May 21

AI as the Next Infrastructure Wave (Part 2 of 3)

This is the second part of our three-part series on the evolution of software. If you haven’t read the first part, we recommend starting there!

Over the last 20 years BuildGroup’s team has developed a deep understanding of the infrastructure that shapes the way we interact with tech today. In this series of blog posts, we dig into the six key trends that we believe have defined the evolution of software and how AI fits within this context. This is part two of three and picks up right where part one leaves off. We recommend reading the series in order. Click here to start with part one

If you’d like to read an AI-generated summary of this post, scroll all the way to the bottom (thanks, Claude!).  

Wave 3:  Mobile

The release of the Apple iPhone in 2007 unleashed the mobile infrastructure wave. For the first time, a mobile device became a legitimate alternative place for a user to consume software (versus on a computer). That is because the iPhone focused on enabling a native app experience similar to the desktop, as well as providing a full functional browser capability intended to fully rival a computer-based browser experience. This was a major change in how SaaS could now be consumed. Essentially, an end-user now had the capability to interact with a SaaS application 24 hours a day regardless of where they were, so long as they had either a computer or a mobile device.

Some SaaS companies viewed mobile as more of a “feature” rather than a major change in how software would be consumed. In the consumer world, one of the better examples was MySpace versus Facebook. In fairness, many aspects of Facebook’s product enabled it to quickly displace MySpace as the dominant social platform. But mobile was absolutely key to their victory. If you think back to 15 years ago, you had to go sit at a desk to access Facebook (and you probably did that a lot). Today it's very likely that you mostly use the Facebook app on your phone. According to recent data, almost 82% of Facebook users exclusively access Facebook via their phones. MySpace did not get this trend, and it contributed to its quick demise.

But mobile also changed how software was built and maintained. Now companies had to build “native” apps to run on Apple or Android phones. Facebook recognized this complexity and released React, which is an open source project that essentially enables SaaS companies to easily build application interfaces for any mobile platform.

In our portfolio, Fiix was an early SaaS company that recognized how important the mobile change would be to their customers. Fiix was a SaaS solution for maintenance departments at manufacturers. It allowed them to track assets, service history, parts, and manage trouble tickets. In the first generation of the product, using Fiix required users to be at a computer, as it was not available on a phone. Imagine being a maintenance technician who had to walk around all day with a clipboard taking notes, then return to sit at a desk to input them into the Fiix application on their desktop browser. Not very efficient.

Fiix quickly became focused on enabling their product on phones, including using technologies like React to make the transition easier.  It was a perfect example of how mobile changed the consumption model in a very powerful way.

Mobile was also an infrastructure wave that lifted many boats, and as the Facebook example indicates, some much more than others. Now it's hard to imagine not having an application – consumer or enterprise – not available to us on our phones. And we have a low tolerance for those applications whose functionality is diminished on the phone versus on the computer browser. Those SaaS companies who have mastered both have benefited the most.

Wave 4:  Open Source

Open source software has been around for many years, with Linux being the most popular example. Its origin goes back to the 1960s and 1970s with Unix, but most would trace its real start to the launch of Linux in 1991. Linux was not an overnight success, but today over 90% of public cloud platforms are Linux-based*, and there are many derivatives of it, including the Android operating system on phones.

Open source software comes in different varieties of project types and licensing models, but in general it can be defined as, “code that is designed to be publicly accessible—anyone can see, modify, and distribute the code as they see fit”*. This is the opposite of closed source software models from companies such as Microsoft and Oracle, where they control the source code, including any modifications to the code and its distribution.

The first three infrastructure waves – SaaS, cloud platforms and mobile – lead to an explosion of open source software projects and usage. Today, there are estimated to be approximately 3.9 million open source projects*. The first reason is simply that the internet enabled a level of collaboration that was not possible before. Historically, developers have had a strong history of collaboration even across competitors in an industry.  It just is part of the culture. As the 2000s unfolded, the internet provided an effective means for that collaboration; it started with file sharing and shared drives, then exploded with the launch of online code repositories such as Github in 2008. 

The second reason for the popularity of open source was that just as the SaaS and cloud platform waves offered real cost efficiencies, so did open source, and these were increasingly hard to ignore. Now software could be deployed into production without paying anyone a licensing fee. You could choose to pay for a license for a certified distribution of an open source project that was supported by a commercial software company, such as Linux from Red Hat, but you did not have to.

Third, SaaS introduced different and varying needs for applications that legacy software providers simply couldn’t address. Databases serve as a primary example of this. There are now databases for every time of need and performance objective. The firehose of data coming out of SaaS applications created pressure for new and innovative databases to address this challenge. The capabilities of any one company could no longer keep up with the capabilities of the community, leading to the rapid acceptance of open source as a legitimate alternative to closed source. 

The rapid growth in application development from 2000 onward put pressure on technology to evolve in ways that commercial companies could not tackle alone. Developers became used to having a need, finding an open source solution, and quickly trying it out. And if it worked, they moved it towards production. If they couldn’t find a solution to address their challenge, they might code it themselves and release it as open source and start collaborating on its build. Roadmaps were no longer the domain of a single vendor!

That is exactly what we did at Rackspace when we launched OpenStack. After the launch of our cloud in 2008, we recognized very quickly that we could not compete with Amazon’s ability to write software much faster than us. We needed a technology upon which to build our cloud platform, but nothing existed. At this time, I met with VMware to talk about using their solution for our cloud, but aside from genuine technical issues (it was not built for a large scale public cloud platform), it was cost-prohibitive. And we had no confidence in their ability to drive a roadmap on the timescale we needed, or with the features our customers would require. So we launched the OpenStack project. By releasing the code we had built for our cloud (which at the time was only 6,000 lines!), along with that of NASA, who collaborated with us on the launch, we hoped to ignite a community to build an open source cloud platform…which they did on a scale we could have never imagined.  

It seemed the world wanted to make sure there was an open alternative for building a cloud, the same as us. Even Microsoft joined our initial launch, arguably the first time they publicly supported a large scale open source project. The project grew from dozens, to hundreds, to tens of thousands of contributors today across a wide swath of the cloud technology stack.  Many of the world’s largest private cloud platforms now run on OpenStack.

At the same time as the launch of OpenStack in 2010, it seemed that open source generally had an inflection point in acceptance. From that point on, the default when building was open source if available, and closed source only if necessary. Around this time, I had a meeting with Fidelity, in which they declared their intent to migrate as much of their infrastructure to open source as possible. That would have been inconceivable 10 years prior, as enterprises viewed open source with distrust. Now not adopting open source would have been a real business risk. The real eye-opener for me was when I received an email from Tim Bell who ran the IT infrastructure for CERN in Europe – the Large Hadron Collider that is seeking answers to fundamental questions of the universe – that said the following:

Open source had indeed arrived. It dramatically improved the way software was built and maintained. It was lifting all boats, but those who were prepared by having moved to SaaS and cloud platforms, benefited the most. Those who fought against these waves just fell further behind. The average end user didn’t directly see these changes, but many if not all of the applications we use today depend heavily on open source. It's hard to imagine a world in which we achieved the same level of innovation over the last 15 years without the rapid adoption of open source.

In all of these technological waves, the manner varies in how profit pools accrue to the underlying “utility providers” vs. the businesses that employ these technologies. Little of this value ended up being captured by the underlying open source “utility providers.” But SaaS companies and developers who embraced open source drove tremendous value for their businesses and end consumers. 

Here’s the Claude AI summary of this blog series:

The post discusses BuildGroup's investment thesis, which is centered around understanding the major infrastructure waves that have shaped the evolution of software and SaaS companies over the past 25 years. It identifies six major waves:

  1. Software-as-a-Service (SaaS)
  2. Cloud Platforms
  3. Mobile
  4. Open Source
  5. Data Science
  6. Artificial Intelligence (AI)

Each wave had a profound impact on how software is built, deployed, distributed, and consumed. The document provides details on how companies that were able to ride these waves early on gained significant advantages.The author believes the latest AI wave will have the greatest amplification effect. Data-enabled SaaS companies that have already amassed large proprietary datasets and domain expertise are best positioned to successfully integrate AI and become "AI-enabled SaaS" companies.

The document uses examples like Fiix, Casetext, and Anthropic to illustrate how companies transitioned through these waves. It argues that AI will dramatically improve software usability, abstracting users away from managing workflows to simply querying an "AI co-pilot." Overall, the thesis is that investing in early-growth, data-enabled SaaS companies ripe for AI integration represents an exciting opportunity to back the next transformative wave in software.

Continue to part 3.

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The information in this blog post is provided in good faith without any warranty. It does not constitute investment advice, recommendation, or an offer of any services or products of BuildGroup Management and it is not intended to provide a sufficient basis on which to make an investment decision. This document is provided for educational purposes only. Discussions of current or former BuildGroup portfolio companies are intended for educational and discussion purposes only. Any portfolio company so discussed has been selected based on objective, non-performance based criteria.

This content does not constitute or form part of an offer of any investment advisory services of BuildGroup Management, LLC, nor does it constitute or form part of an offer to issue or sell, or of a solicitation of an offer to subscribe or buy, any securities or other financial instruments, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.