The technology industry is littered with companies that have tried to make a commercial business out of open source software. Apart from Red Hat, which earned $241 million on $2.3 billion in revenue last year, none have delivered consistent profits to investors.
The big challenge with commercial open source businesses is that the software itself doesn't belong to anybody -- anybody in the world can see the underlying code, change it, and use it for free. Companies like Red Hat (which built its business on the open-source Linux operating system), Hortonworks (built on Hadoop, a data processing and storage technology), Docker (containerization, used in data centers), Mesosphere (similar to Docker), and Mongo DB (a type of database) all aim to make money by selling other software, consulting, or support services that piggyback along with the core open source product that customers actually want.
Confluent, which is announcing $50 million in new venture funding led by Sequoia today, is another company in this category.
But co-founder and CEO Jay Kreps insists it's different because the underlying software -- a data-streaming technology called Apache Kafka, invented by Kreps and his cofounders Neha Narkhede and Jun Rao when they were at LinkedIn -- is "mission critical" for a lot of companies. And not just other Silicon Valley startups, either.
"A lot of open source is adopted by Silicon Valley startups that don't pay for software -- or not much," Krebs told CNBC. "Our target is mostly not those guys. We're mostly selling into large enterprises in the Fortune 500, not the tech crowd."
As far as technical infrastructure goes, Kafka exists at a fairly low level -- it's a way to manage and direct streams of data between all the different applications and systems that a company use.
Because so much data is traveling between apps, once a company starts using it in one place, it can quickly spread throughout an organization. Kreps offers the example of a car company building a large-scale connected car project.
"First, data comes into Kafka about the car," Kreps explains. "Data about the product, about customers. That's the main thing, they've never had access [to this data] before. That draws in all the apps that need it. Those apps bring in their own data about customers, creating a virtuous cycle -- adoption leads to more adoption. That's an important property that's different from most infrastructure software, where you have to win the adoption app by app."
Having the inventors of Kafka running the company gives Confluent credibility as it sells support and additional services, such as a control "dashboard," on top of their Kafka implementations.
Confluent claims to have increased its subscription bookings for these products more than eightfold in the last year, and aims to use the funding round to bolster its engineering group to stay ahead in this relatively new area. "This space is just emerging," says Kreps. "Our capabilities are still not even one-tenth of what they can be."
In addition to Sequoia, whose partner Matt Miller will join Confluent's board, existing investors Benchmark and Index Ventures also participated in the $50 million series C round.