API startups are so hot right now

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

A cluster of related companies recently caught our eye by raising capital in rapid-fire fashion. TechCrunch covered a few of them, and I read coverage of others. Looking back through my notes and the media cycles that they generated, it feels safe to say that API-based startups are hot right now.

What’s fun about this trend is that the startups we’re considering are all relatively early-stage, so they aren’t limping unicorns staring down a closed IPO window. Instead, we’re taking a peek at startups that mostly haven’t raised material external capital — yet. They have lots of room to grow.

And the group is somewhat easy to understand. Sure, I don’t fully grok their underlying tech — that’s a bit of the point with API startups; they take something complex and offer it in an easy-to-consume fashion — but I do get how they make money. Not only are their business models fairly easy to understand, there are public companies that monetized in similar ways for us to use as a framework as the startups themselves scale.

This morning let’s look at FalconX and Treasury Prime and Spruce and Daily.co and Skyflow and Evervault, all API-focused startups to one degree or another, to see what’s up.

What’s an API-based startup?

Simply: a high-growth company that delivers its main service via an application programming interface, or API.

APIs help services communicate with other apps, allowing them to execute tasks or request information quickly and easily. These services are sometimes highly valuable because they can offer something complex and difficult, easily and simply.

Twilio, picking a famous example, provides a telephony-focused API. Other services can plug into Twilio’s API and use it to send text messages, make calls and more. Twilio does all the hard work on the back-end to hook up to the global phone system. Other apps pay Twilio when they use its API, allowing them to do more at a lower price than it would cost to build a Twilio clone.

And as Twilio is operating at scale, it can afford to offer its API-based services at reasonable prices while still generating healthy margins. Everyone kinda wins. That’s the idea of digital services and software eating the world — can we offer more at a really cheap price and still make money?

It’s like the inverse of Oracle.

Anyway, here’s the recent cluster of API-based, or at least API-powered, startups that have raised recently, how much they took on and what they do:

  • May 4, 2020: Daily.co raises $4.6M video chat API service. Daily.co’s video chat API is super-neat because the world is mostly still at home waiting for the air to clear. So, the startup’s service, while compelling as the world becomes a bit more digital, is also pertinent to our current reality.
  • May 5, 2020: Treasury Prime raises $9M to bring its banking APIs to market. The banking world is still very much Behind The Times, something that Treasury Prime wants to change. In short, the startup’s API helps automate banking tasks, which will help institutions make faster transitions into the digital age.
  • May 13, 2020: FalconX raises $17M to power its crypto trading service. FalconX’s crypto pricing and trading service is super-cool. But its API is what caught my eye after I wrote about its funding round, given that it could help other folks trade crypto without, you know, all the usual faff.
  • May 21, 2020: Spruce is eliminating the drudgery of real estate and has $29M more from Scale to make sales easy. TechCrunch described Spruce as a “workflow tool for real estate transactions,” and according to its CEO Patrick Burns, its APIs help cut out “manual communication and manual processes,” allowing users to “to scale effectively and to provide great digital experiences to their customers.” Very API. Very hot.
  • May 21, 2020: Skyflow raises $7.5M to build its privacy API business. Skyflow is the perfect example of an API-focused startup. It wants to provide a service to companies via an application programming interface that will store personal information securely so other companies can’t let it leak. Good! Precisely how Skyflow accomplishes this is a hair outside my current technical knowledge. But if the company pulls it off, we could all become a bit more secure.
  • May 21, 2020: How a 20-year-old convinced Facebook’s former security chief to invest in his data privacy start-up. Evervault is another privacy API play that has attracted notable backers. According to CNBC, the company’s API “will be integrated into companies’ apps to ensure privacy is baked in from the start,” allowing them to build what the firm’s CEO calls a “privacy cage, where basically we let you process your most sensitive data in an encrypted way.” Similar to Skyflow? We’ll see.

There might be a few more API-focused companies than what we’ve noted here that recently raised capital. We’ll keep an eye out for more.

Finally, money. There appear to be two main ways that API-focused startups charge for their services, and a hybrid:

  • Usage pricing: The more you use these services, the more you pay. A great fit for APIs that are pinged all the time for discrete tasks. Like Twilio, for example.
  • SaaS pricing: For APIs that provide a service, but aren’t called very often, SaaS pricing might be the best fit. Skyflow, for example.
  • Hybrid pricing: A mix of SaaS and usage pricing, for startups that provide a service that, when called, has costs. Daily.co, for example.

What will be fun, given how closely in time the above companies raised, is that they will probably raise in the future on a similar cadence. So, we’ll get to update this post in the future with progress. Fun!