Ethan Kurzweil isn’t just internet royalty (he’s the son of futurist Ray Kurzweil), he’s also got strong opinions about what VCs are looking for in developer platform investments. In a recent Heavybit talk Kurzweil offers the firm’s commandments of spotting and finding a big developer-focussed business. Says Kurzweil,”There are 17 million developers globally… It’s much bigger and goes far beyond the cool kids of Silicon Valley.”
In his talk, Kurzweil highlights some of the early exits in the space including Mashery selling to Intel for $100 million, Layer7 selling to CA Technologies for $155 million, and Braintree selling to eBay for $800 million.
It’s wins like this that prove “developers are their own market” — one that is central to businesses and an estimated $3.7 trillion forecasted in IT spending decisions. Kurzweil and Bessemer have already invested in Twilio, SendGrid and Intercom. This projected growth, as illustrated in its own Bessemer Cloud Computing Index, is just one of the reasons why the firm developed its Commandments of Big Developer-Focused Businesses.
- Service Can be Metered: Instead of selling software that can be used forever, great businesses find a way to entice users into a model with recurring revenue. Says Kurzweil, “It’s a far more stable position to be in with far more predictability. If a product is valuable and [you’ve metered it well], then the revenue stream lasts forever.” Kurzweil offers Twilio’s metered voice calls and text messages as an example of subscription model recurring revenue.
- Grows with the Customer: As your customer’s business grows, so should you. Developers don’t spend a ton of money early, nor do they get locked into long term agreements. Instead most technical founders are only willing to pay for a service when it’s mission critical to their company’s growth. Kurzweil offers the example of how by 2011, Dropbox was spending nearly $2.4M dollars on Amazon Web Service storage costs. By building an on-demand model, AWS made it frictionless for Dropbox to try the service at as low as $140 dollars per month and scale up.
- Replaces What Companies Already Pay For: Kurzweil explains that it’s difficult to make the case for new line items in a customer’s budget. Instead he suggests that dev companies should replace or reduce a company’s pre-existing expenses. For example, companies were once forced to purchase, provision and manage their own servers. Today, both AWS and Heroku are cannibalizing that business and all the while, businesses simply change vendors with little to no change to their IT operations budget.
- Offer an Amazing User Experience for the Developer: Founder of Mashape, Aghi Marietti once said, “Even though we’re a developer company, it doesn’t mean that developers deserve bad experiences.” Kurzweil explains that many developer products including Mashape are winning marketshare simply because they’re offering products that are as intuitive as well-designed consumer products. Stripe for example does a great job of replacing the hassle of regular dev merchant products.
- Developers Should Love You: According to Kurzweil, Twilio reads aloud every positive user comment on Twitter before every board meeting. When people are vocal about products, you know you’re doing something right.
- Exhibit Strong Network Effect: Great products are often more useful when used and supported by a large network. In the case of StackOverflow for instance, the product is made more robust with a greater number of devs answering questions.
- Eliminates Schlep: Kurzweil suggests that great companies eliminate the need for a “non-core skill set that no one enjoys.” If you can replace something that isn’t part of a business’ competitive advantage, you free up developer time to work on core product and new feature sets. Again, Stripe is a great example. In the past, there were various developers for each company who were forced to handle merchant processing. The reality is that very few of these engineers enjoyed this job. Stripe changed that. Warns Kurzweil, “Don’t replace what (companies/developers) enjoy doing. Replace something hairy, complicated and terrible.”
- Democratize Development: Companies that help non-devs do developer tasks are often extremely successful. One example is Optimizely – a company that lets a developer embed a few lines of code and offers an interface where business users can then tweak ongoing campaigns. For these types of product interactions, a developer gets involved once for setup and then the business user takes over. The idea here is to replace a clunky and ineffective work flow of back and empower the business user to do more with their limited development skills. An additional perk of democratizing development in this way means that a company’s potential market expands from 17 million developers to 400 million information workers.
In addition to the above, Kurzweil offers his thoughts on what he wants to see before he makes an investment. For a look at what Seed, Series A and Series B rounds might look for dev companies check out Kurzweil’s complete Heavybit talk.
Dana Oshiro is the Director of Programs for Heavybit– a 9 month SF-based program dedicated to helping companies build developer-facing products and services.
The New Stack is a wholly owned subsidiary of Insight Partners, an investor in the following companies mentioned in this article: Optimizely.