Inside Open Source #4
All things Open Source: Interesting reads, startup news, trivia and views from Europe
Welcome to issue #4 of the Inside Open Source Newsletter
Every month I write about interesting developments in the European Open Source ecosystem and related topics that I come across. Check out the May issue below and subscribe if you like what you read :)
This month’s topics:
🍿 ”Open Source is Eating Europe” by Nauta Capital
🔎 Deep Dive European COSS champions: Elastic
💡Thoughts from the Inside
“The power of Open Source is the power of the people. The people rule.”
Philippe Kahn - founder of Borland, Starfish Software, LightSurf Technologies, and Fullpower Technologies
🍿”Open Source is Eating Europe”
Nauta Capital recently published their latest research report on Open Source software in Europe and obviously there is a lot of super interesting stuff to find in it —> must read!
Of course, in a report like this, the obligatory startup landscape slide must not be missing. Great to see so many promising companies in the European ecosystem!
In the report, Nauta’s analysis of the OSS & COSS "Flywheel” particularly stood out. The main thesis behind the analysis is, that there is a positive interconnection between the classic OSS model and the commercial aspect of COSS models. Basically, COSS companies have the advantage of a superior talent acquisition source if they were able to build a well-functioning and growing developer community. By complementing the external developers with internal resources (hired from the community), the companies can deliver a superior product - in terms of codebase quality, which in turn attracts more developers from the community. Ta-da: a Flywheel 🎉🔄
I totally agree with some aspects of the analysis, yet I have two thoughts:
I would be super interested in having some data or hear some operator voices on the significance of the developer community as a recruiting channel. OSS developers are a strange breed - they spend their free time contributing to a software project without getting paid (apart from some Patreon OSS superstars) and their efforts are mainly incentivized by strong social embeddedness in the specific community. I would imagine it not to be easy to get these people on board in a regular fashion.
Nadia Eghbal had some really good thoughts about the hidden maintenance costs of community management in her book “Working in Public”:
OSS incurs ongoing maintenance costs, both marginal (costs that are a function of its users & contributors) and temporal (entropy, or costs associated with decay over time)
one big chunk of maintenance costs is community moderation
the value generated in most OSS projects follows a power-law distribution: a few contributors generate most of the value (and code volume) and there is a big long tail of casual contributors that have made one contribution or less
this long tail of casual contributors generate a lot of work for the maintainers of a project (the company in a COSS model), especially if the community is growing
so I think there could be a saturation in the potential recruiting value behind the community growth (contributors, not users) and the marginal costs of maintenance for community management —> a mechanism that would eventually create friction in the flywheel
🔎Deep Dive European COSS champions: Elastic
Fact Sheet:
founded in 2012 in Amsterdam (Netherlands)
prev. known as Elasticsearch
Product: open-source self-managed and SaaS offerings for search, logging, security, and analytics use cases
raised $162m in venture capital from Benchmark, NEA, Index and SV Angel
IPOed in 2018 at a market cap of roughly $5bn
currently ~2,200 employees, $427m yearly revenue (+58% growth & >70% gross profit margin), and a market cap of ~$10bn
Founding story:
The origin of Elastic was a tool called Compass, a search engine that Shay Banon (founder of Elastic) built to manage the growing recipe directory of his wife in 2004. He started Compass with the belief that search is something that any application should have, and the aim was to have search integrated into a Java application as simple as possible. During the lifecycle of Compass, he tried to address the scalability aspects of a search solution and realized that he had to build something entirely new from scratch in order to address this issue. Shay puts it like this:
“The proper way to solve the scalability problem is by running a “local” index (a shard) on each node, and do map reduce when you execute a search, and routing when you index (this is a very simplistic explanation). So, I started out building elasticsearch. Its basically a solution built from the ground up to be distributed.”
If this explanation is a little too abstract, you can find a good overview of the basic concepts within Elastic here.
Shay open-sourced elasticsearch in 2010 and the user reactions were overwhelming. Soon a community began to build around elasticsearch, in which Shay Banon found his co-founders Steven Schuurman, Uri Boness and Simon Willnauer. Together they founded the company Elasticsearch Inc. in 2012.
After just 18 months after founding the company, Elasticsearch raised more than $100m in 3 rounds from New Enterprise Associates, Benchmark and Index.
The Elastic Stack:
The Elastic Stack is a collection of open-source products that helps users send, receive, process, and then search, analyze, and visualize data from any type of source and in any format in real-time.
Elasticsearch is a highly scalable and flexible search and analytics engine
Logstash is a server-side data processing pipeline that ingests data from multiple sources simultaneously, transforms it, and then sends it to a storage location (such as Elasticsearch)
Kibana enables visualization of data through charts and tables in Elasticsearch
Beats is a use case-specific data shipper, that enables users to send log data from hundreds or thousands of machines and systems to Logstash or Elasticsearch
Product offering:
Elastic is a search company that provides several solutions at its core, all based on one the powerful Elastic Stack. As Elastic puts it: “Whether you want to find documents, monitor your infrastructure, or protect against security threats, a large part of everyday tasks is closely related to search issues”.
Elastic Enterprise Search is a product to easily deliver powerful and modern search experiences. Users can add search capabilities to a website, an application, or an internal workspace
Elastic Observability is a solution to consolidate system log data, metrics, and Application Performance Management (APM) traces into a centralized stack in order to monitor and respond to certain events
Elastic Security empowers security analysts to prevent, detect and combat threats by offering SIEM, endpoint security, threat hunting, cloud monitoring, all based on the Elastic Stack capabilities
The solutions can be deployed on any platform (from the cloud to "bare metal") to immediately extract actionable insights from data of any type.
Business Model:
Many features of Elastic’s software can be used free of charge and some are only available through paid subscriptions, which include access to specific proprietary features and also includes support. Developers don’t need to speak with salespeople. Subscriptions for self-managed deployments typically range from one to three years, and many of their Elastic Cloud customers purchase subscriptions either on a month-to-month basis or on a committed contract of at least one year. Elastic offers support for their products only as a part of their subscriptions. In many cases, Elastic enters an organization through a single developer in a small team for an initial use case or application and expands. Given that potential customers are often already using the software, the company performs low-touch marketing towards users and higher-touch campaigns for qualified prospects.
The number of customers who represented greater than $100,000 in ACV was over 300 in 2018 and the average ACV (ARR / total customers) was $37,534.
The future of Elastic:
In the last years since its IPO, Elastic could demonstrate strong revenue growth rates and a steady gross profit margin of around 70% as well as a best-in-class Net Revenue Retention of ~130%.
Elastic is the undisputed market leader in the enterprise search segment and is becoming more and more competitive in the Application Performance Monitoring (PAM) market. Security seems to be a promising growth area for Elastic in the next years. And all these markets are growing like crazy in the next years with several underlying industry drivers. So overall there seems to be a bright future ahead and a lot of space to grow and expand for Elastic.
But obviously, there has to also be a downer here somewhere: in early 2021 Elastic announced that Elasticsearch and Kibana will no longer be open source! Elastic told their user base and the world that they will switch the source code of both programs from the Apache 2.0 license to the Server Side Public License (SSPL) and the Elastic license. Elastic stated, "This source code licensing change does not impact the overwhelming majority of our user community who use our standard distribution for free. It also has no impact on our cloud customers or customers with self-managed software." But while that may be true in terms of pure user numbers, it's a very different story when it comes to commercial users. That's because many large companies don't have contracts with Elastic. Instead, these companies use the Amazon Elasticsearch service. Elasticsearch is also available in other large public clouds such as Elastic on Azure or Elastic on Google Cloud, but in those cases Elastic has a business relationship with the cloud providers. This is not the case with AWS. So this is a move against AWS: “Our license change is aimed at preventing companies from taking our Elasticsearch and Kibana products and offering them directly as a service without working with us." As a result, AWS will now “step up to create and maintain an ALv2-licensed fork of open source Elasticsearch and Kibana”.
Some view this as a quite destabilizing dynamic for the Elastic ecosystem and many users are quite upset about this development. I honestly haven’t made up my mind about this development and its implications yet.
Let’s see what the future brings for Elastic and its users :)
I hope you liked this month’s edition! If you have colleagues or friends that you think would enjoy this type of content please share the newsletter :)
Sources:
https://www.elastic.co/de/
https://de.wikipedia.org/wiki/Elasticsearch
https://medium.com/@alexfclayton/elastic-ipo-s-1-breakdown-1b475bb8d70f#:~:text=Elastic%20is%20growing%20extremely%20quickly,go%2Dto%2Dmarket%20strategy.&text=Elastic's%20business%20model%20is%20based,software%20directly%20from%20their%20website.
https://www.forbes.com/sites/robertdefrancesco/2019/09/29/elastics-core-search-technology-powers-multiple-growth-levers/?sh=282f8eee784a
https://craft.co/elastic
https://seekingalpha.com/article/4288669-elastic-big-beats-continue
https://www.humio.com/whats-new/blog/worried-about-future-of-elasticsearch
https://www.elastic.co/de/blog/licensing-chang
https://www.zdnet.de/88391367/elastic-setzt-auf-sspl/