The Future is API-First
Following my post on the rise of SMB SaaS, I want to highlight trends I believe are key enablers of these solutions, and subsequently driving innovation in the space. First: Why API-first companies and their customers will benefit.
Before discussing the rise of API-first companies, it’s worth quickly explaining what an API is and what it means to be API-first. An API, short for “application programming interface”, is a piece of code that allows two pieces of software to speak to one other, passing requests and responses back and forth while exposing only the code necessary to provide the appropriate output. An API, in simplest terms, is an interface through which different software applications interact with one another.
There’s a new wave of companies distributing software in the form of an API (“API-First”). This approach empowers developers by allowing them to add external products into their own applications, increasing their functionality and breadth. This has become incredibly valuable as more companies move to the cloud and software gets more distributed. Allowing developers to be able to integrate these API-first products rather than build the functionality and services themselves is a huge competitive advantage and driver of innovation.
I’ve included a few links at the end of the post to provide more color
API technology has been around since distributed computing emerged years ago. However, it wasn’t until the last decade when modern APIs gained traction as companies like eBay, Netflix, and Facebook launched public versions. Companies provided external access to their information and functionality, attracting outside developers by allowing them to build using their APIs, spurring innovation and acquiring more users. This became widely popular shown by the rise in publicly available APIs below:
This brought a shift in the digital ecosystem that turned APIs into the product and developers into the customer. Developers were no longer locked-in to one platform and could innovate by embedding these APIs in their code to provide new services, product features, or accessibility.
Activity in the API economy followed. In addition to multiple acquisitions by companies looking to bolster their capabilities (below), new companies leading with an API-first approach gained momentum. Companies like Stripe, Twilio, and Okta offer APIs as their primary product, allowing developers to focus on the primary components of their businesses and insert best-in-class solutions everywhere else in the form of an API. As a result, developers can quickly and easily add increased functionality around payments, billing, identity, messaging, etc. in a low-cost, effective manner. This becomes valuable for companies that are resource-scarce or cash-constrained, such as startups and SMBs, as it broadens their capabilities and allows them to scale with little effort and cost.
The value APIs bring to the table is quite clear. However, several secular trends have been instrumental in delivering the technology and enabling companies to take advantage.
- Digital Transformation
Companies are finding it critical to have a digital-first strategy, where they can offer products and services through an omnichannel approach. This starts with moving from on-prem to the cloud, where it's common to leverage multiple vendors. This approach results in information federated across multiple providers/systems. This is a huge problem because having a digital-first strategy requires access to real-time, relevant information across multiple systems and the mobility to execute business processes via multiple devices. For this to work, APIs must be used to access separate systems and provide necessary connectivity.
A great example of digital transformation is Salesforce’s acquisition of Mulesoft, a leading API provider enabling organizations to connect and integrate disparate applications. With Mulesoft, customers can unlock data across multiple systems/devices to make effective decisions, subsequently catalyzing their digital transformation and creating a more connected customer experience.
2. Microservice Architecture
To access real-time information, traditional monolithic systems aren’t suited to handle unpredictable workloads and high demands. Monoliths are applications built as a single unit. Any change to the application requires the entire monolith to be re-built. As more companies move to the cloud, monolithic architecture makes it difficult for companies to frequently make changes to apps as well as scale. On the other hand, microservices is an approach to developing an application as a suite of services, independently scalable and deployable. This approach enables end-to-end implementation of capabilities in a fully decoupled manner that avoids scaling flexibility, and dependency issues.
3. Customer Preferences
Customer expectations are at an all-time high, where they expect a personalized, unique experience that reflects an understanding of their interests, problems, and needs. This requires companies to access, navigate, and contextualize essential information from a number of systems, which can be internal, external, or belonging to business partners. If done successfully, the experience will be better and customer loyalty will be higher.
“In this networked world, customer experience is the only true competitive advantage” — Segment
Twilio acquired Segment, a platform that helps users collect, clean, and control their customer data. It enables developers to unify data from every customer touchpoint and empowers marketing, sales, and customer service teams with insights they need to design and build relevant, data-driven customer engagement. The acquisition allows Twilio to help personalize business engagement with customers across every channel in a personalized, timely, and impactful manner. Twilio now has a holistic view of the customer lifecycle and can equip its customers with personalized messaging capabilities and engagement insights to power an impactful end-user experience.
So how do customers benefit from a third-party API vs building internally?
1. Empower Developers: Leveraging third-party APIs induces innovation. The best API companies have made it incredibly easy to understand the use case and add powerful functionality with just a few lines of code. As a result, developers can easily add new capabilities, incorporate outside services into a product, and save time/internal resources by spinning up and testing a new feature in days, not months.
2. Better Customer Experience: APIs reduce friction in the customer experience by making it possible to bring in customer information from different sources. This in turn enables companies to contact customers how they want with the most effective messaging and automate customer actions by leveraging existing information. Uber is well-known for using numerous API integrations in its app, using Google Maps for navigation, Braintree for payment operations, and Twilio for SMS chatting.
3. Cost and Resource Effective: Third-Party APIs normally charge on usage, so companies can pay based on the utility received rather than a year-long subscription/number of seats. Additionally, rather than allocate money/development time to creating new features, teams can embed a third-party API and leverage the capabilities of an external company and its resources.
4. Increase Data Visibility: APIs help enterprises share valuable data internally and with third-parties as well as connect their digital assets to external APIs. Because of the connected ecosystem these APIs create, businesses get real-time visibility into their customers and how their business is performing, leading to proactive and data-driving decision-making.
5. Faster Time to Market: With APIs, internal teams don’t need to code functionality from scratch or stitch together multiple applications — they start with integration. APIs enable microservices, which are independent features you can plug into any application. Dev teams can work on their own components of an application in tandem while leveraging APIs for complex workflows (ML, compute, etc.) instead of hiring experts. This is a huge advantage as it enables faster deployment.
“The API economy is an enabler for turning a business or organization into a platform” — Gartner
Why would a company decide to be API-first and how does it benefit them? Aside from the fact that multiple $10B+ companies (Stripe, Twilio, Okta, etc.) have been created this way, several reasons make this more appealing and advantageous compared to traditional SaaS.
1. Low-Friction Distribution and Pricing
Two differences between Traditional SaaS and API-first are the customer and pricing model. Traditional SaaS sells multi-year subscriptions on a per-seat basis to departments, CIOs, or IT. API-first usually sells based on usage to product/engineering/developers. This minimizes friction in adoption as developers can get started without navigating the complicated, long sales process, allowing the company to scale rapidly and develop a strong developer community.
2. Data Network Effects
Being API-first allows businesses to leverage data created by one customer to make improvements benefitting the entire customer base, subsequently attracting more users. As this feedback loop strengthens, data network effects are established, creating a defensible moat and a better product experience.
3. Switching Costs
Good SaaS products are easy to adopt and similarly easy to replace, resulting in low switching costs. API-first companies carry that mentality for developers, but because the API is embedded within their code, costs to switch are high from an economic, time, and structure standpoint. Switching requires rebuilding their codebase, taking resources away from other priority items on the roadmap which carries risk that could disrupt the business if something went sideways. Additionally, as customers store critical user data in the API-first product, they become less likely to switch as it would require them to recollect that data from customers, resulting in attrition.
4. Customer-led Growth
Bottoms-up SaaS companies like Slack sell into business units and grow with them — a powerful strategy capitalizing on the compounding nature of adding new customers and upselling existing ones. API-first companies are similar, but can potentially benefit even more because once the product is embedded, customers can organically grow without the need for API-first companies to spend dollars on sales and marketing. However, it is worth noting a consideration of usage-based API pricing in that customer growth can be unpredictable.
API-first companies provide businesses with the connective tissue to data and services that enable rapid innovation, create opportunities for new goods/services, and act as the starting point for future partnerships. API-led products have become key aspects of businesses’ capabilities and are positioned to become massive companies themselves. I’m excited to continue seeing API-first companies attack antiquated, yet critical aspects of a business and turn them into automated, revenue-generating features.