110. Developer Platform Investing, Part 1 (Ethan Kurzweil)

*Please excuse any errors in the below transcript

Nick: Today #Ethan Kurzweil joins us from Menlo Park, California. #Ethan is a Partner at #Bessemer Venture Partners, where he focuses on investments in consumer technologies and developer platforms. And #Ethan has invested in companies including #Twitch, #Periscope, #Dropcam, #Twilio, #Sendgrid, #Intercom and many more. #Ethan, thank you for joining us!

Ethan: Thanks for having me, #Nick! Good to be with you! I’m actually joining you from San Fransisco.

Nick: Oh okay, you’re in San Fransisco.

Ethan: Yes, up in San Fransisco today.

Nick: Got it. Okay. Well, today we’re talking about developer platforms and dev focused companies. But to start off, can you kind of walk us through your story and how you became involved in venture?

Ethan: Yeah, absolutely. I actually pitched #Bessemer on a company, back in early 2008, a company idea I should say. I was rolling off, I was involved with #Linden Lab, which was the company behind #Second Life back when they had their hay day in, you know, 2007 – 2008. And I had an idea for a concept that involved some of the virtual world stuff I was working on at #Linden. Pitched an investor at #Bessemer, #David Cowan, and he talked me out of that idea pretty quickly and talked me into becoming a venture capital associate. And I joined #Bessemer 8 years ago. The rest is sort of history.

Nick: And, you know, I’ve read the bio and #Justin Label, who was courteous enough to introduce us, kind of gave me a, a good profile on what you do. But would you be willing to kind of talk through your focus areas and, and what you’re focused on at #Bessemer?

Ethan: Sure, absolutely. I sort of have two split personalities as it relates to my world at #Bessemer. One, as you said, is consumer technology, specifically video, looked at a lot of video concepts and we continue to look at this tremendous amount of consumer viewing attention moving from television to online video and what does that mean and what are the next platforms that are going to be created there. And so that, you know, has led me to do investments like #Twitch and #Periscope that you mentioned and some others. That’s one half of my world. And then I think specific to what we’re going to be talking about for the rest of the hour is developer platforms and companies that take advantage of the developer as the buying agent or developer like activities in the enterprise that allows companies to sell pretty efficiently to technical people or business users that are, that obviate the need for technical people and be able to provide specialized skill sets like communications, security, email delivery, things like that.

Nick: Yeah, and on that point, can you talk a little more about what it means for a startup to have a developer platform focus?

Ethan: Sure! I, I think, I think it’s a specific type of company that’s sort of created from the beginning. And there may be some that companies that have platform elements to them, you know, like Facebook, that’s a consumer company but has a, has a platform that they market. But as it relates to developer platforms, we think about companies that are, have that in their DNA. Companies like #Twilio, #Sendgrid, #NPM, #GitHub, #Stripe, that where they are buying agent, the person that’s going to adopt the technology, and in most cases actually make the purchasing decision or at least advise strongly on the purchasing decision, is a developer, a technical person. And so at #Twilio, the company has an enormous love among the developer community because it makes communications technologies very easy to use and deploy. You call an API, you’d provision that API on your own on their website, put in a credit card and you’re ready to go. And test sending, you know, being able to receive voice calls or sending voice calls or text messages or things like that. So being a developer platform really involves having a product that can be fully commercialized through a developer adopting it. There are other types to developer platforms, companies like #Intercom, where sometimes the user is not a developer. But it would have required in the past developers to code specific functionality for their users. And that’s replaced by a platform like #Intercom or, you know, #Zapier allows you to stitch together various functionality into your application that would have required developers to, to, to code in the past. And so those are both sub themes of developer platforms that we get very excited about.

Nick: And just scanning through your background here, I’m, I’m seeing a diverse range of experiences. How did you decide to choose or how have you chosen to focus on this area specifically?

Ethan: Yeah. It, I’d love to say it was sort of perfectly preplanned from the beginning, you know, but I can’t claim that kind of wisdom unfortunately. But I, you know, a couple things happened, you know, I’m not a developer myself but I’ve always, you know, had an appreciation for developers and am technical enough that I sort of understand code, but haven’t worked as a developer commercially before. And so I had this sort of appreciation for the potential drudgery of a developer’s day and how that could be made better. And at the same time I started realizing that developers were impacting more and more of our world, you know. They’re about the only person who knows that obviously software is becoming far more and more important outside of just the software industry, more things are programmable today. And then I met #Jeff Lawson very early on, the CEO of #Twilio, early in my venture career. And he was just getting started, and he had this, this vision that resonated a lot. And so we invested in his seed round, later led some of his subsequent rounds. This is, you know, Series B, C and D. And I got to appreciate his philosophy and apply it, you know, even more broadly than just communication stack, which is what #Twilio is about, and meet lots of other companies that potentially benefit from that same, that same type of thinking. And so, yeah, I think it’s sort of having an appreciation for the developer but also understanding which potential developer products are commercializable and have big markets behind them was what made me excited about taking on that area.

Nick: Are there positions within the stack or are there sort of horizontal applications within the developer world that you focus on or you sort of stack and application agnostic when it comes to the platforms?

Ethan: Yeah, we’re, we’re, we have no religion around particular stack, particular programming languages or anything like that, you know. I mean, a lacky idea like enabling a tea shop of developers to, to develop mobile apps became #Zammer and that’s a, you know, a big, a relative success story within the developer platform world. So we don’t have a particular religion around that. We recently backed #NPM, which grew out of the node community’s need for package management because people are sharing packages quite broadly in a very open source and public way. And it didn’t take much for the broader javascript community to realize that was a better to do it. Then #NPM became broader than just node packages and that was where, you know, all of mainstream java packages are stored. So there’s no religion around that. I think we do have what we call our commandments for building a developer business. And those are the things like we want a product that can scale up with the underlying usage of the application. As more people, as #Intercom’s customers get bigger, they end up using #Intercom more, paying #Intercom more money. The same is true for #Twilio as a company like #Uber adopts #Twilio as their core way to communicate between drivers and, and riders, they end up using #Twilio more and more. So we like something that can get built into a stack and then grows with a customer. But we don’t have any religion as far as how they do that.

Nick: Well, yeah, I do want to get into some of these commandments, certainly later in this discussion.

Ethan: Alright

Nick: But just, just to back up here, can you give us a sort of brief history on developer platforms and the developer environment over the past couple decades?

Ethan: Sure. I mean, I think traditionally the scene is not a very good place to invest, right, because developers were seen as not particularly sophisticated and not, certainly not buyers of enterprise. And really where you get the big money is not selling to other startup companies as sort of the knock on the, you know, the knock on the industry if there was one.

Nick: Right

Ethan: It was, you know, it’s that you’re just selling to other startups. Really whether the big money is is in an enterprise. This is actually, you know, bigger enterprises or companies that start other startups like #Uber and then, you know, grow to become big. And then the knock has traditionally been that developers don’t make buying decisions in the enterprise. It’s the IT folks that are the gatekeepers to that. And my response to that is that that’s outmoded thinking that actually developers are becoming more and more influential as the world gets more programmable. Developers are now running big companies. #Facebook is run by a developer, #Google is run by a developer, #Yahoo, and it maybe not the best example these days, but they are run by a developer.

Nick: Right

Ethan: And, and, there’s another dozen examples of that. Developers are more influential in the enterprise. They’re the ones that are choosing which technology to adopt, not some IT person telling them what technology they have to adopt. And so that’s the sort of core shift that I think changed the prior view of developers where you had sort of more boring old school companies like #Borland Software and others that didn’t sell and, you know, compilers and developer tools like that, to broad, bigger platforms like #Stripe, like #Twilio, like #GitHub which fosters this developer community around sharing open source code, that those could be profitable businesses with real buying power behind them. And I think that’s the shift and that’s, that’s, that’s what makes this a particularly good time to look at developer platforms, in my view.

Nick: When did you see this shift start to, to materialize? Is this like a, a phenomenon in the last decade or is this just in the last few years?

Ethan: 30 years ago I predicted it. No, I’m just, just kidding. I’d love to be able to do that. I, you know, I think, I would love to say that I had this insight at the time we were funding #Twilio. I think it was sort of, what’s, what’s more accurate is that we, we felt like the pitch resonated there and then came to appreciate that it was much broader than that as we – [unclear/crosstalk 10:33]

Nick: Got it

Ethan: And so it’s really, you know, over the years, 2008, 2009, 2010 we were still formulating it. I think I first put down, we first put down on paper something in 2011 presented internally kind of what we called a road map for it. And kind of refined our thesis, came up with these commandments for which companies we think we’re going to be, you know, have, have the biggest commercial opportunities and, and how we, how we thought the industry would play out as far as, you know, what, what were good products to sell the developers and what would be more challenging to build a big business on. So it was sort of in those, those years that we were refining this thesis that I have, that I have been, been talking to you now.

Nick: So #Ethan, how do you categorize and think about different types of developer platforms?

Ethan: Yeah, I think there’s really two types that I outlined a little bit at the outset. There’s the company that sells to a developer, it’s sold to a technical person, and they are directly calling in API, they’re installing an SDK in their app, they are coding to some particular stack that this platform enables, like a #Zammer and like a #Twilio. And then there’s the, the company that, that developers are involved with but it helps business people be more effective by not requiring a lot of development time. That’s companies like #Intercom, like #Atlassian, like #New Relic, where they are in and around developers and developers use those products too, but they enable the broader business user to be more effective. Analytics tools, application monitoring tools, team effectiveness tools, like what #Atlassian sells. #Intercom helps with communication between businesses and their customers. So those are really the two, the two types that, that we see. And there’s, there’s hybrids, there’s companies that have some have elements of both. #GitHub may be an example of that. And there may be companies that, that aren’t, that are strictly speaking hard to classify, but also take advantage of this trend. But most of them fall in one of those two buckets.

Nick: Is there a certain adoption model that you’re looking for?

Ethan: Well, what’s truly nice,

Nick: sort of

Ethan: I’m sorry, #Nick

Nick: No, no, no, go ahead.

Ethan: Well, what’s truly nice about developer platforms, specifically the first time, is that you don’t have to sell them out of the gate. You, you, you can, you can market them like a consumer product,

Nick: Right

Ethan: through social media, through, through content marketing, through blogging, through other internet marketing techniques, you can reach developers. Developers tend to be a noisy bunch. They, they, in a good way, well, a good way and a bad way. If they like your technology they do tend to talk about it. I mean, search #Twitter for #Stripe, #Twilio, all the, the #GitHub, you’ll get pros and cons about every, all these platforms there. And the ones

Nick: Sure

Ethan: that are, have, that have legs, you’ll hear a lot about. You know, #Signal Conf is going on right now, #Twilio’s conference and it’s like a trending topic here in San Fransisco. It’s like a conference for a thousand people. But clearly it’s getting amplified by the amount of social media activity around that. So what’s nice about the adoption model is it can be very self service, like signing up for, you know, a #Uber or something you can, developers can sign up, start sending text messages, connecting soft kits, accepting payments, taking care of their secure ID, you know. We have a company called #AppZero that will take care of your entire authentication system. And it’s very easily provisioned over the web. And then, you know, you could theoretically get to even some large scale without a sales interaction at all. And a lot of, a lot of these companies, you know, a lot of #Sendgrid’s and #Twilio’s customers, and I assume #Stripe’s too, don’t end up communicating with the sales person until, you know, they’ve been using their product for many months or years even.

Nick: Got it. So most of these approaches are going to get a critical mass of users, you know, using the platform which merits the enterprise to take a closer look at monetizing with the enterprise and a sales at that point after a certain amount of usage and, and users have

Ethan: Yeah

Nick: have got on the platform?

Ethan: Yeah, exactly. I mean, you can, as the developer business, you can see how the developer platform is being used, and when a sales interaction makes sense. I mean, there may be, usually the first bill of any customer usually ends up being, you know, a couple bucks. When they’re just testing something out or considering using a platform they may, they may trunk some small portion of their traffic or test it in a product that hasn’t launched yet. Something like that where they kind of see whether this is the platform that they want to adopt into their technology stack. And then as the underlying service scales, starts getting used or as they start integrating this technology more into whatever it is, it’s being used, you, you start to scale the volume and then it, a sales interaction may be warranted or it may, may not be necessary. You know, they may just, there may be an open priced model. I know #Atlassian doesn’t have sales people. They just, there’s a, there’s a pricing framework and, and they have support and customer success people and you pay them what you owe them. And that’s, that’s how it works. You know, there are different approaches there, specially when you get into security and other things that do involve, you know, buying schematics and things like that. But generally speaking you don’t need a lot of heavy upfront work before a developer’s going to adopt something. You know, you can’t really sell to a developer anyway, they’re going to use the technology that’s best. So it’s hard to sort of mandate something from on high because developers now see are empowered to pick their own tools. And so this model works best for them too.

Nick: So, I’ve found this statement on the website and I’m going to read it back to you now. It’s, “Developerizing the enterprise by giving business users powerful tools without requiring the ability to code”. You talked about this a bit before, but can you give us an example of one or two companies that have done this?

Ethan: Yeah, absolutely. I mean, I think the, the best example is a company like #Intercom, you know, there’s #Optimizely is another good one where in the past, you know, #Optimizely, they help to do A/B testing online, in the past you would have really needed a developer involved in that, in coding the tests to find out what, what traffic is going on which place. #Optimizely, you can do all that in a very user friendly way move, things around, change text, create the experiments you want to create and see the results right in the, in the, in the application. #Intercom, same thing, if you want to do the kind of segmentation analysis and segmentation targeting that they allow, you know, this, when users fall off of this particular page I want to talk, I want to make sure they understood that the button is there, etc., you would have had to involve developers pretty intimately in that work. With #Intercom you set that all up in their, in their platform, in their basically application and you can use it directly. So it extends the power of development and sort of what we call democratizes development so that business users have access to that same type of rich functionality that in the past would have required code. And so, the, the best way we could say it was democratizing development or developerizing the enterprise is our term for it in #BV. Catchiest of all time but that’s kind of the best we, we could

Nick: I like it

Ethan: do. There we go!

Nick: You know, the other thing I came across is #Bessemer sort of talking about how these platforms can be marketed like consumer startups, but make money like enterprise companies. I think you, you sort of teased out some of the components of this before but could you expand on, on how this occurs?

Ethan: Yeah, absolutely. So it’s, so it’s, it’s nice because you’re, your customer acquisition is low like a consumer company. It can be low like a consumer company. So it’s s a really low hurdle to adoption. It’s organics usage drives the business in that once it’s adopted the usage of the underlying product grows with the, the revenue to that customer grows with the usage of the underlying product. And you really need marketing not sales. Then social media can be an accelerant to that. So you end up with low customer acquisition but these are major products that are adopted for things like security, payments, communications, you know, real time messaging, things that have real dollars behind them in some cases. And so the LTV, the lifetime value of customers that you get in through this very light weight approach can be quite big. And so that’s why we say that. We say that, you know, it can be marketed like consumer startups but have the kind of, make the kind of money that, you know, real enterprise companies get. But you look at the types of things that developers are having control over and they’re, they’re real big ticket items on an enterprise’s budget and something that enterprises are used to spending money for and will continue to do that. It’s just now a developer making those decisions are making and figuring out what technology to adopt.

Nick: I’d imagine the, the virality component in this market is like on steroids because, you know, you get some of these platforms into the developer communities and I, I would just expect that they would spread around like wildfire if they’re useful

Ethan: Absolutely. I mean, that is a huge part of this. Two things, virality is huge, so there’s organic, there’s both organic adoption and viral adoption. Specially in some cases where you can actually kind of see how something is done, you know, and you go through a checkout flow on #Stripe and see that it’s nice and want to adopt something else in your own app. There, there is some just sort of organic kind of word of mouth or just organic discovery in the wild that happens there. But also you have in the best cases, tremendous net negative turn because things get adopted and then customers end up liking it if, if it’s a good platform, the best ones. And they start to grow their, they start to grow their revenue with those companies. They start to do more business just as their products grow and they, they want to do more, you know. The #Uber, the #Lift cases where they are connecting customers and riders, as more people rides they end up spending more money. So you’ve got both those things are pretty strong elements of this business model if done well.

Nick: Would #AWS be like a classic example of a developer platform?

Ethan: #AWS is one of the best, in that very easy to provision a server. I mean, not as easy, it, it was easy for the time, they, they’ve got some catching up to do now that other folks like #DigitalOcean have made it even easier. But relatively easy to go on and we could provision a server right as we’re talking now and adopt some of their platform as the service offerings as well, put in a credit card and get going. And as you use more computing capacity and storage and other elements that they build for you end up, your bill ends up going up with #AWS. So they are one of the, one of the best developer platforms out there with, you know, I forget the latest number of billions of dollars in revenue.

Nick: Marketed like consumer startups but make money like enterprise, right?

Ethan: Yeah #Nick, yeah exactly, I mean it’s exactly that. And then, you know, they, they do two and a half billion in revenue, I just got this just like, and that’s per quarter. So it’s actually a $10 Billion

Nick: Wow

Ethan: revenue run rate, right. Just, just massive scale

Nick: and growing, right?

Ethan: Yeah, growing, it’s like more than 20% a quarter. Huge.

Nick: Yeah

Ethan: You know, and that, you know, that’s at the fairly deep technical infrastructure layer, and stuff that used to take all kinds of provisioning and work in the past that’s just made easy by, you know, some, some web hooks. They are, they are definitely one of the better ones. Unfortunately it’s not a startup, so it’s not something we can, we can go and fund. But I guess you can go invest in #Amazon and people that have done that have done fairly well. But it’s not, it’s not sort of in our universe.

Nick: Yeah, I almost didn’t bring it up because it wasn’t investable but

Ethan: Oh but it’s, it’s a, it’s a perfect example and it’s a perfect example of this trend. Actually I usually allude to it at some point.

Nick: So, in the past, you know, I’ve come across a bunch of your content which is fantastic. But you talk about these 8 commandments of building big developer focused businesses. We’re not going to be able to go super deep on each of these today, but could you walk through these 8 commandments and, and just touch on what each of them are and why they’re important?