The State of Open Source in Venture Capital: 2025 Perspectives

When we think about the most impactful software companies of the last fifteen years, a striking proportion of them have open source at their core. Elasticsearch, MongoDB, Confluent, HashiCorp, Redis Labs, Databricks, dbt Labs — these companies built billion-dollar businesses on the back of open source projects that developers loved and enterprises needed to run reliably at scale. Open source is no longer a counterculture philosophy or a licensing curiosity; it is the dominant go-to-market strategy for developer tools companies that aspire to category leadership.

Yet the relationship between open source and venture capital has never been entirely comfortable. VCs invest for returns, which requires defensible businesses with sustainable revenue models. Open source, by definition, makes the core product freely available. The tension between these two facts has produced a decade of experimentation, some spectacular successes, and a number of high-profile failures. As we enter 2025, we think it is worth examining where that experimentation has landed — and what the next chapter of open source VC investing looks like.

The Playbook That Emerged

The dominant commercial open source (COSS) playbook that emerged over the last decade is elegant in structure, if difficult in execution. Release a genuinely useful open source project under a permissive or weak-copyleft license. Build a community of contributors and users around the project. Identify the specific needs of enterprise customers — reliability, security, compliance, support, scalability — that the open source version does not address. Build a commercial product, typically a cloud service or an enterprise edition, that satisfies those needs. Charge appropriately for the commercial product while keeping the open source version free.

The economics of this model at its best are extraordinary. Community-driven distribution dramatically reduces customer acquisition cost. Developers who use the open source product bring it into their organizations, creating a bottom-up sales motion that bypasses traditional enterprise procurement. The commercial product sells itself to enterprises that are already running the open source version and need the additional capabilities.

The best illustration of this playbook remains Elastic. The company built a search and analytics stack that became the default solution for log management, application search, and security analytics. Developers chose it because it was powerful and free. Enterprises paid for Elasticsearch Service because running Elastic at scale is genuinely complex, and the managed cloud service solved real operational problems. The business compounded from that foundation.

License Changes and the Cloud Provider Problem

The 2018-to-2022 period was defined by a specific crisis in open source monetization: the cloud provider problem. AWS, Azure, and Google Cloud built managed services on top of open source projects — Redis, Elasticsearch, MongoDB — without contributing meaningfully to the upstream projects or compensating the companies that built them. The open source companies found themselves in an uncomfortable position: their most popular product was being sold as a managed service by trillion-dollar companies with dramatically better distribution.

The response was a wave of license changes. MongoDB moved to the Server Side Public License (SSPL). Elastic changed the Elasticsearch license from Apache 2.0 to a source-available dual-license. HashiCorp moved Terraform from MPL 2.0 to BUSL 1.1. In each case, the change was designed to prevent cloud providers from offering the software as a service without a commercial agreement with the originating company.

These license changes were controversial within the open source community and created real friction. OpenSearch forked Elasticsearch. OpenTF forked Terraform. The forks have achieved significant adoption, and the debate about what "open source" means in a cloud-native world has not been resolved. As investors, we think the license change wave has reached its plateau, and the next iteration of the COSS model will address the cloud provider problem through product architecture — specifically, by building the commercially valuable capabilities in ways that cannot easily be replicated by a cloud provider offering the core open source project.

What We Look for in Open Source Companies at the Seed Stage

From a seed-stage investment perspective, open source companies require a specific set of conditions to be compelling. Not every open source project is a viable foundation for a venture-backed business, and the filter we apply is more demanding than it might appear from the outside.

The first condition is genuine community traction. A project with real community adoption — measured in GitHub stars, downloads, contributors, and most importantly, production deployments — demonstrates that the project solves a real problem and that developers find it worth integrating into their workflows. We are skeptical of open source companies where the GitHub presence is primarily marketing rather than evidence of genuine adoption.

The second condition is a clear and compelling commercial path. The commercial value proposition must be specific and credible. Vague claims about "enterprise features" or "support" are not sufficient. We want to understand exactly which customer needs the commercial product addresses that the open source version cannot, and we want to see evidence that enterprise customers are willing to pay for those needs.

The third condition is the right licensing structure for the commercial intent. The licensing choice has downstream implications for the business model, the community dynamics, and the ability to defend the commercial product against cloud provider competition. We spend considerable time with founders on licensing strategy, and we consider it a first-order product decision, not a legal afterthought.

The Emerging Models: Usage-Based Pricing and Managed Services

Two business model innovations have materially improved the economics of COSS companies in the last three years. The first is usage-based pricing for managed cloud services. Rather than charging a fixed enterprise license fee, companies like Confluent, Databricks, and MongoDB Atlas charge based on consumption — queries, data processed, compute hours. This aligns pricing with value delivered, reduces the friction of the initial enterprise sale, and creates a revenue trajectory that compounds with customer growth.

For seed-stage companies, the usage-based model is increasingly the default. Developers self-serve, usage grows organically, and revenue grows with usage. The challenge is that usage-based revenue is harder to predict and can be volatile, which creates forecasting challenges as companies scale. The finance and go-to-market discipline required to execute a usage-based model well is a competency that not all founding teams have, and it is something we actively assess in our due diligence.

The second innovation is the emergence of "source available" as a distinct licensing category that preserves many of the benefits of open source distribution while providing more control over commercial use. Source available code can be read, audited, and run by anyone, but commercial use requires a license agreement. This approach has gained traction as a middle ground between fully open source and proprietary software, particularly for developer security tools where code auditability is a genuine user need but uncontrolled commercial deployment would destroy the business model.

The Foundation Model: Public Good or Business Strategy?

The rise of foundation-backed open source — the Linux Foundation, Apache Software Foundation, Cloud Native Computing Foundation, and others — has created an alternative path for projects that want to ensure long-term community governance without the tensions of VC-backed development. The CNCF in particular has become the home for a remarkable collection of infrastructure projects, including Kubernetes, Prometheus, Envoy, and dozens of others that form the foundation of the cloud-native stack.

The relationship between CNCF projects and the commercial companies that develop them is complex. Companies like Isovalent (Cilium), Grafana Labs (Grafana, Prometheus), and Tetrate (Istio) have built significant businesses on top of foundation-donated projects. The donation provides community credibility and reduces the license change risk that damaged Elasticsearch and Terraform, but it also limits the ability to monetize the core project directly.

We generally view foundation-donated infrastructure with some caution as an investment opportunity, precisely because the commercial leverage is reduced. The most interesting investments tend to be in companies where the open source project is genuinely owned by the company and the commercial path from open source to paid product is clear and defensible.

Our Outlook for Open Source Investing

The COSS model remains one of the most compelling paths to building a large, defensible developer tools business. The combination of community-driven distribution, strong developer trust, and the natural enterprise up-sell continues to produce companies with exceptional unit economics when executed well. We remain active and enthusiastic investors in the category.

Our current focus within open source investing is on companies where the commercial product is genuinely differentiated from the open source version by network effects, data advantages, or integration depth — not just support contracts and enterprise dashboards. The most defensible COSS businesses are those where enterprise customers cannot replicate the commercial product's value by running the open source version themselves, regardless of their engineering investment.

If you are building an open source company in the developer tools space and are thinking about your seed round, we would welcome the conversation. Reach out to the DeepDots team to start the discussion.