There are three types of tokens: Money Tokens (like Bitcoin, Ethereum, Ripple or Zcash), Asset Tokens (an instrument that promises future remuneration, such as a percentage of company profits), and Utility Tokens (which can be used to pay for goods and services).
In this blog, I propose that utility tokens offer a much needed new funding model for open source enterprise software startups.
Open source is not a business model–it’s a way to develop software. For certain requirements (like the implementation of Internet standard services), it’s resulted in the best software available. There are four reasons why open source tends to result in better software:
Open source works well for enterprise software which organizations don’t consider a competitive advantage. Internet standards like HTTP, SSL, and SMTP are good examples. One bank wouldn’t say to another bank: “we email better then everyone else!” It’s not part of the customer value proposition, and therefore isn’t an area where competition makes sense.
Information security falls into this category–everyone loses when hackers are successful.
However you fund a company, it still needs to generate revenue. There are a few common strategies to monetize open source software: (1) corporate sponsorship; (2) paid version with extra features; (3) hosting; (4) support; (5) tools; (6) distributions; (7) donations. Which revenue streams are available depends to a large extent on a company’s capital situation.
A few thoughts on each of the potential revenue streams mentioned above:
Developing open source enterprise software requires a large capital investment. However, if your open source startup takes VC money, it will likely kill the open source part of your business model (or the business itself!). There are a few common problems that arise when an open source software company takes VC investment:
The movie Print the Legend offers a great case study of an inexperienced entrepreneur (a teacher), who becomes the pawn of a VC firm that engineers a great outcome for investors (i.e. RIP open source).
The laws of business still apply–startups need capital! However, instead of killing the open source part of the business, capital should: incentive great software, fuel the community, ensure continued innovation and stability, enable community participation in financial success, and reward the startup culture of laptop-sticker-decorating open source zealots.
As the name suggests, the utility token can be used to purchase goods and services of the startup. You don’t need currency to buy something that’s free. But presumably, the startup has aligned with one of the above revenue streams and offers something besides free open source software. Those products and services can be purchased using utility tokens.
Selling utility tokens allows you to:
The important thing here is that raising money via utility tokens aligns the company with users of the software–not outside investors simply looking for capital returns. The better your software, the more demand (and value) there is for your tokens.
Utility tokens are not a panacea–startups still need to write great software! But tokens provide an alternative way to raise capital during the expensive R&D phase without undermining the future of the company or the community.