What changes would you implement to make the OSS/BSS industry more valuable?

How valuable is the OSS / BSS industry do you think? How would you measure it? How would the market measure it?

Have you ever pondered these questions?

By extension, have you also wondered how to make it more valuable? Or perhaps how to make certain players within it more valuable?

If you have, would you apply a technical lens to making OSS companies more valuable? That is, to make better products, to solve more customer problems, to differentiate products from the many others in the market or to innovate in such a way that no other products can compete?

I find all of those concepts interesting, particularly because I feel that most product innovations are happening at the fringes of the long-tail (as discussed in That’s not where to disrupt your OSS.)

How about if we apply a non-technical lens?

Way back in 2016 I wrote an article asking, Would Warren Buffett Invest in OSS?

At the time, Buffett had not been a big investor in tech (although he does now have a large position in Apple). The belief back then was that most players in the OSS / BSS industry would fail many of Buffett’s key investment criteria and the article discussed why. The article also discussed why certain OSS companies with atypical business models were likely to be more palatable to Buffett.

The article was discussed within the context of the then-recent Solarwinds acquisition for $4.5B. Not sure if I had the numbers right, but I think that sale was at a multiple of about 9-10x of revenues. It was clearly an attractive acquisition as there were many interested bidders, as discussed in Solarwinds: Inside the $4.5B Buyout.

By comparison, I believe that most OSS companies are valued at a multiple of less than 1x of revenues (happy to be informed otherwise if you’re aware of other comparables or outliers BTW). That’s a metric that’s a bit hard to comprehend. If we were to assume a total OSS revenue of say $50B per annum, and an indicative multiple of 0.5x, then that would suggest investors would only pay a combined total of $25B for all the OSS companies in the world (I’m not suggesting that’s a true valuation in any way, but just posing as a concept BTW).

Some of the main reasons why that indicative multiple is so low revolves around the typical business models we’ve chosen and the market we service:

  • Recurring revenues are a relatively small component of total revenues
  • Revenues tend to be really lumpy and unpredictable
  • Cost of sales / goods-sold and sales cycles tend to be large
  • Solutions are highly complex and are reliant on a highly skilled and experienced workforce to deliver
  • The market is highly fragmented and competitive (with a lot of duplicated effort and the related analysis paralysis for buyers)
  • We also sell into a customer mindset of a cost-centre rather than the revenue generators they actually are
  • There’s a high level of friction at almost every interaction with OSS (across the buy-build-use lifecycle)

Clearly we need to increase revenues (ie sales growth) to increase overall value, but perhaps the multiple actually pinpoints the challenge for us better.

The Solarwinds business model and product range is simpler, more self-implement / self-service oriented, has greater word-of-mouth based sales and has more of a recurring revenue basis. Do those factors alone depict the massive discrepancy in multiples?

Therefore, do we need to reconsider the lenses we’re applying to making OSS more valuable?

Which are harder to change? Products, business models, revenue models or are all inextricably linked? I’d love to hear your thoughts via the comments section below.

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