How does a small API create a value of 350 million US dollars?

[Editor's note] API is playing an increasingly important role in software construction, and many API-first companies have emerged in the industry. But what exactly is an API? What is the use? What kind of influence can it bring to the development of the industry? 

Compilation | Edited by arvin | Zhang Wen

Head picture | CSDN download from Visual China

Exhibit | CSDN (ID: CSDNnews)

API is becoming more and more important in software construction. Let us follow the pace of Shopify, Stripe, Twilio and other companies and enter the API-first ecosystem.

Last Thursday, Ben Thompson interviewed John Collison, the co-founder and president of the company that announced the new "StripeTreasury" product, and wrote an article about the company.

Stripe Treasury is "a bank as a service API that allows you to embed financial services in your market or platform". With just a few lines of code, the platform allows customers to open bank accounts at partner banks such as Goldman Sachs and Evolve Bank&Trust.

In the article, Stripe highlighted its partnership with Shopify, which is using Stripe Treasury to establish Shopify's balance system. Now, when merchants create a Shopify account, they can create a bank account at the same time.

In the past period of time, people's biggest impression of Stripe is that they are too dependent on Shopify, a large customer. Because before Stripe became popular, the cooperation with Shopify alone created $350 million in revenue for it. Some people think that Shopify will build its own payment solution at some point in the future and will no longer use Stripe payment.

However, Shopify's announcement to build a balance system means that the opposite is true . Shopify did not withdraw from the business, but carried out a deeper integration with Stripe. Many of its customers deposit funds in bank-managed accounts, which are managed by Stripe, not Shopify or merchants. If Shopify wants to end the cooperation now, the conversion cost is considerable. The relationship between the two companies is now like a married couple.

Shopify is a very smart company. It made a deliberate strategic choice, focused on what it did best, and let Stripe do all the things it did best. This is what a third-party API can do.

"API" is one of the acronyms often heard. Maybe you know that it means Application Programming Interface (Application Programming Interface), and maybe even know that API is a way for software to talk to other software. But it is also possible that you, like me, have never really studied them in depth.

So today, let's explore a few questions together: 

• What is API

• API-first ecosystem

• Good internet strategy and bad internet strategy

• Why Shopify is good at creating based on Stripe and Twilio

• The magic of API-first business model

• Twilio and investment API-first

The interesting meaning of API-first involves how the company is built and where value is created. But first you need to be clear...

What is API

Let me start with a story about Picasso: a woman approached Picasso in a restaurant, asked him to draw something for her on a napkin, and told him that she was willing to pay any worthy price. He drew something quickly and asked for ten thousand dollars. "$10,000!?" The woman asked in shock, "But you did it in 30 seconds! "No," Picasso told the woman, "It took me 40 years to do it. "

This is a way to understand the API. API allows companies to take advantage of years of work from other companies in a matter of seconds.

For a more technical and easy-to-understand discussion, Justin Gage said: Applications are just a bunch of functions that accomplish tasks. The API wraps these functions in easy-to-use interfaces so that you can use them without being an expert. Engineers write a bunch of code to manage complex things, and build an API on top of the code to abstract away most of the complexity, so you only need to write a few lines of code to use all of this code.

Eric Vishria of Benchmark Company described in "Invest Like the Best": People interact with software through graphical user interfaces (GUIs), and software interacts with software through APIs.

APIs are dealing with more and more things in the world.

Fifty years ago, it might be a process involving hundreds of people's pen and paper. 10 years ago, a dozen people clicked on the computer screen. Now it might be software that talks with other software through API.

There are three types of APIs:

1. Internal API : used to simplify complex things in the company

2. Public API : usually used to open the dataset so that the public can use it

3. Supplier API : With just a few lines of code, you can provide customers with all the superpowers of the entire company.

Today, we mainly talk about vendor APIs , also known as third-party APIs. Companies that sell third-party APIs are called "API-first companies."

Internal or public APIs abstract away some of the complexity of the code through a clean endpoint.

API-first company essentially abstracts the overall complexity of first-class companies and can provide customers with complete solutions for first-class organizations by entering a small amount of code.

Traditionally, recruitment has always been one of the company's most important tasks. Choosing the right API supplier is like hiring raw material suppliers. When a company chooses to plug in a third-party API, it is actually deciding to hire the entire company to handle the entire functionality of its business.

Imagine copying some code and letting the Collison brothers manage your finance team. Whether in traditional companies or non-traditional companies, this will have a greater impact.

The API-First Ecosystem

API-first companies are a subset of software as a service (SaaS) companies. It has the following key characteristics:

• Purchasing decision Traditional SaaS is a department head, IT executive purchasing decision, and API-first is usually a product and project purchasing decision.

• Many people in the user company interact with typical SaaS products (such as Slack, Salesforce, Airtable, Asana), and usually only engineers work with API-first companies.

• The most common SaaS business model is to charge by purchase volume, while most API-first companies charge customers based on product usage. The charging standard is either pay-per-call (every time the API is called, such as whether you pass Twilio Send SMS), or as a percentage of the transaction size (Stripe charges 2.9% plus $0.30 per transaction).

• Use cases Traditional SaaS products help employees complete tasks, and APIs automatically complete these tasks.

The interpretation of API-first companies may be confusing because many of them provide both API products and traditional SaaS products. Their customers range from large platforms such as Shopify and Uber to individuals who want to accept online payments, and everything in between. For example, Puja and I took a photo on the Dev platform, and the photographer used Stripe to send us her fee list. She uses the GUI of one of Stripe's traditional SaaS products without writing code.

However, in this article, we will focus on API-first companies whose customers use APIs to build functionality into their products or internal processes.

These companies are increasingly able to build almost everything that is not core through APIs .

In the third-party API economy, Grace Isford of Canvas Ventures drew maps of dozens of players in 19 different vertical directions.

"Having a dedicated application" has now changed to "Having a dedicated API". For almost anything that companies need to do, there is an API-first company to choose from, and they can quickly implement a product or a set of products .

What makes me unbelievable is that each logo in the picture represents a company. Things that had to be built on their own in the past can now be completed by writing a few lines of code, and they can do it better.

There are two main reasons for achieving this effect: focus and scale .

The first is focus. The API-first company focuses on solving a very specific problem. Stripe focuses on building the best payment solutions, Twilio focuses on information and phone calls, Plaid does banking data, Algolia does search, Shippo does shipping, and Checkr does background checks.

This focus means that everything the company does is to solve all problems related to that particular field . An old Chinese saying goes: There is a sequence of learning about the Tao, and a specialization in the art industry. If an engineer at Uber is assigned to do a background check, he will be angry because it is not his responsibility; if an engineer at Checkr will be assigned to do a background check, he will be happy to accept it and complete it well !

The second is scale. API-first companies provide services to thousands of customers. Over time, they can gradually form incredible product improvements . For example, Plaid can be integrated with very small financial institutions, because in all products that use Plaid, there may be thousands of users of that institution.

API-first's focus and scale provide their customers with first-class products, which are continuously improved at a cost commensurate with their business. From a product perspective, they are like a gift from God. They are also very attractive strategically, reflected in two aspects: the competitive advantage of the API-first company itself, and their impact on the competitive advantage of customers.

Good network strategy, bad network strategy

Good strategies almost always seem simple and clear, and don't need a lot of slides to explain. It will not pop up some "strategic management" tools, matrices, charts, triangles, or fill-in-the-blank solutions. Instead, a talented leader will identify one or two key issues in the situation, and then focus actions and resources on these issues.

This is the charm of API-first. They allow customers to focus on one or two things that make their business unique, while inserting first-class solutions anywhere else. Just as AWS and cloud allow entrepreneurs to launch products at a lower price, API-first business allows them to achieve scale and specialization with lower upfront costs and management efforts.

Jeff Lawson, the founder and CEO of API-first company Twilio, may not even bother to talk about strategy. On the Bessemer Venture Partners cloud giant podcast, he said: I often say that strategy is a dirty word in business and it should be deleted. Any time you find yourself talking about strategy, in fact, you may be off course. There is only one business strategy : serving customers.

What people call "strategy" is often a bunch of fancy words and inaccurate goals, which confuses the core purpose of an enterprise: serving customers in a differentiated way . When possible, using APIs wisely can make companies more strategically clear and can solve customer problems in a way that only they can do.

Identifying "one or two key issues" is only part of it. A good strategy also includes determining guiding policies and coherent actions.

Guiding policy refers to the overall method to overcome the prominent obstacles in diagnosis, and to solve the identified obstacles in diagnosis by creating or using advantageous sources. It directs the company's energy to areas where it has unique advantages.

Coherent action is a series of interrelated things a company does to implement guidelines that reinforce each other to create a chain system that is almost impossible to replicate. For example, Wal-Mart has become a leading retailer not because of its lower prices, or because it places its stores in a certain type of town, or because it has established the right distribution network. It's not because of anything it does. It is the leading retailer because all these products work together in such a way that no one can copy Wal-Mart without copying the entire system.

According to Lawson, in an API-first ecosystem, coherent actions actually have some rather crazy strategic implications. In this ecosystem, the traditional conveyor belt value chain model no longer makes sense.

Traditionally, the coherent actions taken by a company look like Michael Porter’s value chain. In 1985, Porter wrote: “A company cannot be understood as a whole to understand competitive advantage. It stems from the company’s design, production , Marketing, delivery and support of many discrete activities of its products."

These discrete activities constitute the value chain of the enterprise (Rumelt may also ignore the discreteness of words and focus on the connection of activities). For example, the value chain of Direct-to-Consumer (DTC) is as follows:

It is clean and linear, like a pipeline, just as research and development follow manufacturing.

However, as APIs penetrate more and more of the world of business functions, linear value chains no longer perfectly describe company activities.

Chris Sperandio is now working at Stripe. He wrote an article on Segment that the company needs a new and more dynamic model: the "request/response" model.

If everyone can do something, there is no benefit in continuing to do it, but you will still do it just to be consistent.

This applies to the DTC value chain, and to a certain extent, it also applies to software and platform businesses built with many of the same APIs. If your competitors are using Twilio to send text messages to customers, you should do the same, otherwise they are free to build differentiated products, and you are transforming the wheel and reinventing the wheel.

However, in the request/response model, you can also gain a competitive advantage from how to use APIs to build companies and products.

Using a bunch of very flexible APIs and finding a good way to connect them will trigger a combinatorial explosion of potential workflows. API companies first transform software into customizable building blocks, while Zapier and Tray.io companies, as "the API of all APIs", only need one API to quickly connect almost all applications.

Not only can you combine building blocks in a unique way (the "Infrastructure" column in the request/response model), but you can also build new experiences on top of them (the "Operations" and "Experience" in the request/response model Column).

If the number of potential connections between APIs grows exponentially as the number of additions increases, then the company has a near-infinite ability to create a unique coherent chain of actions from the existing foundation. The linear value chain only uses commoditized components in each step, thus limiting the space for differentiation and value creation, but the request/response model enables companies to differentiate in two main aspects:

1. Directly, focus on the core focus area and build your own solutions for it.

2. Meta-information, responsible for organizing all components of the ecosystem.

This creates a dynamic system to replace the static chain. This system will continue to improve and evolve as the company behind each component strives to build the best possible input for customers.

So why does Shopify rely so much on Stripe?

Let's go back to why Shopify and Stripe collaborate so closely.

They paid an estimated $350 million for this privilege before the new crown pandemic drove growth. Why do they continue to strengthen the partnership? This is a good strategy! Shopify focuses on its key differences and builds a coherent whole, even if many components are modular, there are differences.

Stripe is a typical API-first company. It does a lot of complicated things behind the scenes and provides them to customers in the form of a few lines of code, thereby abstracting away all the complexity.

When a company chooses to use Stripe to pay, it will copy these few lines of code without any processing, and it will receive 16 updates from Stripe to its core API every day. This reduced fraud, increased acceptance rates, accepted payments from more countries, promoted faster payments, and did countless other small things that improved the payment portion of the customer’s business. Over time, this will translate into more money without requiring additional effort.

Not only payment, it also applies to wealth management, subscriptions, billing and corporate cards. The products it provides to customers seem to be increasing day by day, because it uses its work in one area to "improve the GDP of the Internet" as its goal and expand to neighboring areas. For example, two days before the launch of Stripe Treasury, Patrick Collison announced Stripe Capital for Platforms, which allows platforms like Shopify to once again write a few lines of code to raise funds from customers.

By partnering with Stripe, Shopify enables customers to seamlessly collect payments, then easily manage subscriptions, then borrow money, and now you can activate bank accounts with just a few clicks. Shopify is able to produce a product in a few months, and even so, it can’t be compared to Stripe because Stripe focuses on its unique focus and all the hard, non-technical, regulatory and banking-related work it does behind the scenes.

In this sense, the Stripe x Shopify partnership itself is like an API. Shopify inserted Stripe, Stripe continues to add new money-related products, Shopify can use and provide to customers.

The more products Stripe offers and the better the products, the less likely it is that Shopify will leave. Why is this happening? Instead of hiring a large number of engineers and spending management wisdom on secondary products beyond core capabilities, it is better to pay Stripe to handle all these issues. Stripe can build robust money-related solutions for Shopify at a lower cost than Shopify’s own solutions, because Stripe can amortize the cost of everything it builds to millions of customers, some large, some small .

Although Thompson's picture shows that Shopify is just one of many potential Stripe customers, but in fact, Stripe is just one of many third-party APIs used by Shopify. For example, when Twilio talked about its Flex product, it used Shopify as a case study. Flex is Twilio's call center API. It allows Shopify to build a customer experience solution it had only dreamed of before, because Twilio has spent more than ten years and hundreds of millions of dollars creating all the building blocks of the solution, and now the Shopify team can Use this ability in a few minutes.

When I talked to my friend Ben Rollert, who was building a company on top of API, he said that the value system of the API-first world is actually more like the game Factorio, rather than the traditional Porter value chain.

Factorio is one of Shopify CEO Tobi Lutke's favorite video games, and it is also a game he makes every employee consume. This may not be a coincidence. Coincidentally, Shopify is a low-key leader in using APIs as much as possible to build a business in order to focus on its unique point of differentiation: building first-class digital e-commerce solutions.

For example, just two weeks ago, Shopify launched Handshake, a wholesale market acquired last year to compete with unicorn startup Faire. Let Shopify merchants get more inventory at a better price in one place is the core of Shopify. It takes advantage of Shopify's own scale to bring the needs of millions of retailers into wholesale negotiations.

A good strategy is to know when to say no, so that when you say yes, you can go all out to work. Since Shopify spends less time on non-core products, it can increase product speed on products that are truly important to customers.

The magic of API-first business model

So what is the API-first business model?

Powerful API-first businesses are in this best position: they provide customers with critical but non-core functions , such as accepting payments, providing cloud security, or sending communications to customers.

This means two things:

1. huge market. API-first companies provide a small part of what every business needs to do. Almost every company needs to collect money, stay safe, and communicate with customers.

2. Moats, their current situation is that the company can't just tear them up like that-imagine if you can accept the scenario where you can't pay, maybe even for a day! --At the same time, it is not cost-effective for them to pour resources into trying to build a different solution.

Shopify's growing reliance on Stripe and Twilio also shows the importance of this position. It's not just the shopping area. Facebook's WhatsApp pays $100 million to Twilio each year for account verification. 

Twilio’s quarterly revenue was $365 million. WhatsApp accounts for 7% of sales. This means that WhatsApp accounted for more than 25 million U.S. dollars and contributed 100 million U.S. dollars throughout the year!

One of the most common restrictions that API-first companies hear is, "Oh, company X will incubate alternatives within the company." However, they almost never do this.

Not because of lack of resources. Facebook's profit in 2019 ($57 billion) exceeded Twilio's entire market value ($51 billion). But because once they are integrated into the customer's product, API-first's moats are very deep. Specifically, they benefit from network effects, economies of scale, and high switching costs. 

Network effect: The best API-first business has a data network effect: the more customers that use the product, the better the product will be for each customer, because the API-first business can use data from one customer to improve the product for all customers. For example, every time a company uses Checkr to conduct a background check on someone, Checkr will obtain that person’s data so that the next company can benefit from that person when it hires that person, and it can extract patterns from millions of people, thereby improving Perform more accurate inspections faster and cheaper.

In addition, API-first negotiates with third parties on behalf of customers-Stripe negotiates fees with credit card companies, Shippo negotiates freight with FedEx and UPS, and Twilio negotiates information fees with operators-it can be a kind of customer's own negotiation. The way that cannot be done brings the weight of collective bargaining ability to customers.

Economies of scale: API-first companies not only have economies of scale advantages over new entrants, but more importantly, they have economies of scale advantages over customers who may only consider building functions internally. Because they focus on one category and amortize its development costs to thousands or millions of customers, they are able to build for all the small advantage cases that add up to a great advantage. Twilio has relationships and contracts with every telephone operator and telecommunications company around the world, which means that customers just need to plug in the phone to receive information or complete calls wherever the customer may be. If any company does not focus on negotiating all these deals for themselves, it is almost meaningless, and even if they do, they will not have the bargaining power of Twilio.

Switching costs: Remember, one of the main reasons companies use API-first products is to give them peace of mind because their other businesses are already in control, so they can focus on building their own points of differentiation. Even if a company believes that it can save a little money or get a slightly better experience by changing suppliers, doing so requires prioritizing countless things on the roadmap that are at the core of the business.

Since most API products are building blocks, customers can use these building blocks to create their own customized solutions and workflows, and as customers build on top of the API, switching costs will increase.

In addition, as API-first companies added more features and products, just like Stripe did with payment products and new products (such as Treasury), customers became more closed. This is very common if the end user uses API-first products to store anything (from money to data). If a company needs to ask its customers to do something in order to continue to use the service as usual, then it is likely to be too worried about customer loss or inaction to switch.

This indirect relationship with end users points to another advantage of the API-first business model: customer-led growth . The API-first company has a potentially more powerful model. Once they convince the customer to embed their code, the customer is responsible for developing their customer base. This means that all Facebook and Google's money falls on customers, and as they spend their money to develop, API-first companies will enjoy their success.

However, the API-first business model has some challenges and risks:

1. Profit margins may be lower than traditional SaaS businesses. Many traditional SaaS products benefit from the "high upfront cost, low marginal cost" characteristics of software. On the other hand, APIs usually add a beautiful wrapper to existing products, and these products themselves have a cost. For example, Stripe still needs to pay credit card processing fees, while Twilio needs to pay the operator for sending messages and making phone calls. API-first companies are usually products with lower profit margins and higher output.

2. Competition from other API-first companies. The most valuable part of the API ecosystem is between your customers and all their other suppliers, abstracting away the complexity created by other companies and abstracting away the complexity below them. For example, Twilio recently acquired a customer data platform that absorbed all the data about its customers created by the company's other suppliers. It controls customer relationships and modularizes other APIs under it.

This leads to the most important point of API-first companies: they are not just software .

Anything that only requires complex code and simplified code may be a step ahead of competitors or new entrants. The magic of companies like Stripe and Twilio is that in addition to elegant software, they also do work in the real world that no one else wants to do. Stripe is engaged in software as well as compliance, supervision, risk and bank cooperation. Twilio conducts software + operator and telecom transactions on a global scale, optimizes delivery capabilities, and unifies all customer communication touch points.

With just a few lines of code, you can benefit from these arduous tasks, which is why customers register for API-first products and insist on using them, even if they can benefit from them.

Twilio and investment API-first

APIs have brought superpowers to their customers.

I first came into contact with the wonderful world of third-party APIs six years ago, in my first few months at breaker. As the first and only employee in New York City, the most important part of my job is to convince the landlord to rent the space in their house to us, and then we rent it to strangers. It is foreseeable that this is a difficult sale. I hear "no" more times than I want to remember. A few weeks later, a landlord on East 27th Street said "yes", but there was only one problem: this building does not have a guard, but has a dial key. In this way, the tenant can call in the guest.

In view of this situation, we have three options:

1. Every time you make an appointment, you have to send someone to bring your key.

2. Reject the lease,

3. Be creative and find ways to solve problems.

I chose the third option, and spent several days searching Google for terms related to "remote access building" and "unlocking door building phone". All solutions require hardware installation, which is not feasible. Until I found Twilio.

During a few hours in a company, I created a Twilio account, got a customized phone number, asked the landlord to program the box to call that number, and then wrote a script to play dual-tone multi-frequency audio , Open the door for our customers.

After doing this, I took the subway to 27th Street, typed in our suite number on the keyboard, and held my breath. Five seconds later, I heard a click and the door opened.

Twilio gave me super powers because I signed a contract on a building that was previously inaccessible.

Just a few lines of code created this situation!

Someone might think that when Twilio goes public on June 23, 2016, he will immediately buy his stock.

Since its initial public offering (IPO) in June 2016, Twilio's stock price has risen 1115%. In the past year, it has grown by 222%, exceeding the BVP Emerging Cloud Index by 2.4 times.

Although I missed most of the growth period, I am still optimistic about the future of Twilio. There are several reasons:

1. API-first business model For all the reasons highlighted above, I am a fan of the API-first business model. Twilio has a large and growing customer base and is able to cross-sell new products such as Flex and SendGrid in a "company as API" model. I like when a hypothesis appears in the numbers. In this case, Twilio's moats are transformed into the BVP Emerging Cloud Index-leading the expansion of 137%.

2. Acquire Segment. In October, Twilio announced the acquisition of Segment, a leading customer data platform that holds an important position among many other API-first companies.

3. Segment obtained an all-stock transaction of US$3.2 billion. Segment is one of the most popular API-first listed companies on the market and is in a favorable position in the market. It chooses to sell all Twilio stocks of its companies.

4. Developer-centered, the king of API-first field. When the Segment deal was announced, Redpoint Ventures's SaaS venture capitalist Logan Bartlett said on Twitter: There is no rival in this competition, but Twilio's acquisition of Segment is one of the most strategic software acquisitions I have seen in a long time. , Especially the price paid.

Twilio can become a leading acquirer in the API-first ecosystem and expand the building base it provides for the company. The API-first market map will become a competitive area of ​​mergers and acquisitions, and Twilio has shown that its unique combination of scale and developer’s love are very attractive to potential targets, and it seems that only Stripe can match it.

These are just rough ideas. Twilio is worthy of your further research.

Reference link: https://notboring.substack.com/p/apis-all-the-way-down

This article is compiled by CSDN, please indicate the source of reprint.