The Lower Cost of Capital of Open Source Software Companies: Benefits for Enterprise Customers

The open source software (OSS) business model provides more financial stability for OSS vendors when compared to proprietary software vendors. This is a direct result of the lower cost of capital that accrues to well-run OSS vendors.

As a result, customers and users of open source software benefit from the lower cost of capital as the vendors are able to pass these lower costs on to their end customers. At the same time, owners, employees (with stock options) and investors benefit from higher returns in the long term due to the financial structure, community-driven innovation, and lower reliance on high-cost capital. 

In this blog post, we explore why OSS companies often enjoy a lower cost of capital and are, therefore, generally more financially resilient than their proprietary counterparts. The implication is that when choosing your next software vendor, the one that adheres to a true open source business model should get extra weighting.

What is Cost of Capital?

The cost of capital is a measure of the required return that a company must generate to attract investment and meet its financial obligations. It represents the rate at which investors (whether debt or equity holders) expect a return on their investment, influencing the company's funding costs and overall financial structure. Essentially, the cost of capital is the price of using funds to grow and operate a business, impacting decisions around funding sources, project investments, and financial strategy. Companies strive to keep their cost of capital as low as possible, as a lower cost means more favorable financing, easier access to capital, and higher profitability on investments.

Cost of capital includes two primary components: the cost of equity and the cost of debt. The cost of equity reflects the return expected by shareholders and is often higher due to the added risk they bear. Debt, on the other hand, is typically less costly because it carries lower risk (being secured by assets or recurring revenue streams) and can offer tax advantages. The blended average of these costs, called the weighted average cost of capital (WACC), helps companies evaluate which projects or strategies will likely yield returns above their financing costs.

Lowering the cost of capital—whether by reducing debt reliance, optimizing equity returns, or leveraging organic growth, as open source companies often do—can provide companies with a competitive edge in managing their finances and achieving long-term sustainability.

Six Reasons Why Open Source Software Vendors Have a Lower Cost of Capital

1. The Community-Driven Innovation Model Reduces R&D Costs

One of the biggest factors contributing to the lower cost of capital in OSS companies is the model of community-driven innovation. Open source projects benefit from a decentralized group of contributors who provide code, insights, and enhancements often on a volunteer or low-cost basis. This distributed R&D reduces the need for a large in-house team, enabling OSS companies to develop robust, market-relevant products without the expense typically associated with proprietary software development.

In contrast, proprietary software vendors must staff larger development teams and allocate substantial funds to internal R&D and testing/QA. This often leads to the need for higher financing, whether through debt or equity, which increases their cost of capital. Open source companies, by leveraging contributions from an engaged community, can scale development efforts without proportionate increases in funding requirements.

2. Lower Marketing and Sales Expenses: Community as a Marketing Engine

Open source companies benefit significantly from community-led marketing. Because their software is generally free or available under permissive licenses, open source projects tend to reach wide audiences quickly. The OSS community often actively promotes projects, shares information, and encourages adoption, allowing these companies to grow their user base organically without heavy spending on sales and marketing.

Proprietary software companies, however, face a much higher customer acquisition cost (CAC) as they must invest in traditional sales teams, aggressive marketing campaigns, and direct outreach. These efforts require substantial upfront investment and often necessitate external financing, which further increases the company’s cost of capital.

At CrafterCMS, for example, we spend a small fraction of revenue on sales and marketing when compared against our proprietary counterparts.

3. Faster Time to Profit

Open source companies often pursue revenue models like support subscriptions, cloud hosting, and add-on services. These revenue streams offer recurring, predictable income without the initial high investment often needed for large-scale public SaaS infrastructure used by proprietary companies. By monetizing services around their open-source core, these companies can achieve sustainable cash flows that make them less reliant on equity and debt financing, and enable a faster time to profit.

Proprietary vendors, by contrast, are more likely to turn to outside financing to support growth, especially when scaling operations or making large R&D investments. Open source companies, with less reliance on external investors and more stable cash flows, generally benefit from lower cost financing options.

4. Enhanced Liquidity and Lower Equity Cost of Capital

Open source companies have access to a unique form of “sweat equity” in the form of community contributions, which doesn’t require direct compensation or share dilution. Contributors are often incentivized by reputation, interest in the software, or a need for custom solutions rather than equity stakes. As a result, OSS companies can reduce their need for external equity capital, leading to less dilution and a lower overall equity cost of capital.

Additionally, because open source software is often freely accessible, OSS companies achieve wide market penetration without proportionate customer acquisition costs, accelerating their path to profitability. This financial soundness appeals to customers, employees and investors (if any), making OSS companies less risky and more appealing investments.

5. Lower Product Development Risk

The transparent, collaborative nature of open source development means that OSS companies can quickly gauge market interest and user feedback, reducing the risk of developing unwanted or unfit products. OSS projects are built on community consensus and iterative feedback, ensuring that products evolve in line with user demand. This adaptability not only drives value but also reduces capital-intensive pivots or product overhauls that proprietary software companies may face if they misjudge market needs.

Reducing the risk of costly development missteps lowers the perceived risk for customers, employees, investors and lenders, directly contributing to a lower cost of capital. Proprietary software firms, by contrast, must often front substantial costs and time to develop products, without guaranteed user buy-in until much later in the process.

6. Commercial Flexibility

Open source companies offer varied commercial offerings that align with their customers' flexibility and security needs. By building business models around open source licensing, these companies avoid restrictive or complex licensing structures that might deter potential customers, ensuring broader market adoption and reducing barriers to revenue. The greater the adoption, the more stable the revenue streams, reducing dependency on costly, high-risk capital.

Furthermore, OSS companies can capitalize on cloud-hosted or hybrid deployments, increasing their accessibility and enabling a wide array of monetizable offerings (like managed services) that proprietary software companies may struggle to implement. This creates a resilient revenue stream that attracts long-term, low-risk capital.

How Customers Benefit from Open Source Software Vendors

Due to this lower cost of capital, customers of open source software (OSS) vendors generally enjoy significant cost savings and higher returns on investment (ROI) compared to proprietary alternatives. One primary advantage is lower software acquisition costs: because open source solutions are typically available at little to no initial licensing cost, customers avoid the hefty upfront expenses often associated with proprietary software.

OSS vendors generally build revenue models around supplementary services—like support, managed hosting, or custom development—rather than restrictive licensing fees, passing the savings on to customers. This approach allows organizations to allocate more budget toward enhancing functionality, integration, and training, leading to a faster, more value-rich implementation.

Beyond cost savings, open source software provides exceptional stability, flexibility, scalability, and control, further boosting ROI. Unlike proprietary systems, OSS solutions grant customers full access to source code, reducing vendor lock-in constraints and essentially eliminating vendor viability risk. This openness also supports faster adoption of cutting-edge features, as OSS projects benefit from rapid innovation driven by community contributions.

Consequently, customers benefit from high-quality software that adapts quickly to their evolving requirements, delivering a long-term ROI that often surpasses that of proprietary software. In sum, the financial and operational efficiencies from OSS make it a compelling, sustainable choice for businesses aiming to maximize both savings and software ROI.

Unlike many of our venture-backed competitors, CrafterCMS is profitable, cash-flow positive, financially stable with a strong balance sheet, and not reliant on (or subservient to the competing interests of) any outside investors.

Conclusion: Financial Resilience through Open Source Fundamentals

Open source software companies have redefined what it means to build financially resilient, low-cost capital structures. By leveraging community-driven innovation, reducing reliance on outside financing, and maximizing organic growth through community advocacy, OSS companies are able to operate with a lower cost of capital than proprietary software vendors. This financial foundation positions them for sustainable growth and profitability, even in volatile markets.

When choosing your next software vendor, reap the financial benefits of open source -- its not just a technical choice but a powerful business advantage.

Looking to upgrade your enterprise CMS? Download the open source edition of CrafterCMS now.