Non-Winner-Take-All Software Categories
Tags: investing, startup, aws, logging
Published: 2019-10-10 14:10:45

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<p>Software companies are often talked about in a zero sum, winner-take-all context. And this make sense for many categories, like social networking, professional social networking, marketplaces, dating marketplaces, and ridesharing.<br></p>
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<p>Not all software is winner-take-all. Many software categories lack network effects, or do not feature other forces that pull the category towards winner-take-all.<br></p>
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<p>Examples include continuous delivery software, monitoring, logging, knowledge work gig economy, digital transformers, and (in the limit) cloud computing.<br></p>
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<p>Are these categories bad investments? Many of them can be excellent investments:</p>
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<ul><li>Continuous delivery software costs almost nothing for the provider to host it; lock-in is significant; there are upsells over time</li><li>Monitoring and logging software can be priced by amount of data that is being stored; as data gets more heavy and multidimensional there are upsells in search, indexing, automated insights</li><li>Knowledge work gig economy platforms like Fiverr, Upwork, and Toptal are often not the sole platform where their workers hang out; if you are a designer on Fiverr, you are probably also looking for work on Upwork</li><li>Digital transformers like Pivotal, Mesosphere, and Red Hat use consulting services as an onramp to high-margin software subscriptions</li><li>Cloud computing infrastructure companies have great margins, and they will get better over time with economies of scale, better virtualization utilization, and data center robots; higher level cloud providers like Zeit and Heroku will allow different developers (often in the same org) to develop and deploy software however they want to</li></ul>
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<p>There are secular trends which make these businesses more appealing.</p>
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<ul><li>The abstractions for building a software company are becoming “no-ops”; if you build monitoring software or continuous delivery software, your tool probably won’t have outages very often; your op-ex is very low</li><li>Software never gets torn out of an organization, it just gets papered over</li><li>The TAM for software is gigantic yet unclear; how many paper companies will need continuous delivery software? How many oil refineries will need distributed tracing? How many plastic manufacturers are going to buy a CRM? How many insurance companies will give up with their in-house efforts at digital transformation and bring on Mesosphere or Pivotal?</li><li>Today’s Indie Hackers are tomorrow’s small businesses--and there will be tons of them. And each of them will need monitoring software, data engineering tools, and part time workers from Fiverr</li><li>Procurement will get much easier; today, much software procurement is gated by CIOs and CFOs who inhibit the innovation for the sake of cutting costs; more engineers will get trust, blank checks, and creative freedom for their cloud infrastructure (of course, the whole business of cloud cost management is a countervailing trend to this point so it’s possible the pendulum here has already swung)</li></ul>
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<p>It’s still great to be a winner-take-all company. But it’s not a requirement for success.<br></p>
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