Investments in API Companies Doubled in 2018, Surpassing 1 Billion Dollars

2018 has been a great year for API companies. We’ve seen 88 investments in API start-ups, billions of dollars in M&A activity and public API companies’ valuations doubling and tripling.

Over the past few years, we have been closely tracking the growth and expansion of the API economy. Every year, we are excited to see how newer and established API companies are faring financially as an indicator to the future of the API economy. Their phenomenal and consistent growth are a testament to how fundamental APIs have become in software development, and to how wide their usage have spread.

What are APIs & API Companies?

APIs are pieces of functionality that developers can connect to and embed into their applications to perform various actions. These actions can include sending a text message (APIs: Twilio, Nexmo, Telesign), processing a credit card payment (APIs: Stripe, Braintree, Adyen) or recognizing faces in images (Microsoft Computer Vision, Kairos, AWS Rekognition), to name a few.

Where in the past developers would have had to implement these functions from scratch (assuming they even had the expertise and experience required), today they can rely on 3rd parties to provide these services — via APIs.

The benefits of using APIs in software development are abundant. They allow developers work faster and more efficiently, as they don’t have to implement those different functions from scratch. They offer better service levels, as API companies have deeper industry expertise around the individual functions, and often are able to offer an overall lower price point, by providing multiple customers with the same service and thus leveraging economies of scale.

When speaking of companies in the API economy, we refer to companies that are either building and offering APIs to developers, or are offering tools for building / consuming APIs. This is the definition used throughout the report.

Investment in API Startups

In 2018 alone, API startups raised $1.06 billion dollars in venture funding, according to press releases and Crunchbase data. This signifies a significant increase in fiscal activity, compared to only about $500M invested in both 2016 and 2017.

The average round size this year was $12.1M — indicating an increase in maturity and later financing rounds in the space. At the same time, 47 early stage rounds (pre-seed to Series A) made up 53% of the total number of rounds, showing a healthy count of new companies fueling innovation in the space. Those companies made up 12% of the total cash invested ($125M), putting the average early stage API round at $2.7M.

The largest investment we’ve seen this year was Stripe’s $245M Series E, led by Tiger Global, together with Sequoia, Kleiner Perkins and others. This round puts the payment processing giant at a valuation in excess of $20B, well positioned to continue its growth in credit card processing, as well as expanding into new product lines. Stripe has recently launch a card issuing API — letting developers issue and manage physical and virtual credit cards, and announced a new terminal product, letting developers create in-store payment solutions using a new set of APIs.

Acquisitions of API Companies

2018 was a very active year for M&As in the API space with 25 acquisitions — a 32% increase from last year. The most notable (and the largest) deal was the $6.5 billion acquisition of MuleSoft by Salesforce. MuleSoft, who is focusing on API and data integration, should fit well into Salesforce’s overall strategy of integrating with all its customers data sources and systems, in order to provide more value and critical insights across the organization. In conjunction with Heroku (which Salesforce acquired in 2010 for $212M) and force.com, MuleSoft will help bolster Salesforce’s portfolio of tools and solutions to allow developers to build on top of its platform.

Another notable deal was Twilio’s $2B acquisition of SendGrid. Twilio, positioning itself as a communications platform, will add SendGrid’s email APIs to its existing portfolio of SMS and Voice APIs. As competition with other telecommunications API companies (Nexmo, Telesign etc.) becomes more fierce, it makes sense for Twilio to expand horizontally into other parts of customer communications. With SendGrid clearly being the market leader in email communications, Twilio now has market leading solutions in multiple communication channels. This horizontal expansion also allows it to offer a more unified customer communication offering in the future, aggregating different channels (chat apps, SMS, email, fax etc…) into a single convenient API.

Public API Companies Performance

Post-IPO API companies have also been showing solid growth, continuously beating earning projections and creating new value. Both SendGrid and Twilio have grown well, with the former doubling its market cap in the past year and the latter more than trippeling it.

MuleSoft, prior to it’s $6.5B acquisition by SalesForce also showed positive growth as a public company. It’s stock soared 83% in just 5 months — from $24 in January 2018 to over $44 in May when it was acquired. The pattern of post-IPO acquisitions isn’t new in the API space. In 2016, Google acquired API Gateway leader Apigee when the latter was publicly traded.

The solid growth of public API companies alongside the high value M&A activities prove that API companies can create sustainable business models in the long run, and continue growing long past infancy. This is a very strong validation for the API economy, showing that entire public company can be created around supplying developers with an API. This has now been proven true time and time again.

So What’s in Store for 2019?

APIs as enablers of faster and more democratized software development are on the rise. With multiple years of consistent growth from API companies and continued adoption of APIs by companies large and small, it’s clear the API economy is here to stay. As it continues to grow in 2019, there are several key trends that we think will drive much of the growth:

Big Cloud Vendors

Traditionally, the large cloud providers (AWS, Azure and Google Cloud) have focused most of their efforts on offering lower level infrastructure (compute, networking, storage etc.), leaving the higher level APIs for other startups and companies. This focus made sense when most companies were just moving to the cloud and the big vendors had to establish stable & feature rich infrastructure to attract these large accounts.

However cloud is becoming more ubiquitous and workloads are becoming more cloud-agnostic (able to switch between vendors) thanks to platforms like Docker, Kubernetes and Serverless. This commoditization of the cloud sends these large cloud providers after ways to add value and create lock in with higher level services in the form of APIs.

All three leading vendors have released a lot of APIs in the fields of AI, visual recognition, translation, file manipulation and other areas in 2018. AWS’s annual re:Invent conference was jam-packed with API announcements, dominated by machine learning API solutions. Microsoft similarly focused on many cloud vision and machine learning APIs at its annual Connect() conference, and has a wide catalog of dozens of higher level API services as part of it’s Azure offering.

In 2019 as those big vendors look to move up the stack, we expect to see a wealth of new API services being offered on top of the basic cloud infrastructure.

Internal APIs

The rise of APIs is a part of a wider microservices trend: software is built by composing many smaller services, some of which are bought from external providers (“APIs”) and some of which are built and maintained internally (“Internal APIs” / “Microservices”). Larger enterprises are adopting this paradigm — developing many internal services that teams connect to in order to create user facing products.

According to a recent survey conducted by Cybersecurity firm Ping Identity, 25% of companies have over 1,000 internal APIs or microservices, and another 35% have 400–1,000 internal APIs.

Managing such a wealth of internal APIs breeds a host of challenges for responding companies. These include ensuring developers can easily discover and access those internal APIs while ensuring IT leadership has clear visibility into API usage and data flow within the organization.

As the number of internal APIs in companies increases in 2019, and the awareness of CIOs and CISOs to the challenges they breed rises, we’ll see more tooling and methodologies created to manage these internal APIs at scale.

DaaS

Data as a Service or DaaS APIs are a subset of the overall API economy, focusing on delivering key data that can enhance business processes via APIs. With the rise of artificial intelligence and machine learning, data is becoming the new oil. Companies are constantly looking for more data sources they can utilize to enrich their datasets to improve AI & ML capabilities. As more of these models are being productionzied, companies are looking for data sources that are dynamic — like APIs they can call at runtime to enrich data and make live predictions (not just training).

This need has been fueling a breed of DaaS APIs like Crunchbase (providing information about companies & fundraising), FullContact (enriching lead data) and PredictHQ (live & historic data about global events). As artificial intelligence and machine learning becomes more prevenant in production use cases, the need for these DaaS APIs will increase, and we’ll see more types of data offered.