Vercel’s Path to Product-Market Fit — From Open-Source Project to Billion-Dollar Business

Guillermo Rauch, raised in Buenos Aires and fascinated by computers since age 7, taught himself to code and moved to San Francisco at 18. His company, Vercel — the frontend cloud service behind open-source development framework Next.js — was recently valued at $2.5 billion.

EARLY INSPIRATION FOR VERCEL

Growing up in a suburb of Buenos Aires in the 90s, Guillermo Rauch didn’t know many people with computers. So at seven years old, when he booted up Windows 95 on the PC his father brought home, Rauch was mesmerized by this new technology.

“My dad challenged my brother and me to explore what we could do with it,” he recalls. “Could we install software? Could we hack it? He had this very experimental mindset about it.”

Up for the challenge, Rauch began teaching himself to code. It was the early days of the internet, so there wasn’t much information online, and it wasn’t usually in Spanish. So, undeterred, Rauch taught himself English, too. His first goal was to replace Windows with Linux, a difficult task that led him to an enthusiastic group of strangers online who shared their programming expertise for free: the open-source community.

Through his early teens, Rauch had an insatiable appetite to learn everything he could about Linux, JavaScript and web development and built up his reputation as an open-source contributor and frontend developer.

“When I was just 16, Rauch became a core developer for the open-source project MooTools, and later, Facebook came calling with interest in hiring the young phenom. That’s when he realized that this hobby could become a career. He dropped out of high school and eventually moved to San Francisco to start his first full-time job as a software engineer — at just 18 years old. “Open source really was my path out of Argentina in the end,” says Rauch.

He didn’t know it at the time, but open source was also his path to a billion-dollar business. His company, Vercel— the frontend cloud service behind open-source development framework Next.js — was recently valued at $2.5 billion. If you’ve ever visited the websites of eBay, Zapier or The Washington Post, you’ve seen Vercel in action. As for Next.js, more than 850,000 developers use it to build websites with billions of global users, like ChatGPT, TikTok and Notion.

While achieving product-market fit in any form is cause for celebration, Rauch has managed to reach its highest level, what we at First Round call “extreme product-market fit.” This means his product has earned profound, widespread customer love and demand and is delivered through a scalable, profitable go-to-market motion.

In this exclusive interview, we deep-dive into Rauch’s process for building such beloved developer tools, his fresh approach to monetizing an open-source project, the early PMF signals he detected and what he would go about differently if he could do it all over again.

A familiar problem rears its ugly head

After the acquisition was finalized, Rauch began working at WordPress. But in his new role, Rauch bumped up against that thorny problem once again: Why was the cloud so difficult for developers to use?

“When everything is in one code base (a “monolith”), the database and the code are so intricately tied that it constrains what developers can do.

It was hard to get that freedom as a developer. I wanted to try new frameworks, new frontend solutions, but I was constrained within the confines of a monolithic solution.

“This wasn’t solely a WordPress problem — at the time, the entire industry was primarily these monolithic architectures,” says Rauch. “But the world was slowly starting to move in the direction of microservices and composability, breaking down these monolithic ways of building. And the promise of doing that was that developers would get a lot of flexibility. That's what the cloud promised me — that I was going to be able to move really fast.”

The gears were turning in Rauch’s head. In November 2014, he outlined his seven principles for a better user experience for web applications in a blog post that would later become the blueprint for Next.js and Vercel.

BUILDING THE PROTOTYPE

While he was still in the process of finding two co-founding engineers, Rauch tasked himself with an ambitious goal: He would put out a prototype of his deployment platform in just three months.

“Creating infrastructure like that in three months is very, very difficult, but I wanted to create a deadline for myself to start getting feedback. In the process of building, we realized that a deployment platform needs a dynamic web application to be able to do things like orchestrate and see logs. There was a lot needed for a platform like that.”

React, the JavaScript library with which he was building, was great for developing an app, but when it came time to get the finished work in front of end users, React was frustratingly slow. Rauch wanted a framework to expedite the process.

“I describe it like this: React was a great engine, but I needed a car to get from point A to point B. That’s why I started working on this framework, Next.js, which at the time was internal. We started kicking the tires on this tool, at the time we called it N4, and every day, we're like, ‘Hmm, this is working really well, we're moving really fast, it's giving us the results that we wanted.’”

Six months later, N4 was too good to keep to themselves. Rauch released it as an open-source project under the name Next.js in October 2016. It was an instant hit with developers.

“To outsiders, it seemed like an overnight success because Next.js had a lot of attention and adoption from basically day one. But they hadn't seen all this development that went into it before. They hadn't seen all these internal battles and pressure testing. I had been thinking about the principles that the framework would live up to since two years prior, or even more. So the overnight success story is a bit of a myth.”

MONETIZING AN OPEN-SOURCE PROJECT

You could call it a happy accident: Rauch had initially set out to build a platform to help engineers deploy their projects, but along the way, built a React framework that became an instant open-source sensation.

But coding a successful open-source project and building a successful business are often at odds with each other in one key aspect: money. Most open-source software is available for free and doesn’t aim to ever turn a profit. The few that do, face limited options.

“When you try to go from open source to business, there's not a ton of creativity there. You either go open core, which is where you basically limit the free features, or you use some kind of license that allows you to give features but constrains how they're used and deployed.”

Having come up in the open source community, this rankled Rauch, and he didn’t want to restrict his Next.js customers. So, he took a fresh approach.

You have to align the value creation of open source with the value creation of the business that supports that open source project.

“In our case, we developed an infrastructure business with Vercel at a global scale that aims not to just host the products, but entirely outsource teams’ worth of responsibility for the companies that use our system,” he says.

Here’s how it works: To this day, anyone can use the entirety of the Next.js framework for free. If they want their projects hosted on a platform specifically built for Next.js, one that enhances what they’re building, they pay Vercel for that upgrade. And because Next.js remains open source, if the customer ever decides they want to take their workload off of Vercel and self-host it, they’re free to do so. They’re not locked into a single vendor.

If I were to do it over again, I would do it the same way: using open source. And I would continue to invest in making the product as free and available as possible.

Rauch managed to create a brilliant synergy between his products: The widespread popularity of Next.js, which remains open source, set up Vercel to become a revenue-generating complementary product because Next.js users naturally gravitate toward the platform built for that framework. And in turn, Vercel’s revenue funds the upkeep of Next.js. It’s a win-win for both the software and its customers.

SIGNALS OF ‘EXTREME PRODUCT-MARKET FIT’

Identifying the precise moment you’ve found product-market fit can be tricky for any founder. For Rauch, it was especially so because of his existing popularity in the open-source world.

“At the time that I released Next.js, I already had quite a bit of a following in the developer community because of my work on MooTools, Socket.IO and Mongoose, so I could easily get folks to at least look at what I was going to ship.”

So the fact that other developers were eager to get their hands on his latest software wasn’t enough for Rauch to believe he’d nailed product-market fit. Were people clamoring for Next.js because of the solution, or because of his own cache? Instead, the strongest indicator that he’d built a product that solved a real problem was that he had some competitors. Big ones.

One signal of product-market fit that I recommend you pay attention to: When something is really needed, you’ll find there are lots of very intelligent people at other organizations trying to build a version of it.

And despite all the customer love for what Rauch had built, that doesn’t mean it was without its critics.

“Not everyone in the developer community was jazzed about Next.js, and there were some competitive alternatives at the time that had a completely different philosophy,” says Rauch. “So it wasn't that we’d won right away. We had to navigate that market and the competition for quite a few years.”

4 LESSONS ON BUILDING SOFTWARE THAT CUSTOMERS ARE OBSESSED WITH

1. Instead of building more, become exceptionally good at less.

Rauch credits a pivotal moment in finding joint product-market fit for Next.js and Vercel to simplifying the offering.

2. Velocity matters more than speed.

Focus on iteration velocity, rather than speed. Velocity is speed with direction — you know where you're headed.

3. Don’t underestimate the power of integrations.

Having exceptionally good integrations can bring great value, rather than trying to build everything yourself.

4. When your product is new, make the messaging relatable — not category-defining.

In the early days, your priority should be to make your product relatable.

THE PATH FORWARD

Today, Vercel is a Series D startup with a total funding of $313 million. As the company has grown, it’s expanded to offerings that fall under two product categories: managed infrastructure and developer experience (DX) platform. In 2023, Vercel made big bets on artificial intelligence with the release of v0.

Rauch sees a huge opportunity to leverage AI and the move toward frontend services to take a bite out of the market. "AI will act as an accelerator of human potential."