API Startups: What are Your Barriers to Entry?
This post is part of our series covering the API and SaaS world. You can find all our stories on the P9 Capital Medium Channel.
Written by Clement Vouillon · First published on Point Nine Land on Medium, May 2016
In recent articles I’ve covered the rise of APIs that are eating the product stack. When I analyse such products a recurring question I’m asking myself is “What are their barriers to entry?” What are the defensible assets that these companies build with time and that will give them an edge over competition, bigger players or the customers themselves (a.k.a they cannot build your product in-house).
So far I have on my list 4 main barriers to entry for APIs: technology, data, user experience and cost.
Technology
The “technology” barrier is when an API offers to its users access to a technology which they cannot build in-house. A good example is IBM Watson. Many startups use Watson because it enables them to integrate NLP, Natural Language Processing, almost “out of the box”.
Just think of the whole Artificial Intelligence field, without a doubt we’ll see more and more products integrating AI but not every startup will be able to create it in-house. They’ll need to leverage APIs for that.
Algolia is another good example. Building a great search technology requires advanced skills in fields such as algorithmic that, realistically, not every startup can have access to.
The key in that case is the team, the team and the team. Talents are so scarce in these fields that building a very strong team is extremely difficult and capital intensive. This is why very often these startups are created by experienced people (who bring along with them experienced colleagues) or are created by big companies (IBM Watson, Google Tensorflow…)
Data
There is a “data” barrier when an API offers to its users access to data. Ex: Clearbit, Terravion, TalentIQ etc…
In this case the “barrier” is the quality and / or quantity of data provided. This data can be “proprietary” in which case it’s the API provider that produces the data (ex Terravion) or it can come from open and public data in which case the value offered by the API is convenience (the provider collects and structures publicly available data so you don’t have to).
I see two very important aspects for these companies: data collection and data “maintenance”.
Data collection: how hard and defensible is it to collect this data (whether proprietary or open)? What are the mid & long term threats to this defensibility?
Data “maintenance”: how complicated is it to keep this data relevant and fresh for the users? (data is like fruits, it can rot fast)
User Experience
The third barrier to entry is User Experience. This one is especially relevant for “Feature as a Service” APIs which I mentioned in this article.
The aim of these APIs is to enable developers to integrate a specific feature in their product without having to reinvent the wheel. Traditionally developers used to code these features in-house, so the value these new APIs provide is not only a time shortcut but also a knowledge shortcut.
For example by adopting Algolia you not only buy a search technology but also the guarantee that your users will have a great search experience (UX)on your website. It’s because Algolia can focus 100% of its resources on this particular product feature that what they provide is better than what you can do yourself.
Another example is Digital Ocean. Digital Ocean competes with Amazon Web Service not at the price or features levels but at the design one. They focus on providing a better user experience and developers are ready to pay for that.
Great UX is actually a real defensible asset and it’s extremely hard to build and equally hard to maintain.
Cost
The last barrier to entry I would like to mention is cost. This competitive advantage is especially true for infrastructure APIs. In 2016 it makes no sense for a startup to run its product on its own physical server, or to develop its own communication infrastructure. They’d better use Amazon Web Service or Twilio for that.
Being able to drive down the costs is very often linked to economies of scale. This is why most of the time this is a barrier to entry inherent to big companies and not to small startups.
Conclusion
The barriers to entry I’ve listed are not “mutually exclusive”. An API can have a great core technology and provide an awesome easy to use product (Technology + User Experience barriers to entry). There are probably other barriers to entry that I forgot, please let a comment below if you think of some.
Our previous API posts:
How APIs are Eating the Product Stack This post is part of our series covering the API and SaaS world. You can find all our stories on the P9 Capital Medium…medium.com
The Rise of APIs for Non Developers Or why the new API evangelists might not even need to codemedium.com
Open Source is losing, SaaS is leading, APIs will win… Famously, “Software is eating the world”, and I would add: at a fast pace!medium.com
The Unbundling of Traditional SaaS Products This post is part of our series covering the SaaS industry. You can find all our SaaS related stories on the P9 Capital…medium.com