API Stack: The Billion Dollar Opportunities Redefining Infrastructure, Services & Platforms

Much has been written about the rise of the API economy over the last 5+ years, and for good reason. According to a recent survey nearly 40% of large organizations use over 250 APIs, and 71% of developers plan to use even more in the coming year. Investors like myself are taking notice, with more than $2B invested in API companies in 2020, increasing from just $0.5M in 2017. And if Stripe’s recent $600M funding at a $95B valuation is any sign of things to come, 2021 will see many more investment dollars in API companies.  

Why are we seeing such massive adoption? APIs are the ‘picks and shovels’ of our modern digital age. Defacto building blocks, APIs provide core infrastructure and enable developers to build quickly without needing to code everything from scratch. Yet, at the risk of taking the analogy too far, APIs are moving from just picks and shovels to become bulldozers, excavators and even complete prefab buildings. In other words, we’ve moved from a 1st layer of APIs that provide API Infrastructure components, into a 2nd layer of APIs that offer higher value API Services. Together, API Infrastructure and API Services, along with consolidated API Platforms, make up the API Stack. The API Stack blurs the boundaries between infrastructure and applications in an exciting way that will create opportunities for developers to build more, faster.  

1st Layer: API Infrastructure

This first layer of the API economy can be defined as API Infrastructure, the picks and shovels, or the foundation of the API Stack used to build applications. Examples include authentication (Auth0, $6.5B acquisition), Messaging (Sendgrid, $3B acquisition), Chat (Drift), Search (Algolia) and Video (Mux). It’s no secret there has been significant investment pouring into API infrastructure, as well as significant financial exits. Yet, there is still more potential here. I believe we will see a wave of specialized APIs which still have large, unrealized potential, such as API infrastructure for specific verticals. However, as the APIs become more specialized there is a question of what will break out to create meaningful scale and lasting independent companies, and what will end up being consolidated into API infrastructure platforms, such as Stripe and Twilio.

To understand what type of significant companies might emerge here, we should look for specific characteristics of new startup entrants. The most successful API Infrastructure companies will be: 

1. must have, not nice to have; 
2. revenue driver, not a cost center; 
3. sustaining differentiation;
4. broad applicability.  

API Infrastructure areas that fit these criteria may include companies within Identity, Integration, and Automation. I experienced first hand breakout success with an API Infrastructure company as the CEO at Gigya, an enterprise software company that provided an API for Customer Identity for over 700 customers and 2B customer identities, with a successful acquisition by SAP. Another example where I see many of these same success attributes is around APIs for Identity Verification - as an example with Berbix - where I led a Series A investment by Mayfield, due to the fact that it’s A) critical infrastructure; B) revenue driving; C) potential for sustaining advantage; and D) a necessary ingredient for digital transformation. Other areas to watch include API for Passwordless, API for Authorization, API for Fraud, and API for Data Integration.

2nd Layer: API Services

The API economy is moving into a new era where APIs are moving beyond providing a utility to providing an embedded service that enables higher order software applications to be created. As an example, we see APIs for Banking, or Banking as a Service, that allow any existing or new business to offer bank accounts, credit cards, or lending as an embedded service within another application. The end result is any company can more quickly launch a completely new business or new line of business within an existing company.

To imagine what might 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, that company can now offer business banking & loans, as an extension to their existing business without any of the hassle of needing to establish a bank license or build any technical infrastructure. They can quickly and cost-effectively provide a more complete solution that enables them to increase revenue and retention.

API Services are enabling traditional brick and mortar businesses to more quickly move towards digitization. Take Staircase, an API for mortgages, which is helping digitize the mortgage process for traditional mortgage lenders. Alloy, an API for customer onboarding, is helping traditional banks better offer digital products like digitally native companies.

Finally, we are seeing API Services that allow new digitally native startups to be built more quickly, allowing for more specialized differentiation and faster time to market. An example is WorkOS, that provides a suite of APIs that provides all of the SaaS components needed to build a software business.    

As noted by the examples above, API Services will become critical enablers for developers moving forward, and this is the area that we’ll see the most innovation among API companies. API Services ripe for breakout include APIs for Banking, Mortgages, Insurance, and Commerce.

Consolidation: API Platforms

What will become of the API Infrastructure and API Services companies in the long term? As noted above, there will be many opportunities for standalone companies with large successful outcomes to be built, especially for those that solve core needs, are revenue drivers, and have mass applicability. That being said, like we’ve seen in virtually every other market since the dawn 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 the initial winners like Stripe & Twilio continue to build more products and acquire API companies to become platforms, much like AWS has done within cloud infrastructure. As an example, look no further than Twilio’s acquisitions of Sendgrid for $2B and Segment for $3.2B. This will continue, and likely occur mostly within the largest market segments like Identity (Okta), Payments (Stripe), Communications (Twilio), and Finance (Plaid).

The combination of standalone opportunities within API Infrastructure & API Services, along with the ability for API Platforms to emerge, is what makes this opportunity so exciting, and why we are seeing so many investment dollars, include my own, pouring into the space.  

Conclusion

As the API economy matures, I’m excited about what sort of API companies will continue to emerge. We will see more and more businesses built within the API Stack, a combination of API Infrastructure and API Services. Iconic, lasting companies will be those that can achieve breakout velocity, scale, and funding, providing a significant install base and war chest to broaden offerings via R&D and M&A. I’m confident that there is a bright future for the startups that are building these next generation of APIs, as well as all the businesses that will be built by this new set of infrastructure and services.  

--

Note: A version of this article was originally posted on Forbes.com, where I am a contributor.