I’m surprised how many firms put a partner from their enterprise software team on their developer tools thesis area. Don’t get me wrong, many of these investors are truly fantastic. They’ve all got better track records than me (not hard to do, so far!) Take for example, Andrew Reed who led Sequoia’s investment in GitHub and shepherded then to a great home inside Microsoft. And in general, you can’t really correlate an investor’s background to their success (check the Midas List.) So for the avoidance of doubt, I’m not throwing shade.
Rather, I intend to call attention to an implicit assumption some firms are making — that developer tools are enterprise software. There is certainly an extent to which this is true. But it’s not my mental model at the seed stage, at least for most devtools companies.
The economics and growth of enterprise startups is well-understood, especially as the company moves into later stages. Mark Suster is one of the best bloggers on this topic. To be a bit reductive, the business depends initially on the founders building business-to-business (B2B) relationships with customers of the segment they intend to focus on. Then the company grows by bringing in an inside sales team, and their success is measured by a number of well-defined metrics such as lifetime value to cost of acquisition ratio (LTV/CAC,) churn rate, or retention cohorts. Their milestones are measured in annually recurring revenue (ARR.)
Consumer startups on the other hand are a bit more like magic! Even the most successful early stage consumer investors will say that they need evidence of mind-blowing, rapid, hockeystick-shaped, exponential growth to invest. The thinking goes (and again, this is reductive) that early on, a consumer startup’s growth is viral, word-of-mouth, organic. A more mature and growing consumer startup starts spending on advertising, content marketing, influencer marketing, TV ads, etc. to acquire customers. Often, there is no revenue at the beginning. And that sounds insane, but it is the story behind nearly every consumer success story from Twitter to Peloton. In order to predict the occurrence of raving fans, early stage consumer investors often describe themselves as keen observers of social trends and consumer taste, and may even style themselves as tastemakers or product experts. And among the very best consumer investors, it’s hard to argue with that.
Which of these sounds like the majority of developer tools and services startups to you?
When I look at a software product intended for software developers, I read the docs. I do the hello world. Sometimes I make a toy project. I’m looking for developer ergonomics, developer user experience, or as DHH might call it — programmer happiness. It’s often hard to describe to an outsider the difference between say GitHub and Sourceforge, or VMware and Docker. I’ve even failed to explain these to non-technical people today! You might even say the differences are intangible.
Software tools also grow and scale like modern consumer businesses! Influencers in the world of programming exist, bringing their audiences from platform to platform, leading communities, giving talks, and sharing YouTube videos. Content marketing is super effective in the spread of developer tools. Look no further than Joel on Software, which propels growth for his companies even years after the new posts stopped coming.
But developer tools can also be enterprise software, and that’s the subject of tomorrow’s post.