Companies face an inherent tension between being open or proprietary, but we’ve seen, again and again, that open systems can act as catalysts for entirely new businesses built on top of a popular platform.
Earlier this month, we encountered examples of each approach, as Tesla Motors opened up its patents and Netflix decided to shut down, or at least severely limit access to its API. (To be fair though, Netflix makes a lot of valuable contributions to open source).
Companies have their reasons for isolating or opening, but when you open a platform, innovation tends to happen.
Whether we are talking Linux in the 90s or Hadoop and OpenStack today, we’ve seen that when there is a broad agreement on a standard or open way of doing something, and there is wide adoption of that standard, then companies develop to build solutions on top of that standard platform to meet a variety of needs.
Some are high level applications and some are management tools, but over time the open systems have acted as launching pads for new businesses creating what are essentially startup ecosystems.
And this works with even a little bit of openness like opening your APIs and encouraging third party developers to build on top of your system.
First, Some Numbers
To give you a sense of the power of open source platforms, there are dozens of companies listed in Crunchbase that identify themselves as being based on open source. Just as a few examples, Cloudera, a company built on the open source Apache Hadoop platform has raised a whopping $1B to date. Competitor Hortonworks, a company also built on Hadoop, announced $100M in new funding in March for a total of $198M to date. Mesosphere, a company built on the open source Mesos product raised $10.M earlier this month, while Docker, Inc. the Linux container company built on top of the open source Docker project scored $15M earlier this year.
There are countless other examples of companies building businesses on top of open source projects and landing big chunks of venture capital to do it.  VCs are handing out millions and millions of dollars to these companies, driving a huge open source startup feeder system.
And there’s a reason for it –because open platforms (even when they aren’t open source per se), act as catalysts that drive new companies. They give these companies a head start in terms of access to a standard tool set, a community of programming resources, and they provide a ready market that needs solutions to work on these platforms.
Opening Operating Systems
Sean Sucher, cofounder and CEO at Haddoop startup Pepperdata argues that Microsoft Windows was one of the first examples of a widely adopted platform that spawned thousands of new companies on top of it. He noted there were other operating systems options available in the late 1980s and early 1990s, but Windows stuck (partly because of questionable market control tactics that got it in trouble with the Department of Justice). Regardless of the reason though, there is no denying Windows acted as an impetus for the launch of many new companies.
“In retrospect, we clearly know the ubiquity of [Microsoft Windows] enabled the creation of thousands of companies. There were other personal computer operating systems, but they did not have the adoption to spawn the industry,” Sucher explained.
While Windows is a prime of example of how wide adoption can fuel this kind of ecosystem to fill in holes missing in the core product (and we have also seen it in Microsoft’s SharePoint) this kind of ecosystem tends to happen more organically when it comes to open source platforms.
Linux took this a step further, by not just allowing people to build applications on top of the operating system, but open sourcing the operating system itself to create entirely new versions. Donald Fischer, who is Venture Partner at General Catalyst Partners, a venture capital firm in Boston and Palo Alto, was the original product manager for Red Hat Enterprise Linux, a product that was created because of the openness of Linux.
That in turn drove a similar kind of development on top of the platform that we saw with Windows creating even more companies and driving Red Hat’s success. “Our entire thesis, the engine that continues to drive the company, was the ecosystem of applications that sits on top of that,” he explained. As companies built more applications, that produced a flywheel effect that continues to this day and fed the success of the company. Enterprise customers bought into Red Hat Enterprise Linux because companies were building enterprise applications on top of it –and companies continued to build these applications because of the popularity of RHEL. In fact, earlier this month, Red Hat released version 7.0 of RHEL.
The Community Impact
Steve Herrod, former CTO and cofounder at VMware, who is currently a managing partner at General Catalyst, says that accessing a community of developers can help fuel your project.  Just recently, we saw that Docker, a 35 person company, was able to launch version 1.0 of its product in just 15 months, partly because it relied on a community of 450 developer partners to help make it happen. Clearly, a small company with few resources would have taken much longer, but by making Docker open source, it helped speed up delivery of the product to market.
Michael Bushong, vice president of marketing at Plexxi says this community aspect is particularly important because it drives people to contribute and be a part of something bigger.
“Another major shift that has been going on in the business world generally (and the technology world specifically) is a movement towards community. This is particularly strong in some parts of the development community. Giving back is a source of pride for many people,” he said.
He believes this is driven in part by social media and the desire to build a personal brand, and being a part of open source increases your profile and leads to community recognition. “Because the tech community tends to laud its open source contributors, there are personal drivers behind open source participation. And that branding extends to the companies that employ these people, which makes corporations more likely to not only support but actively staff open source initiatives,” Bushong said.
Ready-made Launch Pad For Startups
The bottom line is that using open source platforms simplifies development for new companies and gives them a common set of functionality that’s ready to use, saving tons of valuable startup energy that might have been spent reinventing the wheel every time. Arje Cahn, CTO at open source content management vendor, Hippo says when he started his company, he used open source platforms and it saved him a ton of development time.
“Hippo itself formed a business around Apache Cocoon and Apache Jackrabbit when in our early days we realized that a large part of what we wanted to build already existed as an open platform,” Cahn explained.
He says that means new companies can save time and money and then give back to the open source community, so everyone wins.
“When a business (like our own) builds around an open platform and the agreed base set of services, there’s plenty of space for pure innovation on top of these standards. Take versioning in the CMS space as an example. Versioning is not innovative, it’s a commodity. All of the vendors that agree to stick to the JCR standard, and accept versioning as a feature have the space to raise the bar in terms of the features we’re developing. Because, at the same time, we’re sharing whatever we do with one another, we’re collectively pushing each other to innovate further. That’s what Apache is all about,” he told me.
And it’s not just Hadoop, any open system can produce this same impact.
CTERA CEO Liran Eshel says his cloud storage company has also benefited from the open source community, particularly OpenStack.
“Fundamentally, being part of an open and vibrant community of cloud engineers enables CTERA to leverage the investments already made by other innovators around object storage, compute frameworks and at-scale systems management, where we can optimize and focus our investment around our true core competence, our cloud storage service platform.  We get our product to market much faster while also enabling a broader collection of companies to benefit from our cloud storage service delivery tools on OpenStack,” he said.
Open Platforms Provide Established Markets
Chad Carson, who is co-founder and VP of product at startup Pepperdata, says building on a broadly used platform like Hadoop means that new companies can immediately access a much larger market than they could in the past.
“Today there are thousands of companies using Hadoop. Of course, they’re not all doing the same thing with it, but there’s a common set of needs, pain points, and business opportunities that many of them share. So when a company develops a new product that runs on Hadoop, they have hundreds of potential customers who could benefit from it — and those customers only need to evaluate that specific product. They don’t have to decide whether to gamble on a new architecture, with an unknown set of problems, in order to use the new product,” he told me.
Jerry Chen, a partner at Greylock Partners, says that open source builds markets because it makes it easy to try and as more companies use these products, the bigger the market becomes.
“Because open source reduces friction to try, [a platform like] Hadoop gets widely distributed. Open source is a great way to get distribution and build a customer base and have more customers to sell to,” he said. And he explained because it’s open source other companies and open source users themselves can build on top of the open source platform, and when that happens, the project can take off and become a stimulus for new business creation.
And Carson says that includes third party integrators. “Another business-side benefit of commonly used, open platforms is that there are many third parties ready to help companies evaluate and apply new technologies. There’s basically an ecosystem on top of an ecosystem. For example, in the Hadoop space, when a company creates a great new application, the distribution vendors are ready to incorporate it and help their customers use it, but there’s also a very healthy community of Hadoop consultants and systems integrators who can help,” he said.
Open Sourcing Hardware Too
Interestingly enough, it’s not just software and operating systems. We are starting to see open source hardware designs too, and although this is probably too recent a phenomenon to drive new businesses just yet, the potential is there for the same reasons.
Just last week Facebook announced a new open source top of rack switch, which it will make available through the Open Compute Project. Facebook could very well have kept this technology to themselves, but the company sees value in giving the design to the community and letting them build on top of it and perhaps improve it.
Matt Corddry, director of hardware engineering at Facebook says open sourcing this tech makes sense because they can gain as much as they give. “By developing an open hardware platform, we’re able to catalyze a broader set of discussions in the hardware industry, as well as gather feedback from a wider set of thought leaders in order to improve our designs. While this may seem obvious to those familiar with the world of open source software, we find that many large-scale datacenter operators continue to operate a closed and confidential hardware platform,” he said.
Corddry says they saw this in practice when they were developing their open source storage component called OpenVault. “A number of experienced hard drive architects attended our talk, and found that we were tilting the drives too rapidly during service events, which could cause damage over time. Based on their feedback, we updated our design and testing plans to ensure that we controlled the tilt rate of the drives properly, and our production design is better as a result,” he said.
Even A Little Bean Of Openness Can Drive Innovation
As fellow TechCrunch writer Romain Dillet, who wrote a 150 page thesis on the power of open platforms said, even a little bit of openness can help. That means, even when a large company controls the project, it can still lead to tremendous innovation and create hundreds of new companies.
If you doubt this look at Android. As Danny Sullivan from Search Engine Land put it in a 2012 commentary, “Google has made much of Android being “open” for use by anyone and thus potentially better than the “closed” system of the Apple iOS world. But “clopen” would be a better way to describe Android, as some have, because it’s both closed and open at the same time,” Sullivan wrote.
In spite of that, we have seen hardware and software companies make money developing phones and apps by the score on top of the Android platform.
Sometimes simply opening your APIs and allowing companies to build on your platform can drive the same type of innovation. If you want a great example of this, look at Salesforce.com. There are countless companies building businesses based entirely on the platform or simply expanding their businesses by taking advantage of the platform and the large number of Salesforce.com customers. As one example, FinancialForce, an ERP solution built on top of Salesforce got $50M in funding earlier this year. SpringCM, a content management company with some solutions built on the platform scored $18M in funding earlier this year. As with open source, these kinds of systems can also create new businesses and attract vast amounts of venture capital.
For a smaller example, Kevin Fleming, head of developer/community outreach at Bloomberg explained simply by opening their financial data APIs at the end of 2012, and inviting companies to build applications on top of Bloomberg’s information, they now have more than 30 third-party applications based on this API available in their online app store.
Of course, there are lots of open source projects that never really get organized or fail to take off for any number of reasons, and there are companies that have opened their APIs and had very little interest or traction in building third-party applications for whatever reason, but it’s clear that when an open source project or an open API gains widespread use, and the community grows, then companies begin to bubble up on top of the platform, and when that happens, it produces all kinds of startup energy.
All of that energy feeds on itself and eventually you have companies building applications and utilities and plug-ins. And as companies build these products, independent software vendors take notice and develop practices around the platform to help customers implement these solutions –and the cycle feeds itself. VCs come on board to fund new projects, and before you know it, you’ve created a rich startup ecosystem.
