The Emergence of API-based companies
In 2002, Jeff Bezos famously decreed that all Amazon teams' software should communicate with each other via “API’s” (Application Programming Interfaces) – sets of well-defined rules (or “protocols”) used by different websites and companies to talk to each other. It is said that Bezos insisted “anyone who doesn’t do this will be fired.”
This was probably a critical moment in Amazon building its $12B cloud computing business, and today, well-defined API’s remain a critical part of the cloud computing architecture and philosophy, as well as a foundation for providing Software-as-a-Service (Saas).
In the olden days of in-house proprietary software, well-defined API’s were hardly used within a company’s systems, and it was very difficult for companies to make their different pieces of software talk to each other – indeed, whole companies specialized in building software to help other software interact. This proprietary architecture gave a natural advantage to incumbents to build more and more features into their big software offerings. It was quasi-impossible for a new player to offer a feature that plugged into that software…. And even harder for such a company to send sales people to go to each company and install this software on their premises.
In those days, venture capitalists were known to reject new business plans if they proposed to create just a “feature”, for they knew full well how hard it was to have customers integrate any new “feature” into their proprietary software systems. So of course, it wouldn’t make much sense to fund a company whose business model was to install such a feature for enough customers to scale into a real product company.
API-Based Companies
In contrast, with cloud computing, a software developer using a modern (cloud-like) architecture can write just a few lines of code to integrate a new feature which has been developed by another software company. The company developing that feature can focus on improving that feature, and customers can adopt and buy that feature much more easily than developing it themselves.
As a result, successful companies can be built that merely offer features via API’s. Examples of this include Adyen and Stripe, which offer payment processing solutions that can be slotted seamlessly into their customers’ transactions web-page. Similarly, Twilio offers telephony features via API, and Clarifai handles image recognition via API
In each of these cases, these API-enabled feature companies have been able to master highly complex processes internally, while making it incredibly easy for their clients to adopt these processes securely, and reliably. (Recently, Google and Microsoft even introduced their own Machine Learning algorithms via API.)
the case of Adyen and stripe
Payment API’s like the ones provided by Adyen and Stripe have been particularly successful. These two companies provide similar products – an API that enables merchants to accept payments from their customers via their websites or mobile applications.
From the customers’ perspective, this has immense value. Why would a company like Uber or Airbnb or even Facebook want to develop expertise in the 250 different payment methods across the regulatory environments in 150 currencies, when they can easily plug into the Adyen API or the Stripe API? For smaller startups, this kind of API is even more valuable as they can suddenly scale their business globally without spending resources on functions which are not in their core competence.
Stripe and Adyen have also been riding an immense wave of consumers moving their purchasing habits towards mobile purchases, using mobile apps that often integrate payment API’s from these two young companies. During the recent Thanksgiving holiday, retailers like Target and Walmart stated that 60-70% of online sales and traffic is now coming from mobile. Paypal estimated that on Thanksgiving day alone, in the US, a record $770M of purchases were made via mobile devices.
And so both Adyen and Stripe have been growing immensely. Forbes estimated that Stripe had reached $20B annual transaction volume earlier this year, generating $450 million in annualized revenues. Adyen announced that in 2015, they had doubled their transaction volume to $50B, generating $350M in revenues.
This phenomenal growth has also allowed these two companies to leverage their scale and create more value-added services for their customers. Of course, the volume of data across merchant sites allows these firms to provide better fraud detection and prevention. Better fraud detection can also increase sales, as legitimate purchases can be processed more quickly. Having transparency over all elements of the transaction will allow these companies not just to process more efficiently but also allow them to impact the holy grail of retail: conversion rates.
Both firms are also expanding by offering complimentary services to their core customer base. Stripe has started providing complementary services focused on helping start-ups to get up and running in the US. Adyen, with its strong base in Europe, has been expanding its presence in offline retail sales. Its point-of-sales brings similar benefits for offline customers.
It is no wonder that these companies have been valued so highly by VCs. Stripe recently raised funding at a $9.2B valuation, up from the $5B valuation it received in 2015. Adyen, which is cashflow positive, had its last round of funding in 2015 at a $2.3B valuation, making it one of the most highly prized European tech companies.
Disclaimer
The content of this article has been approved and issued by TOP Fund Advisors SA for background, information and discussion purposes only and does not purport to be full or complete. No information in this document should be construed as providing financial, investment or other professional advice.
Authors: Salman Farmanfarmaian and Richard Rimer