The Third-Party API Economy

How to Give Your Users Superpowers

Starting an API-first company bringing your users superpowers? I’d love to hear from you at grace@canvas.vc.

APIs are nothing new. In 2006, my colleague Gary Little wrote the first check into MuleSoft, the software integration platform to connect any app or data source using APIs. An overwhelming majority of software today is built using APIs.

But the next, exciting phase of the API economy, specifically third-party APIs, is just beginning in 2020. With the rise of serverless applications, backend functionalities are increasingly behind APIs, rather than on web servers. With an accelerated transition to cloud computing, APIs are playing a more crucial role integrating and facilitating cloud migration. App development is cheaper than ever before, and JAMstack is reliant upon APIs to shield complexity from web architecture. Not to mention third-party APIs are easier to flexibly use and integrate with query languages like GraphQL, and network effects compound a given API’s value over time.

This convergence of factors creates a ripe environment for APIs to flourish — and those companies that provide APIs that deliver value for frequent, universal cases will dominate. Users discern and switch APIs until they find the one that best fits their needs — fostering a competitive market driving innovation forward.

What’s an API? Justin Gage’s breakdown is one of the clearest I’ve seen. At a basic level, an API takes a specific input and provides an output. An API can be internal within an existing company or app’s software stack, external or public APIs or functional code interfaces. Most often, APIs serve a specific use case and are often paired with a front-end dashboard tracking key metrics and analytics.

My definition? The best API-first companies give their users “superpowers” that they wouldn’t have otherwise.

While you might not think of them this way, some of the biggest companies of the past few decades originated from easily-implemented APIs that gave their users heightened power, efficiency or accessibility. API-first companies like Stripe, Twilio & Okta either created new markets or dramatically grew existing categories.

Yet as more and more APIs enter the landscape (several of which are doing seemingly the same function) how do you identify which one pulls away? How do translate these superpowers into concrete terms — what are the defining attributes of successful third-party API companies?

Josh Nussbaum puts it this way: “The best API companies are those that take a problem that is core to their customers’ businesses yet isn’t their core competency and provides a simple and cheaper solution.”

Inspired by his words, here’s my own take and how it applies to existing winners and emerging API categories.

Common Characteristics of a Successful API-First Company

  1. Simplifies Complexity → API takes away complexity, and makes a previous function easier than it was before, with a clear ROI in terms of either time or money. The best third-party APIs champion their users and a consumer often doesn’t even know it’s there (e.g. Stripe on e-commerce sites or Twilio messaging within apps.)
  2. Provides Business Critical Functionality→ While third-party API functionality may not be a business’ core competency, it should be critical to the business’ success, often tied in to a customer monetization or engagement loop (e.g. bank connectivity for Plaid, messaging for Twilio, online payments for Stripe), and is frequently used in day-to-day product operations.
  3. Takes Advantage of a Tectonic Shift → The most successful third-party API companies have taken off at unique points in time (e.g. the advent of the Internet, the proliferation of the smartphone, an explosion in contactless payments) and oftentimes enable a functionality that was previously impossible prior to said tectonic shift.
  4. Community X-Factor → One interesting phenomenon I’ve noticed across successful API-first companies is an evangelist community of early users, often leveraging open source software. Stripe, Twilio and Okta all invested deeply in the user communities of which they were a part, championing their users and empowering them so meaningfully that they organically spread the product across peer groups.

A few examples of incumbent API winners:

Twilio, Current Market Cap: $36B Messaging

  • Superpower: amplifies developers with text and voice messaging functionality
  • Simplifies Complexity → made adding voice or text messages easy to implement with just a few lines of code
  • Business Critical Functionality → messaging isn’t the core competency of most tech companies, however, it’s a critical business functionality to communicate using tech apps (e.g. texting your Uber or Lyft driver in-app)
  • Tectonic Shift → advent of the smartphone & Apple App Store, where consumers were faced with a litany of apps and heightened customer service expectations allowed Twilio to seamlessly democratize a global telecommunications platform to its customers.
  • X-Factor → over 5M developers in the community championed by Twilio to democratize text, voice & chat communications. Gave developers 1000 free minutes in their sandbox in early days.

Stripe, Current Valuation: $36B Payments

  • Superpower: empowers online payments for merchants
  • Simplifies Complexity → made it easier and simpler to accept online payments
  • Business Critical Functionality → while online payments isn’t the core competency of merchants, the ability to easily accept online credit card payments (on their own website) is crucial.
  • Tectonic Shift → building off the Shopify tools for e-commerce, Stripe took advantage of the e-commerce explosion and the shortcomings of incumbents (e.g. PayPal) coupled with increasing usage of credit cards over cash.
  • X-Factor → started as a single GitHub repository nurturing an early developer community (and has grown to 9 public libraries & 90 public repositories!)

Okta, Current Market Cap: $27B Authentication/Identity

  • Superpower: enabled IT managers to easily manage identity & access management
  • Simplifies Complexity → made single-sign-on & identity verification easy to implement as an on-demand product
  • Business Critical Functionality → while user authentication isn’t the core competency of most companies, user identification is critical for a business to maintain security & access controls
  • Tectonic Shift → explosion of mobile, consumerization of IT with digitization of companies and apps presenting new challenges for organizational user management
  • X-Factor → nurtured customer base of “SMB IT Network” to become sales advocates and grow early community

Beyond messaging, payments and authentication, another successful category is the content management space — pioneered by Automattic/Wordpress enabling easy blog and website creation or location data with Foursquare. Several more massive companies have also been built assembling a unique collection of API services together, such as Uber in the transportation space (APIs for maps, messaging, payments), or AWS in the computing space (APIs for a variety of web services, across frameworks and languages.)

A key distinction — many successful companies like Stripe or Twilio were API-first from inception, while others start with a non-API use case (e.g. Shopify with e-commerce back-end) but expand into APIs over time. The opposite is also true — API-first companies are strategically positioned to expand customer usage in other non-API products (e.g. Stripe Atlas, Shopify fulfillment, Okta lifecycle management.) Another interesting area of analysis is how companies broach the API to non-API product transition and the common attributes and strategies of those companies that successfully do so.

I’m excited about third party APIs especially those fitting the criteria above to invent and improve functionalities in categories where the superhero community hasn’t yet been built from Banking-as-a-Service to payroll and data management. While you can see a bunch of categories I’m generally excited about in my market map, I’ll highlight a few below.

Image: Grace Isford

Emerging Third-Party API Categories:

Banking-as-a-Service (BaaS) — API-first companies in the banking-as-a-service space are simplifying the previously complex back-end of banking systems, equipping businesses with added banking service functionalities, and exploiting a tectonic shift to modernize an archaic banking ecosystem.

API Function: easily deliver a bank’s financial services

Representative Companies:

  • Plaid — connect bank accounts to an app
  • Galileo — provide sophisticated payment card & banking solutions
  • Modern Treasury — automate & manage full cycle of payment flows via API
  • Treasury Prime — API banking platform to open & service bank accounts
  • SynapseFI — build & launch financial banking products
  • Bond — personalized financial banking products
  • Fidel — API for linking bank cards to applications globally
  • Sila — API for KYC, money transfer, bank account linking
  • Moov — API for ACH transactions/bank processing

Identity — API-first companies in the identity space make it easy to authenticate users either in terms of identifying attributes (credit card info, email etc.), exploiting tailwinds of the increased need for digital authentication in a COVID era.

API Use Case: authenticate data or identity users

Representative Companies:

  • Okta — secure identity management
  • ForgeRock — digital identity
  • Auth0 — integrate authentication seamlessly
  • Persona — all-in-one identity platform
  • Passbase — identify verification as a service
  • Trusona — passwordless multi-factor authentication
  • WorkOS — API for single sign on

Data Storage/Management — API-first companies in the data management space are simplifying complex ways to move and manage data, providing added value and efficiency gains, leveraging tectonic shift in developer first technology with increasing preferences for serverless, simpler data setups.

API Use Case: move, collect or store data

Representative Companies:

  • Segment — API for analytics data collection
  • FaunaDB — data API for client-serverless applications
  • Jexia — API-enabled backend services to build serverless applications
  • Cherre — API to connect & analyze real-estate data
  • Clearbit — API to find customer data
  • Gretel.ai — API to create safe data

Verification/Checks — API-first companies in the verification space are providing background and employment verification checks with a few clicks, often building APIs or technical integrations with courts & historical data, leveraging improvements in technology to simplify and speed up a previously complex process. While Checkr is the incumbent in background checking, there’s many more types of checks, manual processes and whitespace in international markets to innovate.

API Use Case: verify individuals for employment, background checks

Representative Companies:

  • Checkr — background checks
  • Middesk — business verification & risk assessment
  • Certn — background checks in U.S. & Canada
  • Truework — employment verification & income
  • Argyle — verification & payroll data aggregator

Payroll — API-first companies in the payroll space are making payroll instant, easy and simple via APIs and SDKs streamlining a previously high-friction process. Payroll companies are exploiting tailwinds to open up and modernize esoteric financial systems and put more power back in the hands of the consumer. (Note: several companies in the employee verification category over time can bleed into the payroll space and vice versa.)

API Use Case: facilitate payroll connections

Representative Companies:

Health — API-first companies in the health space are innovating data sharing in healthcare ecosystems across insurers, healthcare providers and more. There’s ripe opportunity here given the complexity of the healthcare industry, and there may uniquely be a tectonic shift in further digitizing and streamlining healthcare data in the face of the pandemic.

API Use Case: aggregate health data

Representative Companies:

  • RibbonHealth — API layer for healthcare enterprises
  • 1UpHealth — connect with EHRs in minutes
  • Eligible — healthcare insurance billing API
  • HumanAPI — connect & share health data
  • PatientPing — care collaboration platform connecting providers

Fraud — In an increasingly digital world, it’s more crucial than ever before to identify and manage fraud. Technological improvements are making it easier to detect fraud and simpler APIs are allowing companies without the tech team in-house to implement world-class fraud detection.

API Use Case: identify fraud

Representative Companies:

  • Alloy — complete identity OS — use single API & dashboard to manage KYC/AML, fraud etc.
  • Sentilink — API to identify synthetic fraud
  • Cognito — anti-fraud & compliance solutions to verify customers
  • Signifyd — e-commerce fraud detection

Video — API-first video companies are doing exactly what you’d think — helping provide the infrastructure for companies to provide their own real-time video communications in a browser. While you could build this in-house, it is a non-core critical business functionality for many companies and API companies in the space make the process simpler and easier while maintaining integrity of the user experience and has become even more relevant in the wake of COVID-19.

API Use Case: provides video functionality, often improving WebRTC

Representative Companies:

  • mux — API to enable on-demand video
  • Daily.co — 1-click video chat API
  • Agora — embed real-time voice & video
  • API.video — video cloud hosting & streaming

Automation — API-first companies are automating workflows and help enable companies to connect & integrate apps seamlessly, coupled with advances in automation and engineering technology and a proliferation of cloud-first apps and workflows. There’s still extensive opportunity here especially as we democratize usage of RPA (robotic process automation), beyond IPaaS (Integration Platform as a Service).

API Use Case: automate workflows

Representative Companies:

  • Zapier — API to connect apps & automate workflows
  • Tray.io — connect cloud stack using APIs & automate complex processes

Let’s continue building and funding products that aren’t just useful tools, but truly bring their users superpowers exploiting some of the tectonic consumer & technological shifts we’re experiencing in a tumultuous 2020.

Starting an API-first company that fits this criteria? I’d love to hear from you at grace at canvas dot vc.

Thanks to Gary Little, Paul Hsiao, Annabel Strauss and several others for their feedback on this article.

Resources:

Investor at Canvas Ventures

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