In 2021, the Berlin-based team behind Coqui.ai — an open source startup offering AI-generated text-to-speech services — decided to reincorporate the company as a Delaware C-Corp.
The HQ — and most of the team — remained in Berlin, but cofounder Kelly Davis says the move made a significant difference when it came to accessing funding.
US VCs understand the commercial potential of open source — code that is available for anyone else to access, modify and distribute as they see fit — but many European VCs don’t, Davis says. “There was a lot of initial effort on our part in trying to explain our open source model to VCs in Europe.”
That’s despite several success stories in recent years. Open source giant Red Hat was bought by IBM for $34bn in 2019, while California-based Databricks, which has raised $3.5bn, was valued at $38bn in 2021. Open source unicorns like Grafana Labs and Redis have also hit billion-dollar valuations in recent years; and just last month, open source AI startup MosaicML was acquired by Databricks for $1.3bn.
Davis isn’t alone in his decision to move. Although the number of open source startups in Europe is reaching record highs, many founders are choosing to up sticks and head to the US to scale their companies.
Funding open source in Europe
The open source concept was developed decades ago by computer scientists who were keen to foster a more collaborative and transparent approach to software development in the spirit of free shared knowledge. Today, however, many companies and startups have found ways to monetise it, for example by providing additional software services and support on top of free code or by offering a commercial premium version of the software that complements an open “core”.
Today, open source software permeates the tech industry, with US tech giants like Google, Facebook and Amazon creating and releasing a number of tools and libraries that are accessible for free. Even Microsoft, which 20 years ago saw open source a threat to its proprietary software-based business model, is now a huge contributor to the open source community.
Tracking exactly how many open source startups exist is tricky given its conceptual origins and the many ways that companies interact with it. VC Runa Capital has its own definition, which it uses to inform its quarterly Runa Open Source Startup (ROSS) Index, a ranking of the fastest-growing open source startups globally. The latest iteration of the index found that almost as many of the world’s fast-growing open source companies are started by Europeans as Americans, with the top 10 featuring three companies started by European founders and four started by Americans.
There’s also no shortage of talented developers interested in open source in Europe. A 2021 report by Open Forum Europe counted approximately 260k individual contributors to open source projects in the EU, who together made 30m commits in that year.
Funding, however, is not keeping pace. In 2022, open source companies HQ'd in Europe raised a total $760m, compared to $3.9bn in the US, according to Dealroom, which tracks over 5,000 open source businesses globally.
A 2021 report by Nauta Capital shows that funding for open source companies has been increasing globally since 2016, but that European investors lag behind particularly in later rounds. The mean deal size at Series B stands at $21.6m globally, compared to $9.5m in Europe.
“VCs [in Europe] are more sceptical and often do not recognise the future potential of a COSS [commercial open source] model,” says Andre Zayarni, the cofounder of Berlin-based open source startup Qdrant, which provides a high-complexity search engine. Like many Europeans, he’s considering a move to the US and has already started hiring a team there.
Flocking to the US
Anh-Tho Chuong is part of a generation of European open source entrepreneurs who have already settled in Silicon Valley in search of better conditions.
She started her company Lago, an open-source metering and billing startup, which is based on a free and open core offering complemented by a monetised premium product, in Paris in 2021.
Commercial open-source startups are on the rise in France, she says, but there’s little support for founders to grow their companies and succeed. “There’s little encouragement for this trend,” she tells Sifted. “Unfortunately, few French and European investors understand this model, so we have to seek funds elsewhere.”
Funding is only part of the problem. Chuong says Europeans also struggle to believe that open source isn’t fundamentally at odds with commercialisation.
In some cases, developers worry that businesses might brandish the open source label to better market themselves, while not aligning with the movement’s founding principles, such as free redistribution of software and a ban on restrictions on anyone making use of the program for certain purposes.
“This ideological view on open source means that in Europe, we are struggling to pass the commercialisation stage,” says Pierre Baudracco, the chairman of the French union of open source software and digital technology companies (CNLL) and himself the founder of an open source company. “Whereas in the US, things are much more pragmatic.”
Coqui.ai’s Davis says that this debate is a critical part of building an open source startup. “There’s a commercial community you’re selling to and an open source community you’re trying to appease and work with,” he says. “You need to get the balance right of open source versus closed source, so that you can effectively talk to both audiences.”
But Davis believes the growth of commercial open source can only be beneficial to the development of open source as a whole. “If an open source company can’t be a commercial success, no one wins,” he says.
Sadly, it seems that European open source founders have lost faith in their ability to successfully commercialise their businesses on home turf. One of the most promising companies in the open source space, Hugging Face, which provides open source tools to build machine learning applications, is headquartered in New York — but was founded by a trio of French founders. It is now valued at $2bn. Airbyte, a unicorn open source data integration platform, was founded by French duo Michel Tricot and Jean Lafleur.
In a recent testimony before the US Congress, Hugging Face’s CEO Clément Delangue said: “With my cofounders Julien and Thomas, we started this company from scratch here in the US, as a US startup. We are proud to employ team members in 10 different US states today. I believe we could not have created this company anywhere else.”