The Developer Renaissance

What an exciting time to be in this business.  The “post PC era” and cloud computing are colliding to create a perfect storm. First, thanks to the post PC era, demand for software is exploding. Second, thanks to cloud computing, software development is becoming increasingly accessible.

There's an interesting positive externality to these trends: The developer "citizenship" is exploding.  Consequently, developers are finally a large enough community with enough purchasing power that you can actually build a company just by selling to developers.  I'd love to invest in companies doing just that.

In this post, I'll provide a little color on the two trends, and then, in the interest of feedback or thoughts, I'll outline three areas in which I’m particularly interested.  This is an investment road map in progress, so would  truly welcome any feedback.

Exploding Demand

In the late Mainframe Era, developing an application was a real team effort, access to mainframes was restricted, and given the expense to purchase a mainframe, not to mention maintain it, the number of computers for every person was exceedingly low. Then the PC era came upon us -- computers got cheap enough that suddenly households could purchase them and the number of computers per person, while probably less than 1 computer:3 people, started to rise. With that increase in the number of computers, demand for applications started to tick up. People needed a word processing application, a browser, some games… you get the picture. But because there was a very small number of application platforms (Windows, Apple), and a small number of computers relative to the number of people, demand was capped.

Now we’ve entered a new, fascinating era in software development: the alleged “post-pc” era. Computers are now a fraction of the cost for a multiple of the power. Even the computers we hold in our hands (smartphones) are more powerful than the computers we once had on our desks ten years ago. Consequently, the ratio of computers to people is inversing. Whereas multiple people used to share a single computer, now it’s not uncommon for a single person to have multiple computers. Compounding this trend, applications are no longer limited to just Windows or Apple’s OS. Everywhere you look there is a new application platform. iOS. Android. Blackberry. Facebook. Force.com. Wordpress. Twitter. Drupal. Box. Shopify. Samsung. Heck – even automobiles like BMW are trying to get in the game!

Consequently, the demand for applications has exploded.

“Democratization” of Software Development

Increasing demand by itself will always create an increase in supply. But there is another trend that is making this process happen even faster: software development is getting democratized. It used to take a team of developers and sysadmins to build an application, and software development was a highly specialized skill. Now, self-taught programmers abound, and developers can launch new applications after just a weekend’s worth of work. As my colleague David Cowan outlined back in 2008 his Internet Law:

“The time and money required to produce (design, develop, secure, test, launch, scale) a typical data-oriented form application on the web drops in half every 2 years.”

Because software development has become more accessible, the number of developers worldwide has exploded. As my friend Art Chang pointed out - it’s a fascinating reversal of the industrial revolution – the means of production is being handed back to the masses. This population of developers is only going to grow from here.

Why I’m interested in this trend

Developers are finally a large enough community with enough purchasing power that you can build a company just by selling to developers.   In particular, there are three types of companies that most interest me:

·         Further Democratizing Software Development:  To me, this means riding the trend of cloud disruption, but higher up on the stack.  The first wave was on an infrastructure level such as Rackspace and Amazon Web Services.   Then the second wave went slightly higher – platform as a service offerings like Heroku, Force.com, and Engine Yard.  But the wave I’m most interested is the next – companies like Pantheon which make it stupid simple to deploy Drupal, or Bessemer portfolio company Wix, which makes it stupid simple to build Flash websites without any coding ability.

·         “Developer Components”:  I love Christina Cacioppo’s description of this opportunity as software developing a “component industry” in her post “What comes next,” though I suppose I slice the market a little differently.  We’ve already invested in a couple companies in this space including Twilio and a soon-to-be-announced company SendGrid, and hope to do more. 

·         Developer “Picks and Shovels”:  Developers need a new breed of web-based tools to help them build.  This ranges from collaboration-centric tools like Pivotal Tracker and Flowdock, to code hosting or developer environments like Koding, to application monitoring like Nodeable.

The space is still early, but the trends are very clear.  It will be exciting to see how this renaissance plays out in 2012.

Holding your hand to the fire

Several months ago, I wrote a post about the four stages of learning.  Implicit in the transition out of stage 1, the "enthusiastic beginner", is the fact that to really learn something, you need to try to do it, and inevitably, do it wrong.  

Given the wealth of fantastic content out there in the blogosphere, especially when it comes to starting a company, raising capital, building a product, etc., it can be tempting to try to read blogs and hope that they'll help you navigate potential road mines. But if you are brand new to any one of these domains, most of what you read won't really "catch" in your brain. Instead, I find the best time to learn something is after I just messed up on that thing.

So if you're starting something for the first time, and find yourself making rookie mistakes like building too many features into the first version of your product, or not having your "elevator pitch" ready when you pitch a VC, don't worry.  To really learn, you need to hold your hand to the fire.

As Rob May of Backupify once tweeted, "Everything I learned about doing a startup came from doing a startup... not reading blogs about it."

Can product "disruption" become a new paradigm?

Facebook is an incredible company, and it’s incredible for many, many reasons. But one of the things that most impresses and amazes me is Facebook’s relentless reinvention. The company has disrupted its product, and therefore its users, on multiple occasions. I’m sure everyone remembers the backlash Facebook weathered when it launched its newsfeed. And of course, we’re still less than a month into Facebook’s newest disruption, this time to its profile page.

Facebook is in rare company. Microsoft, to its credit, disrupted its Office product suite by introducing the ribbon (which was probably a great change for my mom, but drives me a bit crazy), and more recently disrupted its Windows suite. But I’m having trouble thinking of other companies that have taken their core product and fundamentally changed it in a way that is both disruptive to its end users and unavoidable.

Recently, I’ve started to use Salesforce.com’s CRM. Although Salesforce is a huge step up from the other CRM I was using, it’s clear that the application was designed several years ago and has since evolved but hasn’t fundamentally gone through any disruptions. While the UI/UX must have been a dramatic, disruptive improvement upon other legacy CRMs when it launched, as it continues to evolve, it might one day find itself surprised by a new, shiny startup that takes advantage of the last five years of technology innovation (both technically and UI/UX-wise).

Obviously, there’s a reason why you don’t see a lot of disruption. It’s incredibly difficult to execute, and unbelievably risky. Large companies aren't known for pursuing risky strategies.  But could a Marc Benioff look to Mark Zuckerberg as a disruptive role model?  Crazier things have happened. Facebook is leading the way not only by example, but by lowering the riskiness of disruption by forcing its 800m+ users to better embrace change.

We’ve gotten used to hearing about struggling startups “pivoting”. It would be pretty incredible if we soon found ourselves getting used to hearing about companies with market dominance “disrupt” their products and leap from the past to the future.  

Are you a vitamin, a painkiller… or a drug?

It’s become commonplace to describe products as either painkillers (“need to have”) or vitamins (“nice to have”). Painkillers are products that address existing needs/pain points. Companies selling painkillers harvest customer demand; the prospects are already searching for someone to fix their problem and take their money. Vitamins on the other hand don’t really address an immediately apparent need. Instead, the vitamin company must sell a prospect on how their solution will make the prospect’s life better. The problem with vitamins is that it’s hard to get people to pay for them and once you have them as customers, hard to keep them paying. Painkillers on the other hand are sticky. Once you start using it, you’re hooked. For this reason, investors have preferred investing in painkillers over vitamins.  While the vitamin vs. painkiller dichotomy is helpful, I don’t think it properly describes an important small-but-growing group of products: the drug.

While painkillers kill existing pain, drugs kill pain consumers never knew they had.  Like vitamins, drugs must sell a prospect on how their solution will make the prospect’s life better. However, unlike vitamins, drugs become as addictive as painkillers.

I think there are three qualities that distinguish drugs from vitamins:

• Accruing benefit. The more you use the product, the better it gets. I think this is largely because a consumer adds data to the product, either passively or actively. 
• Mounting loss. The flipside of the accruing benefit is that the longer you stay with the product, the more you rely on the product and therefore have to lose by leaving the product. Going cold turkey is hard. 
• Product-market fit. At the core, drugs are vitamins with product-market fit. Drugs pass Sean Ellis’s product-market fit question, “how disappointed would you feel if you could no longer use this product?” with flying colors. 

For example, for me, Evernote is a drug. Sure, it’s a productivity tool (the quintessential definition of a “vitamin”) but I’ve become an addict. Essentially, Evernote’s freemium model was like a drug dealer offering a little “taste”. Now it’s become such an ingrained part of my life; my lifetime value for Evernote is going to be very, very high. Products like Dropbox, Pivotal Tracker, and Sanebox also resemble drugs to me, and I think Bessemer portfolio company BillGuard might have the potential to become one.

Because drugs can't harvest demand in the same way painkillers can, but also because it becomes harder and harder to let go of a drug the longer you use it, drug-like products are perfect for a usage-based freemium model. The barrier to getting a customer hooked on the drug goes down significantly (though not completely) when the initial "taste" is free.  Vitamin-like products, meanwhile, need to extract as much value as possible while the customer is active because their churn rate will be much higher.

(hat tip to greg duffy at dropcam for inspiring this post.)

2011 is the year entrepreneurship went global

Entrepreneurship is flourishing everywhere. Not just in the US, not just Israel, not just China. Everywhere. The world wide web always held the promise of a flat world, but the startup world is finally flat. An idea is seeded in Chicago, and it very quickly blooms across the world.

The result of this new generation of entrepreneurs is that local companies must race to be global. Groupon couldn’t just launch in the US, hone its product, and then launch internationally in a measured roll-out (much like Yelp has been doing). It has had to race to plant a flag in countless countries around the world if it has any chance of becoming a global brand. AirBnB just started running the same sprint, and they are rumored to be raising a giant warchest to help them get there.

It didn’t used to be like this. Startups could focus on the US and launch internationally when they got there. The competitive race was here, not abroad.  But now, things have changed.  Entrepreneurship has finally gone global, and many US companies hoping to expand internationally are facing stiff competition.  

Accomplishment Arbitrage

I've noticed there is a fair amount of what I'll call "accomplishment arbitrage" taking place regularly in the tech world right now.  "Accomplishment arbitrage" occurs if someone refers to an accomplishment that occurred in the past when the value of that accomplishment was different than it is now.  For example, if the accomplishment was easier to achieve in the past, the speaker can take advantage of that spread in value, make claim to an accomplishment that happened in the past with perceived value that is higher than the true value of their accomplishment, and in doing so, essentially arbitrage the accomplishment.  On the flipside, if it was harder to achieve in the past but newly easy, the speaker can once again take advantage of the lag in understanding. The key is that there is a disconnect between the perceived value of an accomplishment, and the true value.

Evolution in accomplishment value happens a lot outside the tech world.  Take sports, as an example. People keep on getting faster and stronger. But this consistency makes it hard to arbitrage the accomplishment.  If a swimmer who swam in the 2008 Summer Olympics told their 100m freestyle time to someone who swam in the 1932 Summer Olympics, the old timer would look the youngin' up and down and quickly say, "so what? It's easier now!"

The problem with accomplishments in the tech world is that they're not consistently changing in one direction, and it's not as obvious that you're talking to the equivalent of the 2008 Olympian.   Take the statements, "I sold my company for $500m" or "I invested in a company that was acquired for $500m."  I wasn't in high school yet so I don't have a good sense, but I would guess that a negative arbitrage occurs if the acquisition happened before 1995.  But a big positive arbitrage occurs if the acquisition was in cash and took place in the late 90's / early 00's.  An even bigger positive arbitrage takes place if the acquisition took place in the late 90's / early 00's in an all-stock transaction with a public company (that probably no longer exists). Of course, the speaker best takes advantage of this value arbitrage by providing none of this context.  The same phenomena is true for when it comes to taking a company public.  Sometimes it's been easy, sometimes it's been hard. But we interpret the value of the accomplishment based on how easy or hard it is to accomplish now.

The dot.com bubble is a great source of accomplishment arbitrage value.  I think we're currently creating a new breed of accomplishment arbitrage.  As an example, take what it means to "be an investor" in a particular company.  The vibrant secondary markets for companies like Facebook, Zynga, Twitter, LinkedIn and others, not to mention large seed syndicates, has altered the value of what it means to "be an investor".  Nonetheless, we're still holding on to the traditional definition of what it means to "be an investor" because for the most part, the traditional definition of being an investor is still the dominant type of investment.  Unfortunately, this makes this type of accomplishment arbitrage even harder to spot -- it's still the exception to the rule.  Still, while I see a lot of positive arbitrage going on now, in five years, my guess is the spread on this claim will be even larger.

Stop calling Groupon “social commerce”.

There is a lot of enthusiasm and attention around “social commerce” right now. People point to companies like Groupon, Living Social, ShoeDazzle and others as examples of the promise of a new generation of social commerce companies. The explosive growth of these companies has certainly been incredible, and I have no doubt that many new, fantastically successful e-commerce concepts will emerge that will leverage social in some way. Nonetheless, I think people have been giving social too much credit when it comes to the “social commerce” examples we have thus far, and have been misplacing our emphasis on "social" in e-commerce.

In e-commerce, there are two truths: Customers will always want lower prices, and once they’ve spent their money, they’ll always want as close to immediate gratification as possible. (A third principle, that customers will always want more selection, though I think probably true, is up for debate. It might asymptote given the paradox of choice.) If an e-commerce company forgets either of these two maxims, they’ll soon find that their customers have gone elsewhere.

With “social” however, the same is not true. It’s not the case that a customer will always want their e-commerce experience to be more social. Will customers want and enjoy some social features? Sure. There absolutely is utility in social features (more on that later) not to mention fun/entertainment, but it’s just not the case that consumers will always ask for more social features in the same way that they’ll always ask for cheaper prices and faster delivery (or even, more SKUs). In the customer’s hierarchy of e-commerce needs, social must surely be #3 at best (and frankly, I think breadth of SKU selection would be #3).

What does this have to do with “social commerce” darling Groupon?

Imagine a world in which Groupon had no social elements that form part of the user experience (i.e., no “tipping” once a certain number of people bought a deal). Would the company be the same one it is today? It might not have grown as fast, but with its brilliant and disruptive product offering, I have no doubt it would still be a fantastic business. Now imagine if Groupon had all the social features and more, but no discounts. It might still be around today, but Groupon would have been a shadow of its current form.

Groupon’s current success is not because of the social elements on the site. Consequently, I think it’s incredibly generous to "social commerce" to call Groupon a social commerce site. Its success has always been because of Groupon’s ridiculously low prices and immediate gratification. The same can be said for other “social commerce” examples like ShoeDazzle (fantastic deals on knock-off designer shoes thanks to their vertically integrated business model), and Woot (probably the first e-commerce experience with social elements). The social features integrated into these sites enhance the user experience, but they play second (or even third) fiddle to the real value proposition of these sites: lower prices and availability.

Why then is “social commerce” important? In a post today, Om Malik (whom I respect tremendously) paraphrases Jeremy Liew (a fantastic investor) as saying "The next phase of e-commerce is about recreational shopping, and as a result, it needs to be a more fun and social experience."  I couldn't disagree more.  E-commerce is about lower prices and availability.  Social is about discovery. I believe the companies that will emerge in the near future as the true "social commerce" leaders will leverage social for discovery.  Not for fun, not for recreation, not for being social for the sake of being social.  So, please, enough calling Groupon a "social commerce" leader.  Amazon out-socialed Groupon years ago.  What do you think Amazon's feature "Customers who bought this item also bought" is?