By Shamillah Bankiya and Virginia Pozzato
Fig. 01
Developer tools have come of age over the last decade.
Multi-billion companies have been built selling products and tools to developers, and entrepreneurs — and consequently investors — are now well and truly awake to the sheer scale of the opportunity.
There are two dynamics to this market.
The first is companies building workflow tools for developers. Atlassian, the number one player, commands a $56bn market cap, and makes a whopping $1.7bn in revenue, still growing at 30%+ every single year. While Jira, Atlassian’s core product, started off as issue tracking, it has evolved into a full-on project management and collaboration platform for developers.
The birth of git in 2005 to track changes and versions paved the way for Bitbucket (acquired by Atlassian) and later GitLab and Github, and the many hundreds of other tools that are key to developer collaboration. Github was acquired by Microsoft in Jun 2018 for $7.5bn (a true aha! moment for the industry), and GitLab recently sold $195m of secondary shares at a $6bn valuation.
The second is software companies selling to developers. In other words, companies who build SaaS solutions, then target those solutions at developers — their chosen distribution channel.
Companies like Twilio and Stripe were born to build a specific layer of infrastructure (in this case, innovating in messaging and payments). These are among the first (and most successful) examples of API-first businesses, which follow the broader trend of replacing a monolithic stack with best-of-breed pieces of software.
Fig. 02
The result of this is a market of 19m developers globally, as of 2019. That sounds like a lot, but we estimate that there will be 45m in the next 10 years — so almost 2.5x the number of developers in our ecosystem today.
Europe is extremely important here — we currently have some of the highest concentrations of developer talent globally, and that’s only going to grow as more and more teams become distributed.
If we run some napkin maths, and we assume that every single company has to spend just 1% of developer salaries on tools, it’s pretty easy to see a path to an $8bn TAM in Europe for developer tools alone. It’s also fairly straightforward to see why this is a gross underestimation of the actual opportunity here: there are developers to build for, and developers to sell to.
The massive gap in demand and supply for developers, combined with the incredible amount of value they create, has further positioned developers as important buyers, if not the most important buyers, for everything related to building software.
Demand for development has only grown, and talent hasn’t kept up. Furthermore, workloads have become more intense, and developers need to have the right products to be able to build and ship quickly.
Fig. 03
Selling in at the coalface, developer-focused companies look increasingly like bottom-up SaaS titans such as Slack and Dropbox — companies that have blanketed use via individuals, building inherent communities as they go.
This is the area of innovation where B2B elides with B2C.
Fig. 04
Meanwhile, the open-source nature of these tools offer social proof for users (which aren’t available with closed platforms) stars and forks on Github, for example. Product-community-fit therefore becomes a greater focus for these companies.
The open source business model, pioneered by companies like RedHat, were thought to be unsustainable. We now know that isn’t true.
Fig. 05
We will take a deeper dive into these areas in the second part of our three-part series on dev tools, running through our framework for approaching the market, and the themes and companies we are excited about in Europe!