Invest in Open Source with Joseph Jacks

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 there's a specific type of startup that I focus on investing in — a startup where the creator is focused initially on building an open source technology of some kind, typically a project built towards addressing some problem for developers, built in the open transparently, that allows people to see the technology in its entirety. You can read the entire source code, and you can actually modify and change that technology yourself.

The interesting thing about the startups that I invest in through my fund — which is basically a venture capital fund — is that we invest money on behalf of others, limited partners. Our fund makes investment decisions in early-stage startups that fit our investment thesis: we identify and develop a point of view around open source technologies that we think can really be the basis, over time, for very large and impactful businesses.

Alexis:

So tell me about the pivotal moment that led you to start OSS capital?

Joseph:

I was previously an entrepreneur for a number of years. I started a couple of startups that really resemble our thesis — companies building a commercial opportunity for the founders, investors and ecosystems around some open source technology. I developed a pretty strong understanding of this approach for a few years just as an entrepreneur. I also got to know a bunch of people in the venture capital industry, and a lot of the observations I developed there motivated me to start OSS Capital.

There were a few structural things I learned about venture capital. The main one is that very few venture capitalists have a clear focus mandate. If you survey the top funds, the way they describe their focus often boils down to: "we like to invest in great people building great companies." It's really difficult to get a sense of what they actually focus on.

The other thing was that, having worked at a pretty early open source company called Talend (originally from France), and then at a couple of fully proprietary software businesses, I developed the point of view that open source companies are a different species of company — unique on many dimensions, not just one. The combination of those two observations — very little focus in venture capital, and open source companies being categorically different — really motivated me to start OSS Capital. I noticed no one else was building a fund focused exclusively on investing in open source founders, and that gave me the conviction to do it. This was around 2017–2018.

Alexis:

Yeah, it's different. If you're a fund and you want to invest in IP, you don't really have IP — at least not the way people traditionally think about IP. So it requires a real focus, and I like that you're really focused on something.

Joseph:

Yeah, that's true. It requires a change in mindset and revisiting a lot of previous assumptions and points of view on how intellectual property works for sure.

Alexis:

So tell me what you are looking for when you meet with startup founders.

Joseph:

Well, I don't meet with startup founders, really. I focus exclusively on this world of open source technology, and most of our investments — probably 95% — have been made by developing a point of view, then developing a thesis around a project that exists in the world, and then contacting the creator of the project, introducing ourselves, and telling them we really like what they're doing.

A lot of the hard work is in developing conviction that the people behind creating the project are also the right people to start a company that can raise millions of dollars and potentially build a large business. We spend a lot of time investigating that. A lot of the time we don't believe it's true and we just don't invest. But sometimes when the stars align, we invest.

It's quite different from the traditional venture capital approach where you're getting pitches all day and sitting through pitch meetings. 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, which categories can be created at what points in time, looking at changes in the software industry, the rates of growth in different areas, new categories that didn't exist before. We try to understand whether open source has an advantage in a particular area.

A big part of our job is separating signal from noise: what stands out, what's actually really interesting from a growth standpoint, from an engineering quality standpoint. There's a lot you can determine just by looking at GitHub and at publicly available data. 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 initial diligence. Of course we hold investments for a very long time — we're not trading in and out of them — but the data-driven aspect is very prominent in the way we develop an investment thesis.

Alexis:

Yeah, it's really interesting. Of course, it's built in the open so you can do the due diligence by yourself. So how do you help those project people go from the project to building a company?

Joseph:

Almost all the time when we lead or co-lead a round, we are involved when the company is incorporated or we actually help incorporate the company. It's at the very earliest stages — when the creators have decided 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.

The main things we help with are: the formation of the team, an understanding of the business plan and a monetization strategy, thinking about competitive market dynamics, and understanding the broader ecosystem. Maybe the main contribution we bring is making sure that — not only on an advisory basis but on a co-investment basis — other really great individuals who've built hugely successful open source companies over the last 15, 20, 30 years actually come along on the journey with us.

We really want to create a mechanism for knowledge transfer. We have this network of people who join us as angel investors in rounds: investors in our fund, advisors to our companies — people who, from the idea stage, built companies like Red Hat, Confluent, GitHub, MongoDB, Elastic. They can be incredibly valuable to new founders trying to figure out a lot of things they're encountering for the first time. We also connect founders with each other so they can learn from each other directly.

Alexis:

I love that idea of leveraging the power of the community to really build other companies. 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 we put up on our website. I wouldn't correct the statement — I think 50% is actually low as a rough estimate.

Think about a company building a totally proprietary product in isolation. The energy required to build that product is a function of how much time and resources you need to invest before you get the product to market. By the time you launch, you've already spent a lot of time and energy. With open source it's very different. You start building in the open from the beginning. The project benefits from accelerated feedback from many more people than would be possible if it was built in private. That makes the product better at a faster rate, and reduces the cost of bringing the technology to a state of stability and maturity that would otherwise require many millions of dollars in a fully proprietary approach.

On the customer acquisition and revenue side, the capital efficiencies are even greater. Developers in the community use the technology in many flexible contexts, and by the time you navigate to a buyer inside an enterprise, they may already be users of your technology and advocates internally. The friction of selling drops dramatically.

The specific 50% figure on the website was actually pointing to something more precise: a cohort of open source businesses in the last few years that reached $100M or more in revenue raised, on average, about a quarter of a billion dollars to get there — series seed, A, B, C, sometimes D. My long-running hypothesis, which we are actively testing with OSS Capital, is that in all of those cases the companies raised more money than they needed to in order to reach the same outcomes. Part of our mission is to change a few things about how open source businesses are built so they can 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:

I'm very biased in thinking the rate of open source is only expanding and growing. One proxy is GitHub: when Microsoft acquired them in 2018 they had around 30M users; they're going to reach something like 100M registered users pretty soon. Not every account is creating open source, but a meaningful fraction is.

More broadly, more humans are becoming aware that one of the highest-leverage and most impactful careers you can pursue is software engineering. I do not subscribe to the point of view that AI is going to be writing all the code for us. We need to express very precise instructions to the computer in order for it to do what we want, and current AI models can't generate the level of precision and nuance needed to build complex software products end-to-end.

And if you look at the 30 to 50 million professional software engineers in the world, I'd argue 99.9% of them heavily depend on open source — fundamentally depend on it. Without open source tools and infrastructure they would not be productive. Imagine having to write your own compiler, your own programming language, your own application server, your own networking stack, your own database from scratch. You'd never get anything done.

A lot of non-technical people ask: why do humans contribute so much time to open source when they're not getting paid? It's revealing of how much benefit and leverage engineers get from helping other engineers. There's a really interesting tribal aspect — engineers are very motivated to help other engineers, and the way they do that most efficiently is by contributing to open source. There are two types of motivations: extrinsic, where you're doing something for a measurable reward, and intrinsic, where you're doing it out of the goodness of your heart, to learn something new, or to participate in a positive system. Open source is largely about that intrinsic motivation, and that's what keeps the flywheel turning. I actually think open source will disrupt and transform pretty much every category in the digital world over time.

Alexis:

Wow, 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 is humility. People who have accomplished a lot and are extremely successful at what they do tend to have humility, and it's something that has really stood out to me — and something I'm still personally working on. I can definitely have a lot of arrogance and hubris a lot of times, so developing humility is a really important attribute that I admire.

It's easy to forget when you're trying to identify the absolute best people in some area. The vast majority of the time, people who have accomplished really huge things, if you really sit down with them, are very humble. They almost think very little of what they've built — they think "I learned a lot from that, but I don't think that's what defines me as a human." There are some leaders who don't have that quality; they may be very accomplished but they lack the self-awareness that comes with humility, and that becomes very valuable in conversations, when you're partnering with them, collaborating with them, or trying to solve a problem. That's probably the number one thing I pay attention to these days.

Alexis:

Excellent. Really beautiful and inspiring. Thank you very much, Joseph, for joining the podcast today.

Joseph:

Thank you, Alexis, for having me.