Why investors should make it rain on developer tools

Marko Kaasila is co-founder and CEO of Bitbar, a technology and services company that provides mobile software development and testing solutions based on open standards.

Something is brewing in software developer tools and services. The venture capital activity in this space increased 77 percent year over year and reached $646 million in 2012.

To make this even more interesting, most of the investments went to early-stage companies. Clearly, someone is thinking that in couple years, there is serious money to be made in this market, and I fully agree

Let me explain why:

Developers are the new rock stars

The first waves of this new world order were started by Marc Andreessen’s “Why Software Is Eating The World” article in the Wall Street Journal on August 2011, which he followed up by participating in a $100 million funding round for social coding service GitHub a year later.

In this new, programmable world, developers are rock stars, and anyone who has tried to recruit developers (at least in Silicon Valley) can testify to this!

In many fast-growing tech companies, the hiring of skilled developers is the biggest bottleneck for growth, and any service or tool that can make these geese lay more golden eggs and to do it faster is selling at a premium.

Exponentially growing demand

The sharply rising value of being a developer and the availability of easy to access online resources and training services like Codeacademy are lowering the barrier to become a developer.

Additionally, various easy-to-use tools and treasure troves with tens of millions of lines of fully working open source code like Github are accelerating the time to a working product for millions of developers. This new kind of social coding creates new needs for tools and services different from anything that existed before.

Liquid exit market

All above suggests that it is possible to build wildly profitable business out of selling software to nerds, but your buttoned down VC is inevitably going to ask, “How do I make billion-dollar exit out of this?” Here are some scenarios:

• A lot of Facebook’s, Google’s, Twitter’s, Salesforce’s, PayPal’s, and Amazon’s businesses are built around other software building on their APIs, infrastructure, and basic building blocks. Without efficient developer offerings, the growth of these platforms will stall, and developers will flock to the next latest and greatest platform. To avoid this, these progressive players will be snatching up developer-facing companies to speed up their time to platform dominance. For instance, what would make better match for a company that wants to organize every bit of information in the world than acquiring a company that is already organizing majority of world’s source code?
• Given the fragmented state of cloud-based developer offerings, mobile development tools, and the early maturity level of developer-facing offerings, this is a great opportunity for old-school software companies such as IBM, HP, and others to start beefing up their dusty offerings, which are carefully tailored for IT organizations and CIOs who are now losing their power as their grass root developers are bypassing them left, right, and center and buying SaaS, PaaS, and IaaS offerings with their team leader’s credit cards. The new generation of developer-facing companies will be a lifeline for these behemoths that are unable to adjust their products and business to the new world order otherwise. There have been some delicious examples of this scenario in the past — for instance, Twitter recently bought app crash reporting company Crashlytics for $100M and this seems only be the beginning of a developer tool acquisition spree.
• Even Wall Street is starting to buy in to this developer renaissance. Boulder, Colo.-based developer tool company Rally Software (RALY) just raised $84 million in its IPO. In its first month on the market, the stock is already up by some 36 percent.

With opportunities like these in a market like the one we currently have, there’s no reason investors should be making it rain on the new crop of developer services companies.

Marko Kaasila is co-founder and CEO of Bitbar, a technology and services company that provides high-performance mobile software development and testing solutions based on widely adopted open standards. The company’s flagship cloud-based Android and iOS testing solution, Testdroid Cloud, is the first automated, real-time testing tool for mobile application developers.

Image credit: MTV