Startups that deliver products via an API are seeing momentum in 2020, as their method of serving customers becomes increasingly mainstream. And investors are taking note.
It’s not hard to find a startup with an API-based delivery model that is doing well this year. This column noted a grip of recently funded API-focused startups in May, for example, underscoring how attractive they are to venture capitalists today.
Yesterday, I caught up with Alpaca, a startup whose API allows other companies to add equities-trading capabilities to their own services. The company’s business is skyrocketing this year. According to data it provided to TechCrunch, Alpaca’s trading volume, processed for its developer users and customers, has grown from $388.1 million in January to nearly $1.6 billion in both June and July. Volume fell some in August, but according to CEO Yoshi Yokokawa, September’s trading volume could see Alpaca surpass its summer records.
Alpaca announced a $6 million round from Spark Capital last November that TechCrunch covered, with Social Leverage, Portag3, Fathom Capital and Zillionize helping boost its total capital raised to nearly $12 million. We confirmed with Yokokawa that his startup’s revenue scales with volume, meaning that the company’s top line has exploded this year, with trading volumes up 10x from July 2019 to July 2020.
Alpaca is a good example of what to think of when we consider an API-powered company versus something more traditional, like Robinhood, which provides services to end users. Alpaca considers developers as its users, and those developers bring Alpaca to market in their own fashion.
The developer-first model can lead to efficiencies. As Twilio CEO Jeff Lawson told TechCrunch regarding new software products: “I don’t want to go through a sales process,” he said, adding that he also doesn’t want to wait “a week to get a call back” but would rather “start exploring now.” With many API companies offering a free tier or low-cost options for tinkering, lowering sales and marketing costs in certain instances when developers sell themselves on an API-delivered service.
So what?
What’s driving the API-delivered model forward in 2020? Or, more simply, why do I keep hearing from API-powered startups that are either raising money, or are seeing rapid growth?
Alpaca’s Yokokawa has a theory. According to the startup exec, two macro trends are coming together to push API startups forward. The first is a simple evolution of the tech industry toward a new software delivery model. Yokokawa drew a timeline for TechCrunch, from legacy IT systems to on-prem software, through SaaS to API-delivered services today, the last in the bunch offering what he views as having the most flexibility. That trend has combined with more folks becoming developers, in his view, through traditional education, coding schools and even no-code’s growth.
An industry shift toward software and services in an increasingly on-demand model (SaaS is more on-demand than on-prem software, and API-delivered tools are even more on-demand than SaaS) and more developers to help plug APIs into other apps could make for a nice tailwind for companies employing the business model.
To get a bit more on the where we stand today, The Exchange chatted with Shasta’s Isaac Roth and collected notes from two Mayfield investors, Patrick Salyer and Rajeev Batra. There’s a general air of bullishness around startups selling APIs. Let’s learn how it is impacting venture interest.
The investor perspective
Roth said market demand for machine-learning capabilities — something that can be delivered via an API, and can be hard to build — is helping drive demand for startups employing the business model. He also cited “new data stores, different ways to work with, store [and] transform data, [and] delivering that as an API” as something that people are willing to pay to access via an API, rather than build themselves, again bolstering demand for what an API-powered startup can sell.
VCs are taking note. “There is more funding” for API-delivered startups today, Roth said, adding that “investors seem to understand the business model,” though he did allow that investors don’t quite have their “hands around” what the long-term gross margin profile of API-powered startups will be.
That caveat is not cooling interest. According to Mayfield’s Batra1, his firm is “seeing quite a few API companies,” and that his team is seeing “many of them get bid up” leading to valuations that “can be up there.” Why? Batra echoed something that we noted above, namely that many API-delivered startups have a “developer-led adoption and consumption model.” Such a model could allow smaller-than-normal sales and marketing spend, allowing API-powered startups to spend more capital on their product rather than simply staying alive.
Mayfield itself has a “belief and a thesis around the ‘API economy,'” Batra said via email. Why? Because in his view, “there is a big trend toward not just [the] API-ification of software, but many utilities or capabilities that make sense to be packaged, delivered and consumed as APIs” as well.
His colleague Patrick Salyer agreed in an email, saying that the market is “still early in the API-ificaiton of software,” adding that in today’s world developers “more and more frequently take a Lego building block approach,” where they hunt for APIs instead of building select tech themselves.
Salyer said two more things are happening that could contribute to API-powered startups being hot in 2020: COVID-19 leading to digitalization of more things, and “a new wave of API companies that provide entire utilities” like banking, which could “further accelerate digital transformation, and enable mashups of businesses previously not even possible.”
Looking back at the trends that Alpaca CEO Yokokawa noted, namely a delivery model evolution and rising developer ranks, Jeff Lawson’s point about letting developers tinker, and what Shasta and Mayfield have in mind, it’s somewhat easy to presume that we’re going to hear from a lot more API-powered startups this year and the next.
No-code and APIs, then, are going to be with us for a long time. What’s next after the pair of trends? Their union, I reckon, when we get no-code tools that can better ingest APIs, allowing even the less technically proficient among us to make our own mashups and new tools.
- Batra led a round in my former employer, Crunchbase, a company where I worked for a few years. Crunchbase has many investors, so I wind up talking to some of them from time to time. They receive, and expect, no special treatment. In time Crunchbase will exit, and I’ll liquidate my modest shareholding and this situation will resolve itself. Until then, expect the occasional disclosure note.