The Billion Dollar Opportunities Redefining Infrastructure, Services & Platforms
Example of product categories and companies in the API stack
MayfieldMuch has been written about the rise of the API economy over the past 5+ years, and for good reason. According to a recent survey, nearly 40% of large organizations are using 250+ APIs, and 71% of developers plan to use even more in the coming year. Investors like me are taking note that more than $ 2 billion was invested in API companies in 2020, down from just $ 0.5 million in 2017. And when Stripe's recent $ 600 million in funding USD 95 billion is a sign of the future, there will be much more investment in API companies in 2021.
Why are we seeing such a massive adoption? APIs are the "picks and shovels" of our modern digital age. Defacto building blocks and APIs provide the core infrastructure and enable developers to build quickly without having to code everything from scratch. At the risk of taking the analogy too far, APIs are transforming from picks and shovels to bulldozers, excavators, and even entire prefabricated houses. In other words, we've moved from a first layer of APIs that provide API infrastructure components to a second layer of APIs that provide higher quality API services. API infrastructure and API services together with consolidated API platforms make up the API stack. The API stack blurs the lines between infrastructure and applications in an exciting way, giving developers the ability to build faster and faster.
1st layer: API infrastructure
This first layer of the API economy can be defined as API infrastructure, picks and shovels, or the foundation of the API stack used to build applications. Examples include Authentication (Auth0, $ 6.5 billion), Messaging (Sendgrid, $ 3 billion), Chat (Drift), Search (Algolia), and Video (Mux). It's no secret that significant investments have been made in API infrastructure as well as significant financial exits. There is even more potential here, however. I believe we will see a wave of specialized APIs that still have great unrealized potential, such as: B. the API infrastructure for certain industries. However, as the APIs specialize, the question arises of what will lead to meaningful scaling and lasting independent businesses, and what will ultimately be consolidated into API infrastructure platforms like Stripe and Twilio.
To understand what kind of significant companies could emerge here, we should look for specific characteristics of new start-up entrants. The most successful API infrastructure companies will be: 1) must have, not beautiful; 2) Sales driver, no cost center; 3) maintaining differentiation; 4) wide applicability.
Characteristics of Successful API Infrastructure Companies
MayfieldAPI infrastructure areas that meet these criteria can include identity, integration, and automation organizations. I have had a firsthand breakout success with an API infrastructure company as CEO at Gigya, an enterprise software company that provided a customer identity API to over 700 customers and 2B customer identities.Many of these success attributes relate to identity verification APIs - as an example for Berbix - where I led a Series A investment by Mayfield as it is an A) critical infrastructure. B) increase in sales; C) potential to maintain the advantage; and D) a necessary ingredient for digital transformation. Other areas to watch include Passwordless API, Authorization API, Fraud API, and Data Integration API.
2nd layer: API services
The API economy is entering a new era in which APIs provide not only a utility but also an embedded service that can be used to build higher order software applications. As an example, we see APIs for Banking or Banking as a Service, with which existing or new companies can offer bank accounts, credit cards or loans as an embedded service in another application. The bottom line is that any company can start an entirely new business or division within an existing company faster.
To imagine what could be possible here, let's look at an example. A SaaS company offers back office management software as a value-added service. With API Services, this company can now offer Business Banking & Lending as an extension of its existing business without having to set up a banking license or build a technical infrastructure. They can quickly and cheaply deploy a more comprehensive solution that can increase sales and customer loyalty.
With API Services, traditional stationary companies can switch to digitization more quickly. Take Staircase, a mortgage API that helps digitize the mortgage process for traditional mortgage lenders. Alloy, an API for customer onboarding, helps traditional banks better serve digital products like digital native businesses.
Finally, we see API services that allow new digital native startups to be created faster, allowing for more specialized differentiation and faster time to market. One example is WorkOS, which provides a set of APIs that provide all of the SaaS components needed to build a software business.
As can be seen from the examples above, API services for developers will become a determining factor in the future and this is where we will see the most innovation among API companies. Breakout-ready API services include APIs for banking, mortgage, insurance, and retail.
Consolidation: API platforms
What will happen to API Infrastructure and API Services in the long term? As mentioned above, there will be plenty of opportunities for stand-alone businesses with great successful results, especially those that solve core needs, are sales drivers, and have mass applicability. However, as we've seen in virtually every other market since the beginning of the Industrial Revolution, whether it's railroads, cable companies or investment banks, there will be consolidation and platforms will emerge.
We are already seeing early winners like Stripe & Twilio continue to build more products and acquire API companies to become platforms, much like AWS did in the cloud infrastructure. For example, look no further than Twilio's acquisitions of Sendgrid for $ 2 billion and Segment for $ 3.2 billion. This is set to continue and is likely to occur primarily in the largest segments of the market such as Identity (Okta), Payments (Stripes), Communications (Twilio), and Finance (Plaid).
The combination of stand-alone opportunities within API Infrastructure & API Services and the possibility for API platforms to emerge is what makes this opportunity so exciting and why we are seeing so much investment, including my own, flowing into the space.
Conclusion
As the API economy matures, I am excited to see what kind of API companies will continue to emerge. We will see more and more companies being built within the US API stack, a combination of API infrastructure and API services. Iconic, long-lasting companies will be those that can achieve breakout speed, scale, and funding, and provide a significant installation base and war chest to expand on through R&D and M&A. I am confident that the startups that are building these next generation APIs, as well as any companies that will be built with this new set of infrastructures and services, have a bright future.
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