Ask HN: Why do VCS see market opportunity in dev tools?

39 points by as90 3 years ago | 20 comments

This trend has no stopping it seems. Every dev tool startups are getting funded.

Some of these startups are simple clones of existing proprietary services offered by AWS and other providers. (Like Cognito / Auth0)

Why VCs are betting on this market? What is the opportunity to build a huge business here for a new startup, beating reputed players like AWS, Auth0 etc? What is the conviction of VCs here that these new startups will build a $100M business?

I'm confused.

Also, despite getting a lot of pessimistic comments on the future of such startups here in HN, they seem to raise further rounds (Series A, B) and even building a stable business.

I feel like VCs are better at spotting something huge in this space, than the actual users (I mean developers) who feel pessimistic. Lol.

anandnair 3 years ago |

Dev tools market is indeed an interesting business to make tons of money. Because of the huge value that it offers to businesses. If you look at the dev tool product companies (even open-source ones) started 10 years back, most of them were either acquired for billions, and many of them did IPO. And most VCs missed this opportunity since they were skeptical about this space.

I think that is what is driving the current VC funding trend in dev tools. Also, considering the future of software engineering, dev tools will have even more adoption than before.

And regarding the pessimistic comments in HN, they are mostly coming from people who lack in-depth knowledge about how businesses work.

codegeek 3 years ago |

I love dev tools. Few reasons I can think of:

1. Software is everywhere. To build/run/manage software, you need Dev Tools. The demand can only go up as we continue to depend on software for everything.

2. Dev tools solve specific problems at least to start with. This makes it a bit easier to find PMF faster or die. Faster PMF = Faster Growth capability = Chances of Unicorn. VCs love that stuff.

3. Lot of current success already with Dev Tools as you mentioned. VCs have a herd mentality. They follow where the success is. Dev Tools has been hot for a while and will continue to be.

4. Dev Tools are usually started by techies who love building tools and cannot be started by MBA types usually. This means that the founders are usually solid with a background in those areas and they are likely to succeed more. Just my personal opinion.

as90 3 years ago | |

Good points. But I'm trying to understand why do they even fund startups even without a well defined moat? I've heard that VCs will fund (even seed round) only if the startup has a chance to make atleast $100M in ARR. Then why do they bet even on startups who just copy and without a proper moat?

jstx1 3 years ago |

VCs have no idea what to do with their money, on the other hand potential founders gravitate towards dev tools because it's a space they know well. It's not necessarily that they're seeing value (not saying that there isn't value there either).

Think of it as

[startups skewing towards dev tools] >> [clueless VC] >> [many dev tools startups get funded]

This actually works even if they aren't clueless - they can only respond to the opportunities presented to them and that input sample will be biased.

time0ut 3 years ago |

It makes sense to invest in the companies selling shovels in a gold rush. If the VCs are investing in developer tools, I guess it means they think the gold rush is still on.

re-thc 3 years ago |

> Every dev tool startups are getting funded.

> beating reputed players like AWS, Auth0 etc?

Maybe your view of "dev tool" is too broad.

Identity shouldn't count as a dev tool. Perhaps security. It can be used to help manage end users. AWS isn't a "dev tool" either.

There's no 1 answer as we're mixing in a lot of things. VCs will see things differently depending on what it is...

as90 3 years ago | |

ok then let's narrow down to "Authentication/Authorization infrastructure" products like Auth0, AWS Cognito etc.

There are atleast 5-6 startups who came up to this space in the last 3-4 years (after the acquisition of Auth0 by Okta for some $6B).

And whenever such startups launch their product here in HN, most devs are like, what is the need for another product like this.

namaria 3 years ago | | |

I think there's some selection bias. There's a huge number of startups getting funded each year, it's a multi billion dollar industry. Do you have data showing a disproportionate amount operating in auth tools were funded recently or are you just going by whatever news reached you lately?

zonethundery 3 years ago | | |

Biden's EO on cyber [0] mandates the agencies move to multifactor auth and zero trust architecture. Requirements on agencies flow through to their contractors, and eventually to the industries they regulate. When most consumer banks don't even do real 2FA (miss me with SMS pls), the TAM is yuuuge.

When the EO came out there were at least five publicly traded identity companies of any size: Okta, CyberArk, Sailpoint, Ping, Forgerock. Thoma Bravo subsequently bought Sailpoint, Ping, and Forgerock at meaningful premiums (~50%). VCs notice things like this.

[0] https://www.whitehouse.gov/briefing-room/presidential-action...

ozymandias_kok 3 years ago |

The investors I know who are most interested in it either come from a non technical background and buy into unprovable but interesting sounding theses that rarely resonate with me as a practitioner, or are deeply technical and over anchor on their own experiences. Very rarely are either right.

z3t4 3 years ago |

There is a saying that in any gold rush, those who make the most money are those who provide the tools. But the real reason is that software for developers will either fail, or get really big, and economy of scale.

vintagedave 3 years ago |

There’s lots of investment acquiring existing mature dev tools companies too.

They definitely see something. It could just be a recurring revenue stream, but why that space? Lock-in?

zonethundery 3 years ago | |

It's a picks/shovels play in PE-land. They really like tools being successfully sold into .gov.

kojeovo 3 years ago |

VCs throw shit at the wall and hope it sticks

as90 3 years ago | |

It's not just hope right? Many of them are doing serious business. But I just don't know how they provide clear value.

kojeovo 3 years ago | | |

I dunno man. WeWork, FTX, Web3...

The value they provide is mainly the networks they've built up. Friendly with a bunch of other people with money and influence in various fields.

mejutoco 3 years ago |

Because shovels, like other comments say below.

Having said that I don't think Cognito/Auth0 is a dev tool. It is an authentication service. Otherwise hosting is a dev tool too. Still it matches the shovels argument, since many websites need authentication. Even a small percentage of that is a lot.

qwery 3 years ago |

It's because VCS is a dev tool. The capital invests approximately randomly and there is a small boosting effect due to content recommendation algorithms (i.e. search engines) having a difficult time disambiguating between VCS and VCs. Someone might ask "Which VCS should I invest time in learning to use?" while another might ask "Where should VCS invest? I'm asking for a friend."

Also, you'll be more likely to notice things happening in a field you're involved with.

reportgunner 3 years ago |

They want to put AI in the tools.