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How to Make Money from Free Software

For years, open-source software was a backwater in venture investing because of the belief that it’s hard to make money from free code. Red Hat, the North Carolina-based firm that sells support contracts to companies like IBM for server software, is an oft-cited success story. Yet its entire $12.8 billion market capitalization pales in comparison to even a single year’s profits at a traditional software firm like Microsoft.

But venture investors including Andreessen Horowitz, Sequoia Capital and Benchmark Capital are betting several billion dollars that things are different now. They are backing dozens of open-source startups that are trying new ways to make money. (See below for breakdown around companies and their business models.)

The funding flood comes amid a big shift in the status and importance of open-source software. In the past, it was used mostly by tech departments for side projects and experiments or as a low-cost alternative to paid software. Its role in mission-critical systems was mostly confined to straightforward jobs on single machines, like the Linux server operating system and simple MySQL databases.

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Most product firms firms also blend in support services as well. For example, Elasticsearch’s main product is open-source code that allows real-time, full-text searches of huge data sets. On top of that, it sells products that show how well the system is working, which is important when many users are searching a data set at once. It is also working on a security product. Elasticsearch offers support subscriptions for the core code as well, with some of the products bundled together with support at various price points.

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