Companies are increasingly looking to build viable businesses around open source software, but the business plan isn't foolproof.
Open source software — packages of code licensed by the creator so others can update and build upon them — has continued to grow in popularity among big companies.
The benefits, such as low costs, the ability to innovate quickly, a selling point to recruit developers who want to continue stay involved with the open source community, are undeniable.
But the approach isn't without its faults. In general, firms are hesistant to build a project on top of an open source package that could lose support and stop getting updated. Brad Peterson, Nasdaq's chief technology and information officer, said any firm using open source wants software that will have longevity.
Peterson said two clear indicators have emerged in recent years that dictate how an open source business will perform.
"If there are too many companies trying to making a living on top of one open-source project, they don't have scale," Peterson said in a recent interview with Business Insider. "If they weren’t the originators of the project, they are usually just a team trying to exploit the popularity of the open-source projects."
Peterson pointed to Apache Hadoop, which offers solutions for big data, as an example of an open-source package that had too many companies built on top of it, limiting their ability to grow. Kubernetes, an open-source package originally developed at Google for deploying applications, is an example of the latter. While companies have popped up based on it, the core engineers aren't involved, he said.
For Peterson the interest isn't just about companies he'd like to incorporate into Nasdaq's technology. He also updates the exchange's listings team on firms that could go public one day.
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"We are in a unique situation," Peterson said. "Every technology company has the one about, 'Which open source do we incorporate in our product to make sure it is long lasting. But no one has that and the one that we have with listings."
Peterson pointed to two open-source companies he believes not only have a strong business model but would be well-suited for an IPO in the future. Databricks, a big data company valued at nearly $1 billion, is a company Nasdaq has bought tech from for years and one Peterson said could go public.
Peterson also highlighted Confluent, a streaming data analytics startup, as an example of another company built on open source software that might make a move to the public markets soon. Based on the popular Apache Kafka software, Confluent raised $125 million in its most recent round, valuing the company at $2.5 billion.
Representatives for Databricks and Confluent couldn't be reached for comment on their IPO plans.
