The API Flywheel and the Golden Age of Software

As talent, imagination, and funding flow into the software ecosystem, much of this software is more powerful and complex than ever before. Companies of all sizes make massive changes to their own operating systems in order to move faster and be more innovative. Whether starting from scratch or building on top of what they already use, chances are another company has built software that allows companies to make these improvements. By integrating these systems, companies can create complex and robust software of their own. The challenge is that companies become burdened with technical debt — costs associated with reworking systems and improving long-term builds. The magic of today’s software, however, is that it can make incredibly complex problems into elegant solutions. Furthermore, as the software ecosystem grows, it improves upon itself and strengthens the future of software development itself creating a massive flywheel.

As a core tenant, software is supposed to make mundane tasks easier; it is supposed to work for the user by performing programs the user can’t or doesn’t want to perform. Modern software has reinvented industries and improved global efficiency. One of the major advances has been the emergence and wide-spread adoption of the application programming interface, or API. While APIs have been around for years, innovative integration of API-based services and the emerging flywheel effect on the software ecosystem that ensue have brought us to the golden age of software development.

APIs give rise to a new generation of software companies that are easily integrated within the software ecosystem and can leverage other software developers’ efforts. APIs allow programmers to simplify their own work by utilizing integrations while removing the underlying complexity from the necessary output. A great example of this is Instacart using Marqeta* to power Just-in-Time Funding (automatically funding an account in real-time during the transaction process), aiding in flexible shopper onboarding (digitally onboard shoppers without them needing a physical card), and ensuring consistent uptime (robust and redundant architecture ensures service deliverability to customers). These were missing critical processes of the Instacart business (many of which caused predecessor Webvan to fail). Instacart has an amazingly talented team of engineers that no doubt could have built a solid alternative to Marqeta. But Marqeta allows Instacart to grow in other important areas while ensuring these mission-critical functionalities are available — with minimal internal development.

APIs play an important role in improving the delivery of software. For a variety of reasons, customers may want to integrate into their existing systems or other purchases. APIs allow these customers to take best of breed products and integrate them exactly how they see fit. Rather than forcing users to adopt new behavior, API-based software can deliver value without having to train users or nail the user interface (though this never hurts). Offering complexity through simplicity has innumerable benefits. Some of the most glaring to me are:

1. Efficiency: Developers can do more in less time by focusing on the net new development, rather than reinventing the wheel, and meet their objectives on time. The API specifies how they are supposed to assemble software components to develop a program they want.
2. Promotes Innovation: APIs have led to rapid innovation as developers can utilize them to create new solutions to problems. The API revolution took off by providing standardized interfaces to external developers.
3. Minimize issues: Businesses go through dozens of processes every day to make their complex operations work. APIs allow them to streamline operations by minimizing issues that require technical skills. Enterprises can now manage complex operations by leveraging the connectivity power of APIs.
4. Availability of new features: The companies behind the APIs are constantly improving their own capabilities and features. APIs allow these companies to bolster their offerings without interrupting existing services.
5. Automation: With the use of APIs, computers rather than humans can manage the work. Companies can update their workflows to make themselves and their workers faster and more productive through APIs.
6. Integration and Personalization: One size does not fit all. APIs allow developers to integrate their platform with third-party applications but personalize the interface to their end-users. This improves the user experience and makes customers less likely to shift to alternatives.

APIs provide endless capabilities and revenue-generating opportunities to all companies — both customers and sellers. We’re now seeing API-driven companies go beyond just being the picks and shovels of the software gold rush. As of this writing, Twilio has a $45b market cap, selling messaging capabilities via API to customers while additionally offering full platform features like Twilio Flex. Salesforce, currently valued at $220b, is estimated to generate ~50% of its revenue selling various services via API. Shopify, Stripe, Slack, Zoom, Snowflake, and countless others offer and rely on APIs to create billions of dollars of value for shareholders and likely significantly more value for customers.

By definition, technology is an ever-changing, ever-improving industry. By becoming the building blocks of software development, APIs will enable radical digital transformation for years to come. The pace of innovation will continue to accelerate as brilliant minds can break down large problems into smaller pieces and focus on the pieces that haven’t already been perfected. A future where developers can focus on new products, features, and business models is unlocked when APIs free up valuable resources from having to reinvent the wheel. This will lead to giant innovation leaps as more resources are devoted toward the new, instead of maintaining the old.

As an investor, one of my favorite features of APIs is the flywheel effect they create in the software ecosystem. By streamlining and simplifying parts of the software development process, companies can build more powerful and more imaginative businesses. We often find these teams build systems internally to solve problems that other companies also face. When the market pull is strong enough, these technologies are spun out or rebuilt as a separate company to service the waiting customer base, fostering further innovation in the startup network. This characteristic of the tech ecosystem has led to compounding innovation and value, which is why tech companies are so highly valued and massive.

Unlike monolithic software builds of the past, companies are leveraging these microservices that are the building blocks of the future. As the functionality of software grows, so does the ecosystem. The larger ecosystem leads to further innovation at a faster rate. As companies streamline innovation, they simplify their products — and simplicity is beautiful.

*Marqeta is a Geodesic Capital portfolio company.