Making Acquisitions of Open Source Companies Successful

I spoke recently with Michael Cheng on The Business of Open Source about the unique challenges that open source companies face when being acquired — or, actually, the unique challenges that the acquiring companies face in getting the value they expected. The episode won’t run for a while, but I wanted to pull out some really important ideas that came up in the conversation. This is also the part of the entrepreneurial journey that gets talked about the least, at least by me. I find nobody likes to talk about the acquisition process and often they’re bound by legal agreements not to talk.

The primary issue that acquiring companies run into when folding an open source company into a non-open-source company is the cultural mismatch, coupled with the acquirer often fundamentally misunderstanding how an open source community works and how it adds value to the company.

The community=leads problem

It’s really common for bigger companies to look at an open source community and see a bunch of warm leads. So when they make the acquisition, they try to swoop in and sell to this community that they see as poised to buy. Except this ends up alienating the community, which for most open source companies is valuable for reasons other than lead gen. So the community is killed.

Under investing in the open source project

In an open source company, the right way to think of an open source project is as its own separate product, not your commercial product’s ugly step-sister. That means doing market research, user interviews and evangelism just about the open source project and having a dedicated team that works on the open source project. It means the open source project has its own roadmap, which yes, has to make sense given the commercial product’s roadmap, but still is created not as an afterthought.

Open source companies have a reason for creating open source projects that are valuable in and of themselves. It’s often about recruiting evangelists, getting product feedback and establishing their solution as the de-facto standard. Sabotaging those projects following an acquisition damages the projects’ reputation and erodes the value of the acquired company.

Not paying attention to the community

Related, community takes effort. If the acquiring company doesn’t recognize that, it’s easy to let the community languish. But if the community brought value to the company, this again erodes the acquired company’s value.

Undervaluing the key maintainers

Key maintainers are a critical part of any open source company. Regardless of who those maintainers are — if they are founders or not — keeping them onboard through the acquisition is really important.

Relatedly, companies looking to be acquired should pay attention to who is the face of the project. If you, as a founder, don’t want to stick around long term after an acquisition, you should make sure you start hiring people to be the project’s public face before you start thinking about your exit.

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I’m sure there are many, many more issues — including some legal issues that Michael touched on. The bottom line from the conversation, though, was that acquisitions of open source companies are more complicated than acquisitions of closed-source companies. They can be profitable for both parties, but acquiring companies need to understand what they’re getting into and how open source adds value to the company if they want to get the most out of open source companies they acquire.