Scarcity + Market Distortions: Create value by cornering a market in developers

I’ve had this idea bouncing around in my head for a while now – I’m hoping that writing it down will help me see the pattern more clearly. First, a few facts:

  1. DST offers $150K in seed funding on ridiculously friendly terms to *any* Y-Combinator company
  2. Salesforce pays $250MM for Heroku (or around 80x rumored sales)
  3. Zynga, Facebook and Jawbone (among others) open Seattle engineering offices to tap new sources of engineering talent
I could string together dozens of other examples, but these are enough to support the framework:
  • Web + mobile software platforms are reaching huge (often global) markets and creating economic value faster than ever before
  • The “limiting reagent” in this rapid business value creation is access to world-class developers
  • Services and platforms that attract and retain large numbers of quality developers are effectively cornering markets for developer attention and reaping disproportionate economic rewards for their efforts
The most obvious current example of the accretive power of developer aggregation is Apple’s iOS + App Store platform. In just a few years Apple has completely upended the mobile value chain, harvesting close to 40% of global profits in a market it entered in 2007. But this same pattern is at work across the startup ecosystem – and in our investment thesis here at Founders Co-op. A few examples:
Urban Airship (disclosure: Founders Co-op investment)
  • In just two years Urban Airship has become a core infrastructure layer for both large and small mobile developers targeting iOS and Android, powering push notifications, in-app purchase and subscriptions at massive scale. With over 8,000 developers on the platform and over 100 million connected devices, Urban Airship has embedded itself at the heart of the exploding smartphone developer ecosystem.
Twilio (disclosure: like an idiot I passed)
  • By offering a dead-simple scripting language for IP telephony features, Jeff Lawson and team have added voice and SMS messaging features to the toolkit of any competent web developer. I don’t have current stats on the size of the developer ecosystem, but the platform has clearly caught fire in the development community, so much so that Dave McClure has created a Twilio-specific fund to draft off the innovation sparked by the platform.
PHP Fog (disclosure: FC investment)
  • Heroku (see above) had great success with the Ruby on Rails community, but the PHP developer audience is 10x larger than Ruby (more than 75% of sites on the web are built in PHP, including a few you may have heard of… like Facebook). With PHP Fog, founder Lucas Carlson has turned the most popular web development framework into a service, with effortless provisioning, code management and n-tier scaling built in. The service is still in private beta but already hosts over 2,500 PHP apps, has thousands of developers on the waiting list and is regularly cited by folks like Amazon CTO Werner Vogels as the go-to Platform-as-a-Service offering for PHP.

Between SaaS, PaaS and Mobile, I don’t see any end to this theme and there are lots of market sectors where the pattern hasn’t yet been applied with vigor. We’re actively on the lookout for developer-centric investment opportunities similar to the examples above – if you’re building a business in the Pacific Northwest that leverages this theme I’d love to meet. (We also have an unannounced deal in this vein that I’ll be writing more about soon!)