After the Microsoft/GitHub deal, Silicon Valley VCs are investing big money in developer startups

GitHub co-founder and outgoing CEO Chris Wanstrath raised $350 million in venture capital before selling GitHub to Microsoft for $7.5 billion in June.GitHub; Samantha Lee/Business Insider

• Investors in Silicon Valley are throwing money at developer-focused startups after Microsoft’s $7.5 billion acquisition of GitHub in June made it clear that the sector is hot. 
• One CEO was laughed at when she first started fundraising in 2014. Now her company is worth $90 million. Other startups in the space are raising money at lofty valuations, too. 
• The reason: Developers are gaining more influence in Silicon Valley, and play a huge role in determining which products are hot — and which are not. 

---

Just as Levi Strauss made his fortune selling blue jeans to miners, a new generation of entrepreneurs are finding gold selling tools to the developers and software engineers who are themselves building the next big thing in tech. 

Developer-focused startups have seen a wave of interest from Silicon Valley investors in recent months, as they pursue their dreams of cashing out in a deal as massive Microsoft’s $7.5 billion acquisition of the developer platform GitHub in June. To wit, GitHub earned investors at Andreessen Horowitz a 10x return on their $100 million check, and investors want in on that. 

“Any time a valuation is set on a DevOps company, you see an increase in interest,” said Sid Sijbrandij, CEO at GitLab. “That was the case when Atlassian IPO’d, and that was the case when GitHub got acquired.”

Sijbrandij is referring to DevOps, a term that means a lot of things to a lot of different people in Silicon Valley and beyond. Generally, it refers to any set of tools and practices that help developers deliver more code, faster. GitLab, a Google-backed code repository tool for helping developers collaborate on software projects, is one of the most well-known companies in the space — and a long-time rival to GitHub, which has a similar sales pitch.

Indeed, beyond just DevOps, there’s plenty of interest in any company helping to make developers’ lives easier. 

Edith Harbaugh, CEO of LaunchDarkly, said investors walked out of her in meetings when she first started fundraising in 2014.LaunchDarkly

Jim Clark, cofounder and chief architect at Atomist, thinks that the GitHub acquisition is “predictive of a lot of growth” in the sector. Atomist, a development automation platform started in 2015, raised a $22 million Series A in November 2017. 

“A lot of VCs are out there checking their portfolios to see how much are they leveraging this change,” Clark said. “To me, it’s a validation that developers are actually playing a larger roll in the speed with which software needs to get to market.”

Edith Harbaugh, CEO and cofounder of LaunchDarkly, said this wasn’t always the case. Though LaunchDarkly has had “dozens” of inbound requests from investors more recently, she says, things didn’t go so well in 2014 when she first tried to raise seed capital for the company. 

“It was awful. I got laughed at,” Harbaugh told Business Insider. “People walked out of meetings — investors. I got walked out on in at least three separate meetings that I can think of.”

LaunchDarkly lets developers test and manage how new features get deployed to app users. The startup has gone on to raise nearly $35 million, and is valued at around $90 million, according to Pitchbook.  Today, LaunchDarkly has 500 customers — including Atlassian, the $20 billion publicly-traded Aussie software giant, a DevOps player itself — and has tripled its customers and revenues annually, according to Harbaugh. 

“Now what I hear from a lot of investors is, ‘This seems really obvious, I was really stupid to miss this,'”Harbaugh said. “Looking back, we were a new category, and that’s always hard for people to see.”

Valuations in DevOps are growing

PagerDuty CEO Jennifer Tejada is expected to announced a major funding round soon that values the startup over $1 billion.PagerDuty

Even in the months before the GitHub deal, VCs were eyeing investments in the developer space. 

A wave of big funding announcements have flooded the coffers of many a startup since the start of the year, and more are expected in months to come as the aftermath of GitHub fully shakes out.

PagerDuty, an incident response platform that alerts IT departments when something goes wrong, has near-term plans to announce a new round of funding that values it over $1 billion, one source said. A funding round is also expected soon from Netlify, a tool for front-end web developers which last raised $12 million in a Series A led by Andreeseen Horowitz in 2017, according to another source. 

In late June, just weeks after Microsoft announced the acquisition, the San Jose-based Jenkins platform CloudBees announced $62 million in funding from Delta-v Capital and Golub Capital, and the Portland based software automation company Puppet Labs announced a $42 million round led by Cisco Investments. 

There were several other late stage rounds earlier in the year as well. In March, the IT operations startup Moogsoft raised $40 million at $220 million valuation. In February, the software company XebiaLabs raised $100 million. And in January, the integration and delivery platform CircleCI raised $31 million at a $141 million valuation. 

Developer love will be the key to success 

Twilio, a communications software company, went public at a $1.23 billion valuation in 2016.Reuters/Brendan McDermid

Despite the big rounds and upticks in valuation this year, Ethan Kurzweil, a partner at Bessemer Venture Partners, said the key change is that now people are paying attention. 

“This trend’s been happening for a while,” said Kurzweil.

He sees larger companies like Twilio, which is valued at $7.8 billion on the public markets, and Stripe, which was last valued at $9.2 billion in a private funding round, as the first startups to benefit from a key trend impacting growth in the space: the sway that developers have over corporate purchasing decisions. 

“All of the specialized skill sets in the enterprise are being disrupted by cloud software, and an increasing realization that the people using the product should be the ones to decide what to use,” said Kurzweil. 

In the old world, the IT department would decide which technology to buy, and which to keep on the shelf. Now, though, the rise of the web and the app store has made it super-simple for anyone to decide which tools they want to use, whether or not it’s officially supported by corporate policy. 

To that end, it’s fairly common for startups in this space to spend only a little on marketing or a traditional sales force, relying on word of mouth and developer communities to build traction. In fact, Atlassian famously doesn’t employ a sales force at all, relying entirely on inbound sales via its website and apps to power its business. 

As an investor, Kurzweil has bet millions of dollars on this proof point. His companies include the developer platform NPM, a package manager for the JavaScript programming language, which has raised around $19 million since its founding in 2014. He’s also invested in PagerDuty. 

Now, the only thing to do is wait for the next GitHub to materialize. But if you want clues as to which company that will be, there’s only one real question to ask: What do developers really like to use?

Get the latest Microsoft stock price here.