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Data-driven VC #30: Developing for developers: the potential behind B2D companies
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This post was written by my colleague Laurin Class and me, and was originally published on the Earlybird blog. Following your continuous interest in my previous dev-related posts and the positive feedback on our original Medium post, I am reposting it here for the Data-driven VC community.
At Earlybird, we love developers. We love having developers as part of our investment team for new perspectives. We love having them in our internal engineering team to build our data-driven VC platform, Eagle Eye. And we especially love to invest and partner with them as founders.
With that proximity to the software engineering community, it follows naturally that we closely observe the developer’s tool kit and continuously try to understand its inherent pain points, as well as how to ease productivity blockers and challenge what might come next.
In the past, we invested in developer-oriented companies such as DeepCode (now part of Snyk), Aiven, Seerene, a UK-based Seed company in Stealth, and more – to help put the right tools in the hands of devs and to assist in generating as much high-quality output as possible.
Recently, we witnessed a growing interest in the space and many of its sub-trends, from both the entrepreneur and the investor side. We have noticed certain tendencies: more companies founded to target programmers, raising bigger investment rounds, achieving higher valuations, and overall generating more attention.
This sparked our interest to take a deeper look into what makes these Business-to-Developer (B2D) companies so special. We found that these companies share a number of unique characteristics and that when quantitatively measured, there is a first indication for an outperformance of the segment from a return perspective — compared to wider market benchmarks.
But let us take a step back and first look at what we understand as B2D and what we discern makes them special.
How we define B2D
The term Business-to-Developers (B2D) is not yet widespread and anything but mainstream. What it means to us is that other than for example, more traditional business-to-business (B2B) or even business-to-consumer (B2C) firms, a company primarily, sometimes exclusively, targets their products or services to software developers.
Over time, we actually saw reason to look at things more broadly and also include Data scientists/engineers/analysts as well as Designers (UX/UI focus) in this category; these 3 customer/user personas often work closely together and share a lot in terms of work set-up, tooling, and community-centeredness. For a better reading flow, we’ll still mainly talk about developers in the B2D context.
The model works since typically B2D businesses sell their solution straight to an individual developer/data worker/designer instead of selling top-down to a whole team through a (product) manager or tech lead, detached from the actual engineering work.
The market momentum that catches our attention
Generally speaking — a lot of macro tailwinds work in favor of this company category. First of all, the number of developers is growing rapidly, from >26m in 2022 to 45m by 2030.
Additionally, first anecdotal indicators point to an increased investment activity targeted towards this segment, further fueled by landmark transactions such as IBM’s RedHat acquisition for $34bn in 2019, the IPO of Elastic at >$2.5bn valuation in 2018, the $20bn acquisition of Figma by Adobe in 2022, and a number of high-profile acquisitions from mainstays like Microsoft.
Some prominent large funding rounds include:
… to name just a few.
But where we see the true magic of B2D is when it comes to the following dynamics in their Go-To-Market:
PLG: With the transition towards consumer-grade UX in enterprise software, more beautiful, powerful, and intuitive, prominent companies such as Slack, Dropbox, or Figma showcased the power of PLG. Though many new startups follow the trend, not every model is made for this particular sales motion. It seems that B2D companies however, almost by nature, are perfect PLG candidates, since developers as a target group want to see proof of the value of a product first and stress-test it in actual live cases before making a purchase decision and upgrading to full functionality tiers.
Internal product ambassadors: Convincing a developer to be a customer is notoriously difficult. You’ll not only need a neat product with excellent usability, but they will also demand a streamlined onboarding experience and seamless documentation. If, however, you managed to convince a developer to become a customer, it can be extremely rewarding. In no other customer group do we see users becoming such fans of a product/company and eventually developing into true champions of that tool– especially within their team, their company, and even beyond.
Community focus: The rise of open source software (OSS) has shown the importance but also the opportunities of community building in the developer world. Like no other users, developers engage in communities to exchange ideas, share hacks, criticize, and most notably, support. This community aspect feeds well into the former aspect of gaining evangelists and is yet another reason for us to love B2D.
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A success recipe for B2D companies to thrive
These advantages, however, come at a price. Besides the normal hassle, B2D founders have a couple of additional aspects they need to nail to master the B2D playbook:
No BS culture: Frankly speaking, there is just no room for BS in B2D. Companies in the space need to be ready to experience brutally honest feedback from a target group with high standards.
Developer experience and developer engagement: It will be crucial to drive these and it may require skills and resources non-B2D companies do not need, (e.g. hiring a developer advocate or tools such as Orbit/CrowdDev).
Continual improvement: Launching a great product is never enough. Regularly improving functionality is expected and key to driving adoption.
Balance between providing value for the individual user but also for the enterprise: Yes, you’ll want to deliver the most value you can to the individual developer in the beginning to start the B2D flywheel, but don’t get lost in the trap and lose sight that eventually your product must deliver valuable functionality for the whole team. This can demand other feature prioritization.
Monetization — when and how: You’ll want to give developers enough time and feature access to really test it out. Build enough user love to inspire them to want to carry it to their team, but do not miss the threshold of giving away your product for free without a clear path to monetization.
Adapting as you mature: At some point, there will likely be the need to switch to some of the more traditional B2B SaaS sales playbooks, (such as top-down outbound-led sales). Once larger and more demanding customers with bigger wallets come into play, with other needs in terms of service, features, and support — do not miss it!
Overall, we definitely see that the strongly beneficial characteristics that B2D companies share outweigh the challenges if done right.
B2D companies and trends that you should know
There is obviously constant change across the whole stack and beyond, so the following trends are by no means exhaustive. Below we list some areas where we currently see a lot of great teams working on new solutions that we perceive as extremely valuable. We want to bring to your attention, as well as some companies where it seems they nail at least parts of the above-mentioned game plan:
Developer productivity measuring: tracks individual developer’s productivity on a couple of relevant metrics (e.g. around the DORA or SPACE frameworks) to understand how a team works, identify blockers, and collaborate more efficiently
Data streaming: a lot of meta trends (e.g. consumer demands but also the nature of data sources) is pushing companies to move from “the modern data stack” to a real-time data stack that allows for data streaming.
DevOps automation: setting up your cloud infra and bringing it into production is a pain, DevOps engineers are a rare resource and no one wants to touch the (AWS) console.
ML Observability/monitoring, pre-deployment, and in production: with the hype around AI, the sad fact is that many ML projects still fail. A variety of companies want to make sure that all governance, compliance, but also performance risks are mitigated pre-deployment but that model performance is then also maintained in production with no drift or anomalies causing them to break
Evidence in the numbers to support that view
Based on our qualitative findings about the virtues of B2D companies coupled with recent anecdotal fundraising successes, we asked ourselves: Can the B2D segment outperform the broader market but also their more general B2B SaaS peers from an investment performance perspective?
For this, we turned our gaze toward actual data to back up this hypothesis.
We quickly realized there are two key hurdles for this endeavor:
Company categorization: The above-mentioned definition we derived sounded straightforward, but reality shows companies are often hard to categorize as B2D companies. There are many examples in which companies initially start as pure B2D companies, only offering solutions for developers, but over time and with growing size and scale, also offer adjacent products for non-technical users (e.g. several companies in the observability space). Are these still B2D? The same goes for so-called ‘API-first’ companies that offer their solution via an API and thus by definition mainly towards developers. But then the product itself mainly offers functionality for another line of business. (We see these a lot in FinTech, e.g. Pagaya or OneConnect).
Sample size: We compiled our list by starting with obvious well-known B2D companies and enriched it over time by screening through large tech indices and through questionnaires. We quickly realized there are only so many publicly traded companies in the target that are yet to go public. The missing critical mass of available data points is thus a key limitation of our current findings.
To solve issue 1) we segregated our identified B2D companies into two sub buckets:
“B2D Light”: we included all companies that have, even though maybe not exclusive, some significant angle toward developers
“Pure B2D”: this is a subsample of B2D Light only including companies that exclusively target developers
For now, we must accept the limitation of issue 2) and therefore see our results as a first indication of where this could be going in the future. The full composition of the two indices can be found below.
We built the index through S&P Capital IQ’s custom index builder. It is a market cap-weighted share price index. The starting time is Jan 2018 so as to not further limit our sample size. As benchmarks, we chose i) the S&P 500 (for a comparison to a general broad market index), ii) the NASDAQ Composite (as a general broad tech market index), as well as iii) a well-known Cloud index from a fellow VC firm.
Looking at the results below, we can make two observations:
The B2D soft index clearly outperforms the broader market index (Δ +27.64%) and the broader tech index (Δ +20.69%) over the chosen time horizon, however, it is very close to the well-known cloud index (Δ +0.65%). The simple answer to this is that 70% of our B2D companies are also represented in the chosen cloud index.
The pure B2D index on the other hand, clearly outperforms all other indices by significant margin. (Δ +150.83% to S&P 500, Δ +143.88% to NASDAQ, Δ +123.84% to Public Cloud Index)
B2D Light: Alteryx, Appen, Atlassian, C3 AI, Cloudera, Cloudflare, Confluent, Couchbase, Datadog, Dynatrace, Elastic, Fastly, GitLab, HashiCorp, JFrog, Monday, MongoDB, New Relic, Okta, PagerDuty, Ping Identity, Pivotal, Qlik, ServiceNow, Splunk, Sumo Logic, SUSE, Twilio, Unity, VMWare
Why we think this is just the beginning
As outlined above, there are notable limitations to our analysis. We should definitely take the result with a grain of salt until better availability of data. However, we prefer to see it as yet another indicator of the big potential of the B2D segment.
Together with our other findings, we definitely believe that we will see a spark in the sector that could further fuel the rise of B2D. This is why we continue to be bullish on the segment and keep on exploring what might be next in changing and improving the way developers work.
To wrap up, if you and your team want to reshape the B2D landscape and complement (or disrupt?) the developer/data/designer tool stack, we should talk! Please feel free to reach out to Laurin or Andre. We would love to hear your story and thoughts.
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