Recently there has been a renewed focus on companies that build developer tools. This is natural for developers, as every entrepreneur starts by trying to solve problems they face themselves. Moreover, this is a trend with far-reaching benefits across every industry — better tools make developers more productive which makes it easier for companies to build really awesome products quickly. Services targeted at developers are a particularly powerful version of this trend — AWS and Heroku, for instance, have enabled countless startups to scale without having to worry about infrastructure, letting them focus on product instead.
Conventional wisdom has long held that it’s hard to build a big, durable business selling developer tools. Reason being that there is a finite universe of developers with limited budget — and inclination — to spend on tooling. However, recent history has shown this simply isn’t the case. The explosion in the number of software developers coupled with new cloud-based delivery models in addition to the increasingly collaborative, network-driven nature of development practices has resulted in the creation of several gigantic businesses. GitHub and Atlassian are the first of several that come to mind.
While addressing developer productivity directly through new tools can lead to successful outcomes, it isn’t without challenges. Developers are a notoriously fickle target customer segment, with perpetually-evolving tastes and a disposition against spending money.
Recognizing this trend, a number of entrepreneurs made an insightful observation: they could build end-to-end services and provide them as APIs and/or SDKs that make it easy for developers to integrate into the software that ultimately powers their business. These aren’t productivity tools meant to help a developer write better code or meet delivery deadlines faster (although they certainly can improve efficiency), but rather are entire business services delivered through code and implemented by the developer. Via this strategy, companies aren’t generating revenue from rationed developer budgets, but rather from line-of-business where spend tends to be far more elastic.
This new breed of companies has been built by selling through developers, rather than to them. By creating services that devs love and could understand and implement in their native language (code), API-based services now power multitude of products and platforms.
The greater appeal of these businesses is that their business model is intrinsically connected to the success of their customers. Services delivered as code are not tied to the traditional model of selling on a per-seat basis to individual devs, but rather pricing is based on value delivered directly to end-users; when your customers make money, you make money. Let’s look at a couple examples (both of which happen to be Redpoint portfolio companies):
· Twilio was one of the original developer services companies, and today stands as a poster child for API-centric businesses. Twilio succeeded by dramatically simplifying the messy challenge of building communications infrastructure (voice, messaging, etc.) into your product. By charging for minutes or messages sent, they are closely linked to end-customer usage. In many cases Twilio’s customers end up charging based on the same metrics, which even more closely aligns their incentives with Twilio’s.
· Stripe radically simplifies the complexity around of accepting and processing credit card payments online. Perhaps more importantly, by focusing solely on efficient credit processing, they are able to address the broader issue associated with end-user conversion. The company has about as direct of a connection to revenue as any business around. By charging a percentage of every transaction, they are able to align themselves with their own customers.
Though the value delivered extends far beyond the individual developer, both Twilio and Stripe have built thriving businesses by winning over the hearts and minds of developers. These companies delight engineers by offering services that are often complex features that need to be recreated time and time again or require significant engineering and operational overhead to power. Meanwhile, businesses employing these developers see clear economic advantages of incorporating these services and are therefore willing to pay a premium.
As more and more of our world becomes instantiated in bits, we’re going to continue to see companies that win by building products and services that enter the organization through the developer. Whether its infrastructure (AWS) payments (Stripe), communications (Twilio), business intelligence (Segment), location (Mapbox), commerce (Shopify), analytics (Keen.io) or anything else, we’re seeing the emergence of a new class of company that delivers value through code. Knowing how to win the developer over will be central to that business model’s success.