From Internal Tool to IPO

One of the most fertile grounds for new startups

May 31, 2022

Hi friends,

Hope everyone had a relaxing Memorial Day Weekend.

It’s no secret that companies like Google, Amazon, Microsoft, Meta, Uber, and others have developed a lot of internal tooling and infrastructure to run their business better and address the various problems they encounter given their scale.

Given that the problems that they were meant to address were faced by many other companies, including smaller ones, over the past decade or so, we’ve seen an increase in the number of these types of tools and products made available to the public, in one form or the other.

This has been a particularly fertile ground for startups, with many startups emerging that build easy-to-use and optimized versions of popular internal tools and infrastructure at these companies and make them available to all companies.

This week I’ll discuss the various forms this has taken, with a focus on how startups have come out of this approach, but cover all the various forms this has taken including:

A bigCo “launching” an initially internal tool
A startup “pivoting” to an internal tool it developed
A startup building a business around an open-sourced internal tool from a bigCo
A startup replicating a bigCo internal tool for the broader world

Note, I’ll be excluding the approach of the bigCo simply open-sourcing their internal tool route since the focus of the piece is around how internal tools become standalone businesses.

1. BigCo “launching” an internal tool

Sometimes, big companies that have built a tool or infrastructure for internal use recognize that this can i) help other companies and ii) represents a large market opportunity and so decide to “launch” something to other companies.

By far the best example of this is Amazon with AWS, which in some sense took the infrastructure and expertise Amazon had developed to power Amazon.com and made it available to others.

“We’d realized in the first ten years we’d built an infrastructure competence deep in the stack — reliable, scalable cost effective data centers to grow the Amazon retail biz the way we needed to.” – Jassy on the infrastructure Amazon had developed

At the time, Amazon basically didn’t work with any non-eCommerce businesses in any capacity. Now, AWS serves thousands of organizations across all industries and is the leading cloud provider doing over $74B in run-rate revenue.

Google has also done the same with many parts of its infrastructure. Typically, Google open-sources a lot of initially internal infrastructure it builds. As Google Cloud has grown, Google now offers managed versions of that infrastructure on Google Cloud, with Google Kubernetes Engine being an example.

This can also apply to internal applications and not just infrastructure. Meta for example, which was a pure consumer and advertising product at the time, launched a version of their internal communication and collaboration product called Workplace (which itself was built as a version of Facebook to use internally at the company) as a B2B SaaS offering. Workplace now has over 7 million paid users.

2. Startups “pivoting” to an internal tool

Occasionally, a startup, while building its core product, builds some internal applications or infrastructure to address the problems it faces. Sometimes, it realizes that this internal product may be more promising than the core product it is building and decides to focus on that instead.

The poster child of this is Slack, which built what became Slack initially as an internal communication and collaboration application for its team to collaborate while it developed a video game called Glitch.

Glitch' died so Slack could take over offices everywhere, but traces of the game live on | Mashable — Glitch, the game that eventually was shut down for the team to build Slack instead

If you don’t yet receive Tanay's newsletter in your email inbox, please join the 4,500+ subscribers who do:

3. Startup building a business around an open-sourced internal tool from a bigCo

Over the years, many big tech companies have been open-sourcing some of the internal infrastructures they end up building internally. This is especially true in areas such as data infrastructure and ML infrastructure.

The benefit of open sourcing is that it allows them to get feedback from the developer community and sometimes also accelerate progress on that infrastructure thanks to help from that developer community, which then, in turn, helps the company, as they are users of it.

Sometimes, as some tooling or infrastructure becomes very popular, it becomes clear that there is an opportunity for a real business to be built around it. In some cases, the bigCo might do it themselves, as discussed above. But in other cases, a frequent route these days is that some employees connected with the project at the bigCo, end up leaving to start a company around that open-source project.

Typically, the startup leverages some form of “open core” type of business model where they extend the product and builds proprietary features on top and/or offer a managed/hosted version of the project, with enterprise support.

One of the most notable examples of this was Confluent, based on the data-streaming platform Apache Kafka, which was initially open-sourced by LinkedIn. The co-creators of Kafka at LinkedIn left to start Confluent, which is now a ~$6B market cap company.

What is Confluent Platform? | Confluent Documentation — Overview of the Confluent Platform

Some other examples include:

Predibase, a low-code platform for building ML models founded by the team that was key contributors to the open-sourced projects Ludwig and Horovod at Uber.
Heptio is a startup started by the people who built the open-source Kubernetes at Google, to make Kubernetes more friendly to use for enterprises. Heptio was later acquired by VMWare for $550M.

4. Startup ‘replicating’ a bigCo internal tool for the broader world

Many big-tech-co employees get accustomed to the plethora of internal tools at their company, some of which are not open source or have a commercial version available. Either after leaving and coming to miss the tool or while still at their bigCo job, they recognize that the product could be helpful to companies more broadly, but isn’t available to them, and so decide to create an independent company around that tool for the broader world.

The product they aim to build isn’t necessarily a direct clone of that tool, but rather a version heavily inspired by that tool optimized for the use cases of the other companies, after which it takes on a life of its own and often becomes more feature-rich and powerful than the bigCo’s internal tool.

Interestingly, this can apply to both infrastructure types of tools as well as internal apps. Some examples of this phenomenon include:

Tecton, a feature platform for ML was started by the creators of Uber's internal ML-as-a-service platform Michelangelo.
Asana, a project management app, was created by Facebook co-founder Dustin Moskovitz and engineer Justin Rosenstein, who initially built an internal project management Tasks tool at Facebook. That would go on to become the MVP for Asana, which is now a ~$4B public company.
The MVP of Asana, which was inspired by Facebok’’s Tasks tool
Go Links and Trotto, enterprise link management solutions, were both heavily inspired by the go/links functionality which was available at Google.
StatSig, an experimentation platform for A/B testing and feature management, was created by former Facebookers and heavily inspired by the internal tooling available at Facebook to run experiments such as Deltoid, Gatekeepers, and Quick experiments.
StatSig

Closing Thoughts

Interestingly, as the number of available SaaS and developer tools and products has exploded, I would expect over time that fewer best-of-breed products end up being versions of internal tools and apps found at large companies, simply because there are more independent companies trying to build the best-of-breed products to solve any problem.

However, I still expect this to be a fertile ground for startups, given that some of these large tech companies end up being forced to innovate first on their internal tooling and infra given that they face problems at a scale that other companies are unlikely to encounter, and they have the capable and talented engineers and designers to solve them.

Also, I know I’ve missed many, many examples. Feel free to comment or tweet/DM me with notable ones I’ve missed, and I’ll add them to the post (and credit you of course).

Thanks for reading! If you liked this post, give it a heart up above to help others find it or share it with your friends.

If you have any comments or thoughts, feel free to tweet at me.

If you’re not a subscriber, you can subscribe below. I write about things related to technology and business once a week on Mondays.