Venture Deep Dives: API-First Companies
Learn how APIs (Application Programming Interfaces) have become the backbone of digital transformation in the 21st century
Our “Deep Dives” series explores vital aspects of burgeoning VC sectors with one of AV’s ~50 investing experts. This week, AV Senior Principal Brook Stroud explains how APIs (Application Programming Interfaces) have become essential tools in our digital age, and why the most successful API-first companies can hold enormous value.
API-first companies are among the most vital and fast-growing investment sectors. But if you mention the acronym outside of a room of software developers, be prepared to receive more than a few blank stares.
At the same time, APIs are everywhere — from social media to payment gateways, weather services, mapping, messaging, e-commerce, cloud storage, and media streaming.
In this Deep Dive, Brook Stroud — Senior Principal for Congress Avenue Ventures and Ring Ventures — helps clear up the mystery and reveals the “magic” of APIs.
Topics include:
- Defining what an API is and what “API-first” companies do
- Exploring the market size and potential growth
- AV’s investment thesis when evaluating the potential of API startups
APIs provide the “picks and shovels” of our modern digital age — delivering core infrastructure or software building blocks, so developers can build without needing to code everything from scratch.
AV’s Deep Dive into API-First Companies
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API Deep Dive Highlights
An API (Application Programming Interface) is like a bridge that allows different software to communicate and share information or do certain tasks together. It simplifies the inner workings of systems and gives developers a consistent way to access and use the features and data of another application, service, or platform. APIs are vital in connecting various software and services, making them work better and improving the user experience in many industries.
An API-first company is one that puts APIs “at the core of its business,” according to Stroud. It focuses on creating APIs to make it easy for developers to build on its platform and integrate its services with other applications. This approach fosters collaboration and seamless interactions with other software systems.
The demand for products and services provided by API-first companies has exploded in recent years. Stroud points to a Rapid 2022 State of APIs survey that found that some 70% of developers indicate they will increase API usage this year, while 63% note that they utilized APIs more in 2022 than they did the previous year. Among companies, nearly 40% of those with 10,000+ employees have more than 250 internal APIs, while roughly 64% of the smallest companies (those with 1-50 employees) use up to 10 internal APIs.
As the use of APIs grows, so does the value of companies providing them, says Stroud. Top API-first companies and their recent estimated valuation are: AWS ($1.5- $2T), Google Cloud ($235B), Auzure ($100B), and Striple ($100B).
Stroud’s Deep Dive also outlines factors AV considers when evaluating potential API-first investments such as:
- Are they offering essential solutions?
- Are they embracing cutting-edge technologies such as AI?
- Are they continuously improving their services?
- Are they expanding their offerings to capture more market value?
Despite positive trends in cloud computing and mobile apps as well as recent innovations, API-first companies still face challenges in brand awareness and adoption, especially in competitive markets, says Stroud.
“However,” he adds, ”we remain optimistic about their potential to revolutionize industries and contribute to the ever-evolving tech landscape by staying innovative and market-focused.”
Contact [email protected] for additional information. To see additional risk factors and investment considerations, visit av-funds.com/disclosures.