closet or whatever metaphor you want to use. The energy required to build that product is a function of how much time and resources you need to invest in order to get that product delivered to the market or into some state where you can actually start seeing adoption and and typically you’ll really see a couple of a couple of things like the cost for doing that will either be subsidized by the individuals behind that technology themselves so they’ll sort of be self-funding that it will be through other sources of financing. You might have to raise money to sort of build that initial technology and prove that out or or another company could be funding it somehow you could be doing it nights and weekends on the side but by the time you launch something you kind of typically already spent a lot of time and energy into building that out. So it really just is is a lot more expensive to do that. With open source, it’s very very very different. The open source you have this kind of idea, you start building in the open from the beginning a lot of projects don’t quite do this and they they build in private and they have a lot of engineering cycles invested before sort of quote unquote flipping the switch on a repository and making it public. I Guess from that standpoint you could say that they’re very similar I mean you still have to make the investment in building out the project and building out the technology but with with open source because you have this dynamic where the project can actually benefit from an accelerated feedback input from many more people than possible if it was built in private and it was sort of a closed Beta and you had a wait list or whatever. It just makes the product and the technology better at a faster rate and as a consequence it reduces the cost to bring the technology to a state of stability and maturity and development velocity really that would otherwise be possible with a proprietary approach and so as a result by the time that we invest in a company around an open source technology. Most of the cases show that the project already has, a sort of an equivalent amount of adoption testing QA, development and really contribution from a lot of people that otherwise you’d have to kind of raise many millions of dollars to produce if you were building a fully proprietary technology company and that’s just on the research and development sort of core technology side of things if you look at customer acquisition and revenue and building a business. Lot of the things that we’ve seen as well are that capital efficiencies are even greater in in that area. So with open source projects, you have this developer community that could use the technology in a lot of different ways, and in many different flexible contexts and lots of use cases. They could be building out and by the time you sort of navigate to a buyer inside of maybe an enterprise organization an it or a line of business or a CTO organization, a lot of the time they might actually already be users of your technology and they might already be advocates and they could in fact, they could just survey their developer community and sort of recognize wow we’re actually already using your technology and everyone loves it. So by the time that we want to start negotiating a contract or you know understand what your product or your services were already sold like there’s no need to sell us and at that point it starts to become much easier and the friction starts to to drop dramatically for the startup or for the company wants to sell something that thing efficiently and sell it with the least amount of friction possible and so instead of the old way of selling software. This is actually not necessarily the old way I think this is actually largely still how it works in sort of proprietary saas world is you have a lot of customer acquisition dollar spent to just get in front of the customer and get users and get adoption and then you have another big wave of dollars spent to convert those um those users into paying customers and so that’s why I think we have in in this kind of saas category we have all these terms like viral coefficients and all the conversion rate heuristics. All these different things that are really optimized around. Okay, you’ve spent a certain amount of dollars to just get the adoption wheel flywheel going and then you have another amount of dollars that you spend to figure out how to convert those users and I’m not saying all those things go away completely. Obviously you still have to invest time and energy and sort of navigating how to convert all of your of your adoption into a business of some kind, fractionally or marginally speaking. But with open source has a sort of phenomena that helps not just with distribution and marketing. It also helps with quality of the product, innovation rate of the product, trust of the product and so many other things. I believe the 50% capital efficiency percentage that you’re that you’re pointing to on the website there is pretty low and in fact, I think that percentage amount was actually referring to something a little bit more specific and so I can kind of explain what it is in like 30 seconds or so but it’s basically pointing to there’s a cohort of open source businesses in the last kind of first years that reached 100M or more in revenue what I was referring to in that percentage was that on average those businesses went out and raised I believe about a quarter of a billion dollars to reach that level of revenue.
Joseph
Meaning that they went out and raised a seed round a series a, series b, a series c, and in some cases a series d to reach a 100M revenue business and I would argue and and this is a long-running hypothesis that we’re actively testing with OSS Capital.
Alexis
I Get this.
Joseph
And hopefully, we’ll see what the data looks like in the next 5 years or something, but I would argue that in all, not some all of those cases, those companies raised too much money that they did not need to raise in order to reach the same outcomes and the same revenue milestones, in, in fact, the same amount of time. So, as a result, you can say those companies were overfunded or they raised money unnecessarily, however, you want to express that is basically part of our mission with OSS Capital is to change a few things about the way open source businesses are built so that they can be better understood from a fundamental standpoint and basically run more capital efficiently.
Alexis
So based on all that we can expect that we will have more people creating open source software in the future right? Do you see that really growing?
Joseph
Well, this is an interesting question There’s a lot of research and reports that I can point to, maybe you can include them in the show notes, that show the rate of open source. Some people point to it as declining, some people point to it as growing. tend to be very biased in thinking that the rate of open source is only expanding and growing. One proxy for that would be looking at Github’s data. They’re going to reach something like 100M registered users pretty soon I think when Microsoft acquired them in 2018, they were around 30M users. So they’ve grown quite a lot over the last few years. It’s not to say that every registered account on Github is someone creating open source I don’t think that’s true. It’s probably a fraction of that 100M that we’re about to see on GitHub actually creating open source projects, but one thing that I do think is true in a broader sense is more humans are becoming aware of the fact that sort of the highest leverage and the most impactful professional career. You can pursue is in software development, software engineering and more specifically building software products and I believe that building software products will over time become more and more automated and humans will need to learn fewer technologies and fewer languages to build complex innovative products, but I do not subscribe to the point of view that the ai is going to be writing all the code for us I do not believe that is true, and so I think more people, more humans will need to learn how to program and write code for computers because with the way computers are currently built, we need to express very precise instructions to that computer in order for the computer to do what we want it to do and I don’t believe that the the Ai models today can generate the level of precision and nuance needed to build complex software products that do very arbitrarily complex things for humans whether it’s infrastructure software, database, software application, software what have you? there are too many wide encompassing aspects of the technology stack that need to be fine-tuned and tweaked and implemented using code and software largely stitched together, managed, or written by hand via humans and so as a result I can only be most confident in the fact that as the software and that sort of this digital technology career starts to become more compelling and interesting to more people because this is really where the highest leverage and the highest compensation is in in the tech industry, more people will realize in order to be the most differentiated you really have to learn. You have to learn how computers speak and as a result you have to learn how to program and I think as that happens if you look at all of the software engineers today, all the professional software engineers, there’s a lot of debate we can do around this but like I think largely speaking most people would agree, there’s somewhere in the order of 20 or 30M software engineers in the world like professional software engineers. Some people say 50M, so let’s say it’s somewhere between 30 and 50M. I would argue, and I think most people would agree that 99.9 of all of those software engineers heavily heavily depend on open source, and it’s not a question of how much they depend on open source. It’s really they fundamentally depend on open source like without open source technology and tools and infrastructure. They would not be able to do their jobs period like that. They would not be productive like imagine as a developer that you went to your computer, and instead of using millions of projects that exist, that you can readily access on the internet for free and pull together in your application to be productive and build something for the World. You had to write your own custom compiler from Scratch. You had to write your own programming language from scratch. You had to write your own application server from Scratch. You had to write your own development framework from Scratch. You know you had to write your own networking stack from scratch and your own database runtime from scratch and a long list of things. You would never get anything done. It would take you decades of your life to get anything done if you were very talented in the modern world, and so I think that there there’s this. There’s this leverage that exists with open source that is unquantifiable and immeasurable, and as a result, software engineers really greatly appreciate that. And they continue to participate in that movement. This is an interesting kind of Phenomena that non-technical people. People who do not code or do not understand how computers work. They just don’t understand how it works. A lot of time when I’m talking to our investors who, in a lot of cases, are non-technical institutions or other individuals and they do that. They’re not familiar with open source. They’ll often ask this question. Why is it that humans continue to invest so much of their time in this open source thing when they’re not getting paid and they don’t have any economic benefit and. It’s kind of interesting that people ask this question because it’s very revealing of the lack of appreciation for, how much benefit and Leverage engineers get from helping other engineers. Right? There’s this really interesting tribal aspect where engineers are very motivated to help other engineers and the way that they do that most efficiently and effectively is by contributing to open source and sharing their project and sharing their their insights with others. And that just perpetuates the growth of this community and so I think as more people come into the tech industry and appreciate that software engineering is the highest leverage discipline.Then they become software engineers. They realize that the only way they can continue to benefit from all the things that come with that is to really contribute to open source and to give back to that community. I think that just continues to expand the flywheel of open source and it continues to accelerate the fundamentals. Another aspect that people don’t really appreciate is there’s really two types of motivations in the world. There’s motivation to do something for an extrinsic reward sort of like an extrinsic motivation I’m doing something to get paid some monetary or some measurable reward. Or you’re doing something intrinsically you have you have this intrinsic motivation you’re doing it out of the goodness of your heart or in order to learn something new or to have a good feeling about participating in some positive system and that’s really what open source is all about people do it for the intrinsic reason that helping others sort of overrides all the other motivations. And they want to do that specifically because they’ve benefited from all these infrastructure that already exists and so I think it’s kind of a counterintuitive thing. It’s a little bit difficult for non-technical people to understand. But I think it’s pretty profound and I believe that’s the the kind of the main reason open source will continue to grow and be be a huge force. Overtime in the future and actually furthermore I have a much more kind of aggressive point of view around this which is that I think open source will not only just continue its current pace. But as people realize more how powerful this approach is for building technology I think that we’re going to see open source disrupt and transform pretty much every category in the at a minimum, the digital technology world which is all of software all of consumer applications, pretty much anything digital that you can imagine.
Alexis
Wow that this is really impactful and speaking about intrinsic motivation, changing the world is a good one. I love it. Joseph, you worked with a lot of leaders among those who you admire what’s the one trait that stands out to you.
Joseph
I would say the main trait that stands out to me is humility. Um people who have accomplished a lot and are extremely successful at what they do tend to have humility and it’s one thing that I’ve noticed. And that has really stood out to me and something that I’m still personally working on. I can definitely have a lot of arrogance and hubris a lot of times. So developing humility I think is a really important attribute that I really admire and it’s actually something that is easy to forget like when you’re really trying to identify the absolute best people in whatever area that you’re looking into and you’re trying to find the best insights and the most skilled people who have just a level of depth that is hard to express, because it’s kind of experiential or some individual has accomplished some massive outcome or built something really huge. I would say the vast majority of the time people who have accomplished really huge things if you really sit down with them and get to know them. They’re very humble and in fact, they’re so humble that they sort of look back at everything that they’ve built and they think, they almost think very little of it. They sort of think I learned a lot from that but I don’t think that’s what defines me as a human and it’s an interesting quality that I appreciate a lot. Probably the main quality. The reason I’m so interested in this is I’d say there some leaders who don’t have that quality where they may actually be very accomplished and may be extremely good at what they do, but they don’t have this humility that comes with a level of self-awareness that becomes very valuable in conversations when you’re partnering with them or you’re collaborating with them or you’re trying to solve a problem and that’s probably the number one thing that I pay attention to these days.
Alexis
Excellent, Really really beautiful and inspiring. Thank you very much Joseph for having joined the podcast today.
Joseph
Thank you Alexis for having me.
Photo by Ian Schneider on Unsplash