Introduction
We are witnessing a significant rise in interest and investment in the developer tools sector. Startups in this space are attracting funding as they aim to make developers’ lives easier and with the growing demand for online platforms and more companies moving to cloud operations, there is enormous potential for high growth in this area worldwide.
This area of investment has been somewhat overlooked in the past as VCs didn’t quite understand the premise nor the promise on their ROI behind tools that ease developer collaboration and developer experience. However, this is now changing. In this article we explore the evidence and reasons behind this surge in VC investment in developer tool startups and some of the (many) startups, scaleups and unicorns to keep an eye on.
Exploration
The rise in the number of developer tool companies can be attributed to multiple factors.
Firstly, we are in an accelerating digital world. Cloud adoption was already expanding for several years before the Covid19 pandemic, but since then, things have moved forward exponentially. Teams were quickly forced to work remotely, securely and maintain levels of productivity. Thus, new trends in cloud usage and security, collaboration and data sharing had to quickly take shape. This shift has highlighted the need for robust tools that facilitate efficient and safe remote development and collaboration.
This increase in demand and necessity quickly caught the attention of VCs. In 2021, investors contributed $37 billion to cloud and web architecture firms to support developers. This is $17 billion more than 5 years before that in 2016[1]! Attitudes have changed.
As interestingly pointed out in the above Business Insider article, this previous lack of popularity and understanding of developer tools among investors in the past actually presented opportunities for startups to enter and dominate this market. These startups have capitalised on the untapped potential by offering innovative solutions and addressing the gaps in the market without too much competition from the three big players (AWS, Google Cloud and Microsoft Azure). Investors have now begun to recognise the value and potential for the growth in the developer tool sectors, leading to increased funding and support for companies who can help developers scale more efficiently and keep up with the demand from the consumer.
As this demand increases, so will the need for tools to ease developers’ inevitable pain points to get products and services to market faster than their competitors.
From DevOps/DevSec to In-browser IDE and Documentation writing to Debugging, there are tools, and tools for tools.
And startups are a great place to look at for the latest innovations using the most recent advancements in technology. In Y Combinator’s cohort of startups in the Winter 2023 batch open source, dev tools and AI related companies dominated. Many of which have already received investment and attention from key players in the VC world[2].
Source: Y Combinator
The Surge of the Startups
Resend
Resend, a platform that empowers developers to create, evaluate, and distribute transactional emails on a large scale, recently secured funding from several notable investors.
Elad Gil, a prominent investor, along with other influential angel investors such as Dylan Field, the CEO of Figma, Calvin French-Owen, the cofounder of Segment, and Guillermo Rauch, the CEO of Vercel, participated in the funding round. This round resulted in a post-money valuation of $25 million for the startup, according to two individuals familiar with the deal.
Having just graduated from the Y-Combinator startup incubator programme, this is a very positive sign for companies like Resend who are stream lining the process of creating managing transactional emails.
Read more here: https://www.ycombinator.com/launches/I6M-resend-email-api-for-developers
Buildt
Buildt is an AI tool specifically developed to assist developers in effectively searching and understanding large codebases. It caters to the needs of engineers who work with codebases containing millions of lines. By harnessing the power of Language Learning Models (LLM), Buildt offers a user-friendly solution for developers at renowned companies like Stripe and Airbnb, enabling them to navigate and understand intricate codebases more easily.
Founded by 2 British entrepreneurs, Sam Stenner and Alistair Pullen last year, Buildt is now a Y-Combinator graduate with a pre-seed investment of $500k, an already growing team and a true growth-mindset.
Read more here: https://www.ycombinator.com/launches/I5x-buildt-llm-powered-codebase-search-and-multi-file-code-generation
The Prospering Scaleups
Replit
In April 2023, Replit raised an impressive amount of $97.4 million in a Series B extension, resulting in a post-money valuation of $1.16 billion! The funding round was led by Andreessen Horowitz, a prominent venture capital firm, with participation from several notable investors such as Khosla Ventures, Coatue, SV Angel, Y Combinator, Bloomberg Beta, Naval Ravikant, ARK Ventures, and Hamilton Helmer – an impressive backing.
Replit’s focus is on developing an AI-powered tool called Ghostwriter, which generates code. The company’s founder and CEO, Amjad Masad, expressed their unwavering commitment to empowering software developers worldwide, with a mission to reach a billion developers.
Stream
Stream is a widely recognised API platform that specialises in scalable feeds and chat services. It is utilised by a large number of companies and has a massive user base exceeding one billion end-users. With a focus on providing reliable scalability and user-friendly APIs, Stream empowers developers to integrate feed and chat functionalities seamlessly into their applications.
Founded in 2014 by Thierry Schellenback and Tommaso Barbugli, Stream has since raised over $58.2 million and includes investors such as GGV Capital and Tom Preston-Werner. With offices in Boulder, Colorado and Amsterdam they are also recognised as a top employer!
The Undeniable Unicorns
Netlify
Netlify, a web development tool, has achieved unicorn status with a valuation of $2 billion as of November 2021.
Founded in 2014 by Christian Bach and Mathias Biilmann Christensen, Netlify simplifies website and web application development by automating code processes and deployment. Its innovative platform, combining front-end configuration and back-end API integration, has gained popularity among developers, positioning Netlify as a leader in the industry.
The company has raised a total of $202.1 million in funding over five rounds, with its latest round being a Series D.
Lacework
Lacework is a data-driven security platform for the cloud that automates cloud security, prioritises risks and helps organisations scale.
Founded in 2015 by Mike Speiser, Sanjai Kaira and Vikram Kapoor it has received $1.8 billion to date from prominent investors including Google Ventures and stands at a current valuation of $8.3 billion, according to SC Magazine. And is listed as one of the ‘Most Promising Unicorns of the year’ in 2023[3].
The surge in venture capital investment in developer tool startups reflects the increasing recognition of the importance of software development and the demand for tools that facilitate efficient and innovative coding processes. VCs are keen to support startups and scaleups that provide solutions to enhance developer productivity, foster collaboration, and drive overall success. With approximately 27 million software developers worldwide and a predicted growth of more than 60% in the next 10 years, we can expect venture capitalists to play a crucial role in fuelling the growth and innovation of developer tool startups.
[1] https://www.businessinsider.com/developer-tools-startups-netlify-funding-round-venture-capital-trends-2021-11?r=US&IR=T)
[2] https://www.ycombinator.com/blog/meet-the-yc-winter-2023-batch
[3] https://www.scmagazine.com/news/strategy/2023-sc-awards-finalists-most-promising-unicorn
