111. Developer Platform Investing, Part 2 (Ethan Kurzweil)

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Today we cover Part 2 of Developer Platform Investing with Ethan Kurzweil of Bessemer Venture Partners. In this segment we address:

  • Startup Developer Platform InvestingHis 8 commandments of building big developer-focused businesses
  • How he uses these commandments while evaluating a startup for investment
  • How he sees the future of developer platforms and what he sees on the horizon?
  • Ethan’s take on emerging, foundational platforms such as VR or the blockchain and do you look out for developer platform opportunities therein
  • And finally, having recently discussed Ethan’s father, Ray Kurzweil in our AI interview w/ Nathan Benaiche, we get his thoughts on early-stage investing in AI

Guest Links:

Key Takeaways:


1- Two Main Types of Developer Platforms

1. Empowers the developer: Companies that sell to the developer/technical person. And they may be directly calling an API, installing an SDK, or coding to some particular spec.

Example businesses here include:

2. Empowers the non-developer w/ developer capabilities: These are the companies that allow businesses to be much more efficient b/c they remove the need for significant development in developer-centric areas. So, maybe your standard knowledge worker, who is not a developer can implement tools and complete tasks that would have previously required code. Analytics tools, application monitoring tools, team effectiveness tools and communication tools. This allows development to be democratized b/c many more people can access the functionality that previously would’ve only been possible w/ code.

Example businesses here include:
New Relic


2- Why Invest in Developer Platforms?

Recall that Ethan said that traditionally, developer platforms were not considered a good place to invest. Mostly due to the fact that many developer-centric businesses were early-stage, startup companies… which are not the best target customers. The best customers are the enterprise.

But now, this area is very attractive for investment because:

* Developers are running more companies
* Developers are becoming more influential
* The investment thesis on Twilio revealed a much larger thesis on the opportunity for these types of platforms
* Tools that make money like the enterprise but can be marketed like a consumer startup
* Cost of customer acquisition can be very low. Really low hurdle to adoption.
* Need marketing, not sales. Social can be an accelerant to that.
* Target applications can have real big dollars behind them. These are big ticket items on an enterprise’s budget.
* Adoption model can be very self-service. An independent developer can sign up and submit payments. This can allow companies to get to very large scale w/o the need for a sales interaction.
* Bottoms up adoption model where a critical mass of users adopt, begin integrating into more things that they use which may ultimately warrant a purchase at the enterprise level.
* Organic and viral adoption
* Tremendous net negative churn
* Very strong business model
* Developers are empowered to pick their own tools. No committee sales decisions.


3- The 8 Commandments of Building Great Developer-Focused Businesses

1. A Metered Service: Is the product/service delivered in a way that can be measured?
2. Revenue Growth with Usage Growth: This is both a pricing and product question. So can the usage increase, as the business grows, in a way that can be further monetized? This results in net negative churn where the revenue per customer grows over time.
3. Replaces an Existing Paid Service: Is the new product addressing something that enterprises already spend money against? Ethan cited areas including communication, security, authentication and payments that currently occupy a line item in the customer’s budget. This fact confirms that the startup is addressing a real problem that currently exists and it also helps with the major adoption objection, which is the introduction of incremental spend. Is it easier to convince a customer to reallocate an existing cost to a much better provider or add a whole new cost to address an issue which may not exist?
4. Offers an Amazing Developer Experience: Just as important as UX is in consumer products… How elegant and pleasant is the experience for the developers adopting the product? Clearly, if it is a delightful experience, developers will to promote it, share it with others and continue using it regularly themselves.
5. Developers Love it:  Related to commandment four, here Ethan is looking for signs that this makes a developers life and work significantly better. It improves their workflow so much that the net promoter score and social media sentiment reflects intense developer appreciation.
6. Exhibit Strong Network Effects:  As more people use the product, it becomes more valuable.
7. Eliminates Non-core Skill Set that No One Enjoys:  Things like authentication or spinning up servers are necessary evils but they’re not differentiators for many businesses. By removing the busy work for many developers, they can be much more efficient and will be very attracted to any offering that can help them achieve this.
8. Democratizes Development:  Gives non-devs, dev-like functionality.

Tip of the Week:    Thematic Driven Theses & Accessing Idle Supply


*Please excuse any errors in the below transcript

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?

Ethan: Sure, absolutely. We’ve hit on some of them. So I can probably go through them all pretty quickly. The first one is that it’s delivered as a metered service. You know, a service that can be metered. So you know how much of it someone’s using, just the importance or there’s some cloud kind of activity component or some way to measure usage. Certainly an API that’s a call to something is obviously measurable. The second is that it grows with the business. So this is both the pricing question and, and a product question. Is the product implemented in such a way that as the underlying business gets bigger or gets used more, the, the opportunity is going to grow. And so we, we touched on that a lot with, you know, #Uber rides and things like that. You know, most developer platforms have that element to them where there’s that nice net negative turn, they get bigger as they, the revenue per customer gets bigger as customers grow.

Nick: Yep

Ethan: We haven’t touched on number three, which is an interesting one. It replaces something that companies already pay for. So this is just saying, there are developer platforms that don’t do this, that they sort of provide you nice insights into something that, that don’t really replace something that the enterprise is already spending money on. But in the core areas, in communications, security, in authentication, in payments, stuff like that, those are areas that, that already have a cost. They are already allowing them in an enterprises budget. And so whether it’s some big consulting project that’s old or something that hadn’t been done with hardware in the past that’s now done in a light weight developer like way, it replaces something where there’s already a budget. So it’s going with it. Number four we touched on a little bit but offers an amazing an amazing user experience. So the, so the DX, this heavy bit called developer experience, is every bit as important as the UX is in consumer products. And it may not just be the technology itself but the way it’s implemented. How elegant is the API or the code or the SDK? Is it, is it a delightful experience for the developer such that they want to tweet about it and, and talk about how amazing it is? Or does it require like, you know, 17 pages of documentation and, and, you know, wringing your hair to be able to figure out how it works? And it’s not just the documentation point. It’s, it’s kind of how the data is presented, how it’s provisioned, how you, all the implements of how a developer might adopt this particular product.

Nick: Sure

Ethan: Yeah

Nick: Yeah

Ethan: You know, do you like Ikea furniture because you find that easy or too hard, you know, stuff like that. Like how the whole product experience is is very important. Commandment five, developers love it. That goes with number four. They, you know, they, they just love using it, they talk about it, they, they have this, you know, intense developer love which can be very easy to suss out because it just makes their life better, their job better, or, or it just gives them functionality they didn’t have before.

Nick: Net Promoter Score for developers.

Ethan: Yeah. Yeah, the NPS is actually a really good way to measure that or the maybe, you know, social media sentiment or all sorts of ways to get at that. But, you know, the best of all for products in general is a ton of developer love. And we could go and, and see that from any of the best companies, you know, in a few minutes just looking, looking around on Twitter.

Nick: Sure

Ethan: Exhibit strong network effects, number six. We haven’t talked about this one too much. This is not true of every company. But the best ones have these network effects where as more people use the product it gets better. #GitHub is a perfect example of that. As more people use #GitHub and, and host more code there, it becomes more valuable to the whole community in the same way that a social network is. There’s a number of companies that have that. Or, you know, as some of these companies that are selling data or have data elements to them, as they get more data they get more useful for everyone else. Security products have the same sorts of elements. As more people use them, as more people authenticate with them, they, they’re just, they’re more valuable to the next customer. So that’s a network effect type business. You know, we funded #NPM, that I mentioned earlier. They have something like 3 billion downloads of their various modules every month now. And it just gets more and more valuable as more modules get put on there, more people download them, more people find out about it. It’s more useful for people to use #NPM software and their code as a way to mange modules as the amount of modules available goes up.

Nick: And harder for users to leave ultimately.

Ethan: Yeah. Yeah, in fact, #NPM brought down the whole internet like a month ago because somebody had, which is an actually interesting example of network effects, somebody had written an open source module that allowed you to take like the right of a string, you know, the right end characters of a string. And not a hard thing to write but somebody wrote it, put it in the #NPM registry and lots of people used it. It was the sort of default way to do that, which, you know, people need to do in code when you’re parsing text or data or things like that.

Nick: Sure

Ethan: And a lot of big companies had adopted it. I think a lot probably without even knowing it, that, that were using this particular node module. And the, for some reason, I forget the exact, there was a disputable something and the developer of this took it down and broke, you know, a huge, a huge number of major enterprises sites that had used this. Just, just pulled it from the registry. Actually caused #NPM to change their polices about when you can do that because people are going to rely on you, you can’t just pull it down with, you know, 10 seconds notice. Specially if you open source you’re giving people an open source license. But anyway, it did show just how interconnected the world is and the network effect that existed and around that particular module being available was really useful to lots of people. It was so, they didn’t know it was useful to them because they were sort of unaware. But then once it was gone it was like oh shoot, I, I don’t have that anymore.

Nick: Wow

Ethan: And so eventually it got worked out. But it just shows the, the network effects. If you google NPM gate, you can see the, the major enterprises that went down as a result of it.

Nick: That’s a great example.

Ethan: So there’s, there’s an example of commandment number six in action. Commandment number seven, eliminates the need for a non core skill set that no one enjoys. So, a non core skill set, you know, like taking payments on a website, you know, handling authentication and security, you know, spinning up servers. And #AWS is a perfect example of that

Nick: Mmhmm

Ethan: I mean, there are people but like it’s not, it’s not a, most businesses don’t specialize in that and aren’t really good at turning on servers or, or they are, you know, competing with #AWS if they are, you know. Mostly it’s sort of a necessary evil of oh to get started and I have to go buy some servers. I mean, no one thinks that way anymore. But that was the case before #AWS. And so that’s, that’s true of a lot of things. Building video into your site, you know, there’s a whole bunch of specialized technology needed to, to accept video, to process it, to parse it. You know, #Cloudinary is made in, in managing images and manipulating images on a website. It’s not something unless you’re a sort of heavily graphics oriented site that, that you think about a lot but you need to be able to render them on mobile, render them on tablet, render them on OTT devices, change the width and scale them according to different parameters depending on, you know, what kind of responsive design setup you have.

Nick: Sure

Ethan: That’s a, I would call that a non core skill set. And if the platform allows you to do that in a faster, easier way, that’s, that’s, that’s a positive for it and meets that commandment. And then finally the last one we talked, we talked about a lot already- democratize the development. That’s that eighth, that’s that second type of developer business where it gives non devs dev-like functionality.

Nick: Awesome.

Ethan: Those are, those are the eight. Now very few companies hit all eight. There are companies that hit the first 7 or, you know, they, they, you know, six of the seven or something like that. But, but if you can get as many of those as possible, you, you tend to see, you know, you tend to see the best businesses that way.

Nick: Yeah. So is that how you’re sizing up opportunities, you know, new business comes to the door, good referral, compelling concept, are you looking for how many of these commandments it satisfies, and, and how well they satisfy each?

Ethan: Yeah. I mean, you know, that’s not, that’s not our whole way of evaluating which companies to invest in because there can be companies that don’t quite hit all of them that, that still are really interesting businesses. They don’t have network effects or there, there’s some element that’s missing there. But that is we do tend to look for those things and all of them and, and those tend to be the way. Do we, do we think there’s the potential for those things, are all true today? And will, might they be true in the future as the business evolves, releases more products, gets bigger? But yes, those are the, those tend to be the, the way we at #Bessemer look at new ideas or new companies.

Nick: So, how do you see the future of developer platforms? And what are some of the most significant changes on the horizon?

Ethan: Yeah, I think, I mean, I think we’re at the very beginning of developer platforms that’s, that use the cloud where, you know, the cloud, your, your code is being sent to the cloud or more and more is happening outside of your environment. You know, #NPM’s taking advantage of that where they’re allowing you to actually host code that you’ve written privately you don’t want to share it with the broader NPM universe, host it in their cloud and share it amongst, amongst the enterprise. I see more and more opportunities that result from that. I think in the beginning developers were, there was more hesitation. Sure, they’ll let, you know, they’ll let you send the email from a cloud server but only if and in certain controlled parameter where certain things are true. That’s becoming less and less of  a hurdle to adoption. Even core security features like authentication, like auditing, like other sorts of security requirements are now, they’re a gain for developer platform, the cloud based developer platform because the cloud is, is, is becoming more and more accepted in the enterprise. I think the other thing is there’ll be more companies like #Zammer and that are created and #Zammer was the, was the company I mentioned at the beginning where it was sort of enabled mobile development within enterprise developers. Most of the developer platforms that have been interesting is they started with startups and sort of grew out of that. I think that will continue. But I think companies that start with big enterprise use cases like enabling C# developers and that particular case will, there’ll be a market for them and developers are taking those meeting, enterprises are, are taking those types of technology seriously and and when needed, you know, enabling meetings with the IT folks that need to sign off on that kind of thing. So you’ll have the top down developer platform in addition to the bottom up one. And that’s a trend I think, which is the very beginning of we’ve a few companies like, but I think there will be more and more of, of that going forward. The second type of developer platform, the, the one that democratizes development, there’s so much more opportunity for things that enable functionality, a business type functionality that we even thought of that isn’t possible today. I think what will be interesting, you know, there’s like, take a company like #Mixpanel or #Google Analytics but there’s very specialized forms of that like, like #Mixpanel, like #Amplitude, #Heap Analytics. There’s a whole bunch of business intelligence companies that give you insight into your data, into the way people use your products, into the correlations among elements of your day that, that just enterprises just did not have. And so I think, you know, there’s a, there’s a lot of companies that have started with that premise that will, will continue to do well and will find a market.

Nick: Do you keep your eye on new user platforms that are emerging, you know, foundational platforms like the internet? Examples could be things like the block chain or, or maybe even VR, if that becomes a, a heavily used platform. Do you, do you follow those and do you look for developer platform opportunities?

Ethan: It’s, it’s, it’s interesting you should say that because when we see stuff like that like the block chain or, or well not VR so much, but the block chain, I do tend to think about it with a developer platform angle. The problem tends to usually be that the enabling tech has to be ubiquitous first before the developer platform makes a lot of sense. So the internet is pretty ubiquitous at this point I would say, and the mobile, you know, the mobile phone, you know, mobile, people have smartphones now and so developer platforms that rely on those things being in lots of people’s hands, needs to have a market to try to pitch that, make that case with.

Nick: Got you, okay

Ethan: Block chain is not, is not quite there yet, where there’s tons of real business transactions that, that use the block chain as a fundamental tenet of how they work such that the, the second order business, the developer platform makes can get big yeah. Now I, I think that’s changing. I think, well I don’t know if it’s necessarily changing with respect to the block chain. But I, I do think some elements of that are real serious enterprises like NASDAQ are taking a look at how they use the block chain for cap tables or things like that. And then it will definitely make sense to have a developer platform. But right now if there’s, you know, two or three businesses that really use the block chain for any serious output, you know, your just, your market is pretty limited.

Nick: You know, we were talking AI on the program recently with #Nathan Benaich of #Playfair,

Ethan: Right

Nick: and your dad’s name came up in the discussion, #Ray Kurzweil of course. So having had his voice in your ear all these years, what are your thoughts on early stage investing in AI?

Ethan: Well, I think the time is now, right. I mean, it, the, we’re a lot closer to the time than, my dad’s been talking about AI for 20 years. And, you know, it’s been a, people kind of dismissed them as oh computers can’t ever get that smart or, you know, we’ll never be smart enough to make them that smart. And I think people are changing their mind about that finally. So the time is finally here where there are real applications of strong AI that we see in our everyday life to make our lives better.You know, the way the Google search engine works for instance. You know, simple things like, you know, routing algorithms and stuff that uses collaborative filtering or machine learning to improve the, you know, uses data to improve the user experience that we have with it, is changing people’s minds about the potential of AI. So that’s nice to see. From a startup perspective, there’s a lot of companies that have built really strong technology, at least as far as you can tell. The question is always how do you, how do you commercialize that in a way where it will be a big business opportunity. And there will be for sure. Companies that have big business opportunities that have at their foundations strong applications of AI. You know, we have a company in our portfolio, #Expect Labs, that is trying to create intelligent natural language processing products that, you know, enable you to have a, a conversation with, with an AI and be able to pull out the elements to that conversation that would allow a technology to respond to it. But, you know, we’re still at the very early innings to figuring out what those commercial opportunities are. So I think probably now is a good time to be looking at that. I don’t know whether we’ll start to see tons of AI companies that ipo and create big markets in the next two to three years, five years, ten years. But it’s, it’s, it’s not, not too far off.

Nick: #Ethan, if we could address any topic in venture, what topic do you think should be addressed and who would you like to hear speak about it?

Ethan: Oh that’s an interesting one. I’d like to, I think we’re just scratching the surface as far as what, what, what’s going to be enabled by, a hesitancy is over virtual reality, but what’s going to  be enabled by sort of very immersive capture and display technologies, be they VR, AR, 360 video, stuff that enables us to more adequately go into other people’s shoes.

Nick: Mmhmm

Ethan: And it’s something I’m starting to think about, but it’s, we don’t have a particular road map around that area. And so from a, what consumer experiences will fall out of that and then what enterprise ones will fall out of that. You know, will it make surgery better, will it make, you know, warehouse technology, you know, managing warehouses easier? What, what will fall out of, you know, having more displays in the world and ones that we can sort of inhabit more easily? And so, you know, I would love to hear what the leaders in both VR and just computing processing have to think about that. What does, what does #Google think? What is #Facebook’s take on it? What’s, you know, what are the gaming companies takes on it? I think, I think that’s an interesting, there’s an interesting trend there that’s not been fully explored.

Nick: What startup investor has inspired and influenced you most and why?

Ethan: Oh that’s a good one. You know, the guys I take inspiration from are some of the folks that are newer to, and I’m thinking specifically within the seed world, that have sort of created this new category and figured out a way to do it that’s really effective. So these are #Hunter Walk with #HomeBrew, #Mike Maples with #Floodgate, #First Round Capital. Firms like that they’ve just created this new need they saw that startups before they got venture funding needed some real support that individual angels couldn’t do it. And each of them have a different take on how they do it. But it’s, it’s inspiring to see an old category get reinvented and a whole bunch of people filling that in very different ways and, you know, their, their NPS scores if you will, for at least those, those three firms that I mentioned are I assume, I think will be very, very high, you know. #Ann and #Mike at #Floodgate they’ve been doing this for you know, I don’t know, 8 to 10 years or something. And they’ve, we talked to founders that have had, are fortunate enough to work with them and they say very, very positive things. And, and they didn’t have a playbook, they created the playbook. So that, that has inspired me.

Nick: And finally to wrap up, what’s the best way for listeners to connect with you?

Ethan: Good management of the time, I didn’t think we were going to do this in an hour. It’s exactly 5 o’clock. So #Nick, well done. The best way are social media or email. I mean, in #Twitter emailing me. Usually, I mean, the best way is to get an introduction from somebody, a portfolio company or just someone that I’ve worked with. That’s always the best way to reach an investor. But failing that, social media is fine too.

Nick: Awesome! Well, thanks so much for coming on. I’ve read so much of your content on developer platforms and I know that the audience has been asking for an episode on this. So I appreciate you coming on and spending your time with us.

Ethan: Great, #Nick! Thanks for having me. This was, this was a lot of fun and entertaining for me too. So I appreciate it.