Mobile Development Startups Think Big, Rake in Big Rounds

The mobile app economy is thriving, but can startups make money—and IPO-style returns for investors—by supplying software to the developers who write those apps? A number of mobile upstarts are betting on it.

San Francisco-based Xamarin last week pulled in $54 million in Series C financing, which it claims is the largest single round for a mobile development company. And on Monday, Mountain View, CA-based Appcelerator said it raised a $22 million Series D round led by new investor Rembrandt Venture Partners. The funding will accelerate its move into a “post-Web world,” CEO Jeff Haynie said in a statement.

Traditionally, programming software is not a high-margin business: developers often get not only free, open-source programming tools, but also databases and other related software. Yet mobile is a major computing industry shift and apps have become strategic to companies in all industries. That’s made room for startups to leap ahead of incumbent providers with mobile-specific products.

The gambit the most ambitious mobile development startups are making is two-fold: First, the future will be a multi-device world, in which consumers access cloud services from devices running iOS, Android, Windows, and other mobile OSes. Second, they plan to construct a broad product portfolio that addresses the growing need for mobile-related software beyond programming tools.

Xamarin’s large round will be used to ramp up sales, give it the financial means to make acquisitions, and, in general, put it on a path towards an IPO, says Izhar Armony, an investor from CRV (formerly known as Charles River Ventures.) “We believe the shift from mobile is way bigger in terms of development budgets and developers than the shift from mainframe computing to client-server,” says Armony. “I believe Xamarin is well suited to be—if not the one—one of the major companies to emerge from this age.”

There is certainly a historical precedent for the notion that major technological changes yield big companies with multi-billion dollar revenues. In the 1990s and early 2000s, a number of middleware companies, including BEA Systems and JBoss, emerged to provide server software to run sophisticated Web applications.

Also, writing code doesn’t happen in isolation; companies need to manage the entire lifecycle of application development, from spelling out an app’s specifications to managing their performance once they’re deployed. Rational Software and Mercury Interactive were two companies that started offering one slice of the app development lifecycle and expanded into adjacent areas to earn more revenue from their customers. Eventually, both went public and were acquired—IBM bought Rational and HP bought Mercury.

Xamarin is among a new class of B2D, or business to developer companies such as Splunk and Atlassian, says Jo Ann Buckner, vice president of marketing at Xamarin. “Developers are increasingly driving technology and business decisions,” she says. “And when you combine that with mobile, it’s creating the opportunity for exponential growth.”

A number of other companies have developed software that lets businesses write mobile apps for multiple devices. Xamarin software allows developers familiar with Microsoft’s tools to write apps on multiple operating systems. The idea is that programmers can create a user interface that’s specific to particular device but still be able to share a large amount of code among different apps and leverage their Microsoft C# (pronounced C sharp) programming skills.

Other startups have formed to develop cross-platform mobile development software, including Boston-based Apperian, Palo Alto, CA-based Corona Labs, and Redwood City, CA-based Sencha. They’re all competing with incumbent providers, some of which have acquired mobile-specific companies. IBM bought Worklight while Pega Systems bought Antenna, a sign that consolidation in mobile app development has started.

There was a report earlier this year that Microsoft was in talks to acquire or invest in Xamarin, but nothing has come of it. Microsoft has historically been reluctant to encourage app creation on non-Windows OSes, but CRV’s Armony notes that under CEO Satya Nadella, “Microsoft is embracing multiple platforms.”

Over time, though, mobile development companies need to do more than just offer a development tool to address their customers’ needs—and justify funding rounds designed to put a company on an IPO path.

“I’m a bit skeptical about just mobile client development tools as a stand-alone market,” says Jeffrey Hammond, an analyst at Forrester Research in Cambridge, MA. “But when you couple together mobile infrastructure services like sync, identity, device, and app management with good development tools, you’re talking about a market that looks very much like the early days of middleware.”

Xamarin already began filling out its product line by acquiring Arhus, Denmark-based LessPainful, which has a testing product for developers. Similarly, Appcelerator is well on its way to filling out its product line beyond development tools. The company’s “platform” is designed for technology professionals who are managing multiple mobile development projects and includes ways to write custom apps as well as test them, measure user adoption, and app performance.

In an interview with VentureBeat last year, Appcelerator CEO Haynie said the company intends to go public and become the next Salesforce or Oracle. (After announcing its Series D funding, a representative said the company is heads down on some projects and not commenting further.)

If history is any guide, there will be a handful of medium-size software companies to emerge from this mobile development and middleware area, and some may even have the heft to go public. Another likely scenario: the large incumbent software providers will acquire specialist mobile companies to get access to their technology and customers, consolidating the enterprise software industry further.

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