🌍 Software and the world…
In 2011, Marc Andreessen (of Andreessen and Horowitz aka, a16z) penned an article in the Wall Street Journal titled “Why Software Is Eating The World”, highlighting the shift from a hardware-based economy to one where software is consuming all. Now, it almost seems safe to say that software isn’t “eating” the world, but rather that software IS the world; nearly every startup that we see is part of a broader ecosystem enabling the development and growth of this “software world”.
A key outcome of this new world is the rapidly expanding developer space. According to a recent report, globally today, there are 26.9 million software developers; that number is expected to grow to 28.7 million in 20241. That’s a LOT of developers, a lot of software products, and a lot of potential products for developers. But while the amount of developers is indeed rising, they are still an expensive and scarce resource, as such, tools for software development and open source projects are becoming more and more prevalent, aka, a lot of growth for the B2D (business to developers) space.
🧑💻 So what exactly is this B2D space?
A good way to understand the B2D space is to look at it almost with a PLG (product led growth) mindset, a bottoms-up and product-focused go-to-market approach. (Side note: beware, you’re about to be hit with a whole bunch of acronyms in this blog 😉.) We see successful PLG in cases like monday.com (an early Entrée portfolio company), where the product itself starts off the relationship, and monday.com’s company growth relies on using the product as the main vehicle to acquire, activate, and retain customers.
B2D, selling to developers, involves a similar play as PLG — businesses (or startups) start off with a value proposition for a single team member, grow within the company, and then complement with a top-down sale. In the case of B2D, rather than market a software product to senior managers, effective B2D companies provide value for a single developer (often with free and open-source tools or solutions), work on building up a community of support, start by offering the product to the individual developers or small teams with a self-serve option, and then eventually either initiate the top-down sales process for senior management (or even better, have the developers themselves “sell” it to their immediate managers, as when there are enough small “islands” within the same organization, the “big” sell is much easier.)
🛠 If you build it, will they come?
It sounds simple enough- founders of B2D startups know what the problem is, know their target audience, and know how to build the solution. So it should be simple, right?
Unfortunately, it’s not that simple.
There are a few obstacles that B2D companies need to overcome (that B2C and B2B typically don’t need to worry about):
- ⛔ No room for B.S: With B2D, it’s not about having a really good marketing or sales team that can sell the product with words… you actually need to have a good product that sells itself. This product will be viciously vetted by the crowd of users that are quite opinionated and extremely knowledgeable already about software. You can’t exactly B.S (excuse the language) your way into adoption here.
- ⚖️ It’s a bit of a balancing act: This complexity is a challenge somewhat similar to what B2B companies face with PLG – the need to create value for the single user while also having an enterprise value proposition. With B2D there is a complex play of bottom-up growth with sales/marketing and a challenge when it comes to balancing the growth motion with enterprise sales.
- 💸 Growth without monetization: When it comes to B2D, that there are two interrelated processes: on one hand, the growth engine (leading and growing with the product), and on the other hand, sales (from the top). With B2D, there is a risk that you can build a strong growth engine that people love, but then you can’t find the right way to monetize it. One common method for generating this growth engine is open-sourcing parts of your solution and building a community around it. In any event, finding the sweet spot between the two processes is complex but necessary for success.
✅ Some tips for B2D founders…
After working with quite a few B2D startups and fantastic founders, here are some tips for those that might be looking to break into the space:
- Consider your open source strategy: when you’re building a developer tool/product you can decide if/which part of it you want to open source as there are advantages and disadvantages when it comes to open source:
- On one hand, R&D managers often show resistance when it comes to adopting new technology due to potential vendor lock-in. An open-source offering can help mitigate that fear and reduce the risk of low adoption.
- Another advantage is that the early adopters will try the product before it is ready and will provide valuable feedback and the open-source community will assist with building the product with issues, feature requests, and even writing code.
- On the other hand, the disadvantage is that there’s no going back… and your competition might use your code and offer a competing service based on your solution.
- Founders of B2D startups need to sit and think about their open-source strategy BEFORE beginning and before it’s too late to monetize their product.
- Community is key: Developers, in general, love “community” and take an active role in sharing information; often, if a developer finds something interesting or helpful, they’ll be more than likely to share it among other fellow developers. As such, a B2D product’s initial adoption and popularity often comes from word-of-mouth “community” marketing, like through social forums (like Discord channels, Twitter, and Reddit communities/Subreddits), conferences, Stack Overflow, GitHub forums, and more.
- As a founder of a B2D startup, you need to be an active player in these spaces, which could mean prioritizing the hiring of a community manager, a DevRel (developer relations), or Developer Advocates pretty early on.
- It is important to remember that within the B2D space, developers are now the decision-makers. They will decide which tools to use and often they even have the ability to purchase it. In this world, a CTO/ CEO cannot force developers to use tools they don’t like.
- Power to the Product: When it comes to B2D, you are your product. You are leading with a product and pushing it to product people, so you can’t just rely on marketing, brand, fancy slogans etc. to get you where you need to go (even in the beginning). B2D products are vetted by developers in a relatively short period of time and must be extremely reliable, have minimal downtime, and prove their practical value from the start.
- B2D founders have to remember that they’re basically building a product for the people that are experts at building products. That means that to be successful they need to put a very focused effort on not only building a very good product (as the product has to lead) but building a well-designed and well-branded one that can stand on its own right from the first click, provide a very quick time to value, and continue to drive growth down the line.
- Metrics Matter: When it comes to fundraising and growth, B2D founders must put an enhanced focus on measuring and deeply analyzing their engagement. The best of breed B2D open-source startups follow the rule of 20/20/20 across user conversion metrics – where 20% of the OS community signs up for the product, 20% of those sign-ups become active users, and 20% of the active users become paid users2.
- As an early-stage founder, be prepared to show off and explain your user retention and engagement numbers and worry less about lack of (or minimal revenue). When it comes to investing in B2D spaces, early proof of high user engagement is enough to indicate the potential for long-term sustainable growth at scale.
🔮 So…what does the future look like?
Though many years have passed since I’ve written my last line of code while serving in 8200 (an IDF intelligence unit), I’m a software developer by training. “Back then”, Stack Overflow and GitHub didn’t even exist; developers and programmers had to do everything manually, step-by-step, and often without efficient processes or advice from others. Over the years I’ve watched this ecosystem evolve due to developers building solutions to problems that they themselves faced. This evolution has come about in parallel with 3-part growth within the broader ecosystem:
According to Gartner 3, growing trends in cloud computing continue to enhance cloud offerings and capabilities and accelerate growth across all segments in the public cloud services market, a primary market of B2D products and technology. They predict that global end-user spending on public cloud services are expected to reach $480B in 2022 and that by 2026, public cloud spending will exceed 45% of all enterprise IT spending, up from less than 17% in 2021.
The U.S. Bureau of Labor Statistics predicts that the “Employment of software developers, quality assurance analysts, and testers is projected to grow 22% from 2019 to 2029, much faster than the average for all occupations.” This growth is due to the shift to the cloud and the need to develop software, services, and solutions related to the cloud. This growth in the developer space (I also mentioned this earlier in the blog) leads to a growth in tools for those developers (hence the growing B2D trend).
Last but not least, Pitchbook data shows that in 2008, B2D startups globally raised about $ 207M in 38 deals; in 2019, B2D companies raised almost 10x that amount and raised $2B in 268 deals. Then, last year (2020) the total fundraising jumped by 55% (!) and has already reached $3.13B with 273 deals. This year is also proving to be a record year, when in the first half of 2021, B2D startups have already raised about $3.1B, (the amount raised throughout the whole of last year), in just 178 deals. According to estimates, the size of the software and services market for developers globally is approaching $40 billion, and that number is expected to rise4.
The B2D space aligns perfectly with Entrée’s “4T” investment thesis: Timing x (Technology + TAM)Team. As seen above, the timing is right, the TAM is massive, the tech has huge potential…all that is needed now are some really fanatic teams ready to change the world.
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