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🔎 Market Spotlight - API-first companies

🔎 Market Spotlight - API-first companies

(by Aarzoo Sharma)

Our first market spotlight covers the API-first trend. The rise of API-first companies (such as Shopify, Stripe, Twilio, Plaid, and Segment) and the fact that API startups raised $1.06 billion in venture funding in 2018 made it interesting for us to dig into this space.

The complete deep-dive is hosted independently on a Notion page and you’ll find below a summary of the key points we address! Check out the market deep dive HERE.

What are APIs, anyway?

Simply put, APIs (Application Programming Interfaces) are computing interfaces that allow software applications to talk to each other. They facilitate communication (exchange of data) between software and can be designed for any level of granularity - go further with Mulesoft’s super intuitive explanation of what an API is.

APIs have been a key part of companies' tech stacks for almost 20 years - they were first popularised by Salesforce, eBay, and AWS in the early 2000s as a means to integrate services in the backend. They then went on to enable some of the most important technologies of the past decadesocial (APIs enabled the success of Facebook and Twitter), cloud (AWS proved that infrastructure could be deployed cheaply using APIs), and mobile (APIs enable interconnectivity of mobile apps).

Thanks to major shifts in the technological landscape (detailed in the next section), APIs form a key part of the tech stack of most products today.

The evolution of SaaS

To understand why APIs are shooting up in importance, it is worthwhile to look at the evolution of SaaS companies (go further on Notion). In this section of the deep dive, we talk about:

  • How SAP and Salesforce helped lay the foundations for the SaaS explosion of the past decade.
  • How the commodification of cloud computing and infrastructure management technology supported the rise of SaaS.
  • Why APIs are central to building defensibility in SaaS, with a focus on Systems of Record/ Engagement/ Intelligence.

The core value proposition of API-first companies

The push of the software industry towards an on-demand, bottom-up, consumer-like adoption model is driving the API-powered product trend. With more SaaS inclusion in the system, it has become more natural for companies to use APIs in their own products as well. Given the flexibility and modularity of APIs, the possibilities for endpoints to create and connect are endless. We see three key areas where API-first companies can add value to their (enterprise) customers.

  • Enable seamless and personalized customer experiences through microservices.
  • Supercharge teams across functions by speeding up experimentation cycles and reducing time to market.
  • Foster collaboration (and innovation) across the value chain.

Market timing - where can API-first companies capture value?

We see two key areas where API-first companies can really capture value:

  • Enabling digital transformation: The growth in cloud computing and the fact that 'every company is now a tech company' has led to the ever-increasing need for integration (across industries). We're already experiencing a great deal of API adoption in the software, finance, and e-commerce industries. However, we think that there is still quite some untapped potential in 'traditional' industries such as construction, logistics, and manufacturing.
  • Facilitating the shift from on-premise to the cloud for companies that are just getting started on their digital transformation journeys.
  • Enabling additive manufacturing and communication across the value chain (Agile ERP, Agile MES, Agile PLM).
  • Developing custom API systems for SMBs that might lack internal technological know-how.
  • Boosting vertical B2B marketplaces by creating a smoother search, listing, checkout, and tracking experiences.
  • More people are becoming developers thanks to no-code: APIs fit in perfectly with the rise of no-code tools and the greater speed of experimentation that comes with using them. Startups are now starting to target citizen developers with their APIs, and there is value to be created on both sides of the table, as proven by the phenomenal rise of Zapier.
  • Autonomous management of APIs to help API developers focus more on designing APIs rather than testing and debugging them.
  • Enabling data access for 'citizen developers' to capitalize on the 'everyone is an analyst' trend.
  • Facilitating API discovery in what is likely to be a crowded space.

API-powered companies mapping

Here is a (non-exhaustive) mapping of API-first companies. Let us know in the comments if we missed any exciting ones!

Conclusion: What you would need to believe in

While the API-first trend is super interesting, we think that there are several hoops startups would have to jump through to really make it big.

  • Achieving Product-Market Fit in addition to building a strong technical foundation for their offering will be critical. We also believe that in the long run, API-first companies would have to look to capture more of the value chainand provide a more comprehensive service before they run the risk of being marginalized as an API-only company that serves a purely transactional purpose.
  • Educating customers on how they can derive the maximum value from their tool and getting the attention of IT teams/ developers (read: building brand awareness) in what is likely to be a noisy space is going to be critical.
  • Building brand equity, especially in situations where the startup is a category creator could be essential to driving future growth.
  • Unlocking the usage-feedback flywheel to build the best possible product for their target customers.

Please feel free to share your thoughts on the Notion page via comments! We would love to hear from you.

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