Breaking Through The (DevTool) Noise
One investor’s framework for evaluating early-stage developer tool startups
Over the past 5 years, I’ve talked to and evaluated hundreds (if not thousands) of developer tool startups. Given the number of paid and free tools available, the bar for investing in a team that’s building something new is high. In this post, I’d like to share a framework for how we think about DevTool investing in today’s environment.
Let’s start with the state of today’s developer tool landscape. There are 1300+ paid developer tools and tens of millions of open source projects created by the 73M+ developers on platforms like GitHub.¹ There have never been more options available to build, test, deploy, and manage software.
Investing in pre-product companies in this noisy environment is particularly challenging as you have to squint to see the potential value that a tool can create once it’s built. This is also true when evaluating startups planning to build a tool tied to an open source project with traction.² The project may point to an unaddressed pain point but that doesn’t always mean there’s a venture-scale opportunity where hundreds of millions of ARR can be generated.
In order to assess the market potential for developer tool startups, we created a framework that we’d like to share with founders. We call it the “pay/stay framework” and break it down below.
Will Developers Pay?
In the early days, the question of whether there will be a quantifiable benefit to using a developer tool feels overlooked. Companies with open source traction and/or free users are often able to raise big venture rounds on the promise that eventually developers will pay. However, when monetization doesn’t materialize, these companies join the crowd of former high-fliers who didn’t deliver on the promise of early “free user” traction.
For time and budget to be created for, or reallocated to, a developer tool, there needs to be a clear explanation to customers of the value it will deliver. That’s why having a view on the quantifiable benefit their developer tool will provide is something we look for in founders.
Another lens we use to evaluate the potential of a developer tool is the benefit companies will get from using it at scale. This translates into the value of using the tool more — additional users, more workloads, or increased support because the tool is becoming heavily used and relied on.
Open source companies need to be particularly thoughtful about their monetization strategy. Getting users to pay can be a dangerous undertaking: any disruption to what users can do with the free open source can harm a company’s credibility and destroy the hope of building a business.
Don’t get me wrong, the distribution potential for open source is phenomenal and we love startups that use its power. The network effects in the open source model mirror that of consumer social. As more open source users engage with a project, the more valuable it becomes. More users mean better code documentation, more customer (community) support, and increased mindshare for the company. The embedded flywheel of an open source-based company can be extremely hard for a competitor to overtake.
However, unlike in consumer social businesses, it’s really hard to monetize a developer tool through personal out-of-pocket payments or paid ads. There has to be a quantifiable benefit that will justify a developer’s employer being willing to pay. And the price needs to be high enough, with enough paid users, to be able to grow to hundreds of millions of ARR over time.
Will Developers Stay?
Because of the pace of innovation in developer tools, we assess whether we believe developers will pay for a tool AND stick with it over time. There are constantly new technologies coming out with 75% of developers learning a new framework or language every year. Stickiness matters a lot in this category.
Since we typically invest pre-product at Cowboy, stickiness won’t be proven out when we decide to partner with a company. Therefore, we talk with founders about their product’s long-term vision to get their view on how they’ll be able to win developers' hearts and minds year after year.
Earlier this year, Cowboy Ventures led the seed round for mobile developer tool company mobile.dev and one of the reasons we invested was the company’s positioning in the pay/stay framework. Co-founders Leland Takamine and Jake Krupski clearly articulated the quantifiable benefit that customers would get from using their platform and how it would become sticky over time.
Mobile.dev catches bugs and performance issues before a new mobile application release goes out. That means users get a higher quality experience — no more 1-star user reviews. Mobile.dev also saves engineers time. As the VP Engineering at their customer Reddit puts it, “we’ll be able to focus more on building rather than chasing down problems in production.”
Leland and Jake also shared their vision of becoming a platform, owning the mobile development lifecycle. This gave us confidence that they would build an enduring and sticky solution for the mobile ecosystem.
At Cowboy Ventures, we spend a lot of time thinking about the market potential for our B2B investments at the earliest stages — and developer tools are no different. Assessing the willingness for customers to pay, as well as how sticky the product will be, are critical to our investment decision.
If you’re an aspiring developer tool founder and/or you have an open source project that you would like to turn into a company, we’d love to help think through your positioning in the pay/stay framework. Email me at firstname.lastname@example.org or shoot me a DM @amanda_robs on Twitter 👩💻
²“Traction” is often defined as the number of GitHub stars, which is a form of light engagement, however other metrics such as downloads or issues that show deeper engagement can be a better signal that a project has true market resonance. Chang Xu at Basis Set put together a great piece on measuring open source traction here.