Startups that deliver their service via an API are having a moment. Or perhaps a year.
Speaking with founders and investors this year, it has become clear that the API model of delivering a product is more than an occasional hit-maker for companies like Twilio or Plaid. Instead, it appears that there is ample room for lots of API-powered startups to build and prosper.
TechCrunch took note of a cluster of funding rounds for API-powered startups earlier this year, only to see more of the same as startups like Alpaca (equities trading via an API) reported massive growth and Noyo (APIs that link players in the health insurance market) raised new capital.
There’s more to come. Twilio’s Jeff Lawson told TechCrunch recently that “the world is getting broken down into APIs” as “every part of the stack of business that a developer might need to build is eventually turning into APIs that developers can use.”
We should expect to see more startups, then, pursuing the business model as time passes.
To dig deep into the API-focused startup space, we’ve done something unusual today. Instead of merely ringing a bunch of VCs to get their take — though we did that as well — we took the time for this survey to also bring a number of entrepreneurs into the conversation.
With two sets of questions targeted at each group, here’s who we corresponded with:
And they had a lot to say.
We’ll limit ourselves to two themes from investors and two from founders. But don’t worry, as we’ve embedded full responses down below.
Starting with investors, our chief takeaway was that the money folks are bullish on not only the current generation of API-powered startups, but also on their future. We asked about the possible union between API-powered startups and low-code/no-code technologies. Our hunch was that as more folks can code in some manner, and APIs get better, there comes a day when nontraditional developers can leverage application programming interfaces.
That day, if it comes, could provide a huge boost to the startups in the space, right? Root VC’s Edward seems to think so. He answered our question about the possibility of nontraditional developers interacting with APIs in the future with an enthusiastic yes, adding that he believes that “eventually almost everyone will be a programmer, but that our definition of programmer will expand to fit a much broader range of activities.” That could mean lots more folks out there ingesting, using and paying for access to APIs that startups will be there to offer.
Even more, Edwards added that the same forces work in reverse, that “API-driven businesses enable low-code implementations and give superpowers to junior developers or people who don’t consider themselves developers at all.”
Shasta’s Roth agreed, saying that “these are highly related segments: low code and APIs.”
Our second investor takeaway is that it’s too simplistic to merely say that API-focused startups are going to be akin to SaaS startups in many ways, albeit with lower gross margins. They are not worse businesses than SaaS startups. Instead, they are different. Roth noted, for example, that API-delivered startups should have strong gross retention (logo retention), but that they may not have strong upselling power (net retention). Adding to the nuance of the conversation around economics, the Accel duo said that while API-powered startups may have “endemically lower” gross margins than SaaS startups, they also often feature “lower spend on sales and marketing and stronger net retention, both via lower churn and faster, bigger expansion.”
So, the net retention point is probably not fully settled yet, but what is clear is that our previous view of API startup economics is probably a bit simplistic.
From our trio of founders, two quick things. First, the venture capital community is as active as you’d expect, especially when it comes to preemption. Second, their startups tend to have improving economic profiles over time. The question for them then becomes how far they can run the gross margin numbers up before they go public.
We’ll see. You’ll find full answers below, lightly edited for clarity:
Isaac Roth, Shasta Ventures
Are API-delivered startups a plank in your firm’s general investment thesis? If so, why?
Yes, very much. But making APIs an investing pillar is like making SaaS an investing pillar — it’s too broad. Rather, we have integrated the understanding that there is a shift to composable capabilities and that it is no longer the domain of custom expensive integrators to hook these capabilities together. The secret sauce is what industries will this affect in which ways, what are the opportunities that arise as a result, which types of APIs will be adopted first and last, of course, where does value lie?
We also see increasing use of APIs by enterprises leading to startups creating solutions for enterprises to manage, monitor and secure APIs and home-grown applications created using those APIs.
Are you seeing most API-delivered startups in the market for capital today find new places to apply APIs, or are you seeing the majority of startups pursuing the model working inside of market areas known to be API-friendly? What market segment is the ripest for API-delivered startup disruption?
The unbundling of financial services, which makes way for innovation and personalized experiences is a great opportunity. That one is easier to realize. An underappreciated opportunity is in HR and corporate finance where monolithic applications integrate many functionalities that could benefit from evolving separately and could be knit together by each enterprise in a manner that is oriented toward their unique needs.
Security is another industry where every solution seems to have its own stovepipe interface and yet most CIOs and CISOs want integrated panes of glass. There will be low-code solutions for aggregation security information and response. Additionally, we predict a significant increase in the use of APIs within enterprises and CISOs to look for solutions to manage access and threats emerging from these APIs.
Finally, think about commerce — a segment that has already benefited from the API economy — it was the original poster child for APIs and is finally catching up to that promise. However, because the nature of commerce is being accelerated due to COVID there is a lot of room left here.
Is the economic profile of API-delivered startups, especially from a gross-margin perspective, still on track to land one level below that of SaaS startups?
Until APIs have proprietary value by aggregating data (see my article about this in Programmable Web) the switching cost is lower than SaaS because there isn’t as much stickiness from needing to retrain a workforce if you switch. This means customers have more pricing power. Similarly, APIs enable competition because they define a standard interaction, and this causes lower margins. But keep reading for how to overcome this.
Does strong retention rates amongst API-delivered startups countermand their more limited gross margin profile?
Related to the above, a well-performing API will retain customers but it may not have as strong net retention as SaaS unless the API business can aggregate more value either beneath the API (more functionality) or around the API (management, integration, workflow, compliance, risk management, etc.).
Epic’s latest argument in its fight against Apple keeps antitrust issues front and center
Epic Games, the game engine developer and creator of the wildly popular Fortnite game, is keeping the focus squarely on antitrust issues in its lawsuit against Apple as pressures mount to rein in anti-competitive practices of the world’s largest tech companies.
Antitrust arguments are gaining ground on both sides of the political spectrum, which could present a more favorable environment for Epic to make its case.
Earlier this month the Trump Justice Department filed its antitrust case against Google even as Congress laid out its roadmap for how to limit the monopoly power of a quartet of trillion-dollar companies: Facebook, Amazon, Apple and Alphabet (the parent company behind Google).
Epic’s lawyers acknowledged in the filing that the company breached its contract with Apple, but said that it only took that step because Apple’s contract restrictions are illegal, according to the company.
“When Epic took steps to allow consumers on iOS devices to make those payments directly, it breached some of the contractual restrictions that Apple imposes on iOS developers,” the lawyers wrote. “Epic did so because those contractual restrictions are unlawful. Epic chose to take a stand against Apple’s monopoly to illustrate that competition could exist on iOS, and that consumers would welcome and benefit from it. Epic did so without advance notice to Apple because Apple would otherwise have used its monopoly control to prevent that competition from happening.”
Ultimately, the argument comes down to whether Apple can claim ownership of commerce occurring on the phones they make and through the marketplace that companies are forced to use to access the users of those phones.
“It’s a crazy, misguided view,” according to a tweet from Epic Games founder and chief executive, Tim Sweeney.
The argument that Epic is making to the court is that Apple’s contractual restrictions are anticompetitive and deny choice to developers and consumers.
From Epic’s perspective, it took the steps it did in creating an in-game marketplace that its players could access directly, to prove that the App Store is not a necessary part of the iOS ecosystem; “they are just the tools Apple uses to maintain its monopoly,” the company’s lawyers wrote.
“Apple has no right to the fruits of Epic’s labor, other than the rights arising under a contract. Consumers who choose to make in-app purchases in Fortnite pay for Epic’s creativity, innovation and effort—to enjoy an experience that Epic has designed,” the company claimed in its filing.
The legal confrontation between one of the world’s most valuable tech company and one of the tech industry’s rising (and incredibly popular) stars began in August when Epic Games introduced a new payment mechanism to its Fortnite app allowing gamers to purchase its in-game currency directly and bypass Apple’s in-app purchase framework.
The company pushed the same update to its Android game, as well. Both Apple and Alphabet responded by taking down the company’s Fortnite game from its app stores.
Earlier this month, Judge Yvonne Gonzales Rogers, kept a temporary restraining order issued in September in place which simultaneously protected Epic’s Unreal Engine from retaliation by Apple, while allowing Apple to keep Epic’s Fortnite game off of its App Store.
Tencent leads $100M Series B funding round into China-based esport provider VSPN
Further confirmation that the esports market is booming amid the pandemic comes today with the news that esports ‘total solutions provider’ VSPN (Versus Programming Network) has raised what it describes as ‘close to’ $100 million in a Series B funding round, led by Tencent Holdings . Other investors that participated in the round include Tiantu Capital, SIG (Susquehanna International Group), and Kuaishou. The funding round will go towards improving esports products and its ecosystem in China and across Asia.
Founded in 2016 and headquartered in Shanghai, VSPN was one of the early pioneers in esports tournament organization and content creation out of Asia. It has since expanded into other businesses including offline venue operation.
In a statement, Dino Ying, CEO of VSPN (see also our exclusive interview) said: “We are delighted to announce this latest round of funding. Thanks to policies supporting Shanghai as the global center for esports, and with Beijing, Chengdu, and Xi’an expressing confidence in the development of esports, VSPN has grown rapidly in recent years. After this funding round, we look forward to building an esports research institute, an esports culture park, and further expanding globally. VSPN has a long-term vision and is dedicated to the sustainable development of the global esports ecosystem.”
Mars Hou, general manager of Tencent Esports, commented: “VSPN’s long-term company vision and leading position in esports production are vital for Tencent to optimize the layout of the esports industry’s development.”
We had a hint that Tencent might invest in VSPN when, in March this year, Mark Ren, COO of Tencent Holdings, made a public statement that Tencent would provide more high-quality esports competitions in conjunction with tournament organizers like VSPN.
As we observed in August, Tencent, already the world’s biggest games publisher, that it would consolidate Douyu and Huya, the previously competing live-streaming sites focused on video games.
In other words, Tencent’s investment into VSPN shows it is once again doubling-down on the esports market.
This Series B funding round comes four years after VSPN’s 2016 Series A funding round, which was led by Focus Media Network, joined by China Jianteng Sports Industry Fund, Guangdian Capital, and Averest Capital.
Now, VSPN has become the principal tournament organizer and broadcaster for PUBG MOBILE international competitions, and China’s top competitions for Honor of Kings, PUBG, Peacekeeper Elite, CrossFire, FIFA, QQ Speed, and Clash Royale. This will tally-up 12,000 hours of original content. The company has partnered with over 70% of China’s esports tournaments.
In addition to its core esports tournament and content production business, VSPN has branded esports venues in Chengdu, Xi’an, and Shanghai. In May, VSPN launched its first overseas venue, V. SPACE in Seoul, South Korea.
And even offline events are coming back. VSPN hosted the first large-scale esport event with offline audiences in August this year. And the LOL S10 event will open 6,000 tickets. However, all tournaments will operate under strict COVID-19 prevention measures and approval processes by the Chinese government, and not all esports events are allowing offline audiences. In the main, only high-level ones are approved.
VSPN said it will continue to focus on building an esports short-form video ecosystem, improving the quality of esports content creation, and reaching more users via different channels. VSPN currently houses more than 1,000 employees in five business divisions.
Esports pioneer Dino Ying talks to TechCrunch about the next phase of VSPN
Following the news that China’s esport giant VSPN (Versus Programming Network) has raised close to $100 million in a Series B funding round, led by Tencent Holdings, TechCrunch interviewed founder and CEO Dino Ying via email about his strategy for the company.
Founded in 2016 and headquartered in Shanghai, VSPN was one of the early pioneer in esports tournament organization and content creation out of Asia. It has since expanded into other businesses including offline venue operation.
VSPN began hosting the first large-scale esport event with offline audiences in August, although tournaments now operate under strict COVID-19 prevention measures.
TechCrunch: VSPN has a large content production ecosystem surrounding its esports activity. Can you expand on the detail behind your stated short-form video strategy? Will this involve TikTok?
Ying: VSPN intends to use our world-class video production capabilities and industry insights to create different forms of content. We will give our existing fans and a wider audience a new and vivid esports experience. Kuaishou, as our investors and a strategic partner, will support in all ways as a media platform to help our content reach more users. Short-form video is an important part of our future strategy and we look forward to working with platforms all over the world in this regard.
TC: What is VSPN’s share of the eSports market?
Ying: There is no official estimation of the size of the esports market but VSPN is far the largest esports organization in China, with over 1000+ employees and covering every major esports tournament you’ve ever heard of. By many measures, we are the largest esports organization in the world and will continue to expand.
TC: Why do you think Shanghai has become a center for esports?
Ying: As the biggest and perhaps most international city in China, it has a vibrant and increasingly sophisticated economy. Tech innovation and new industries are actively encouraged to grow here.
The Shanghai government has implemented supportive measures and policies to encourage the growth of esports both domestically and internationally. Thanks to these measures Shanghai has become an international hub for the biggest and best tournaments in the world
TC: How important is research into eSports for VSPN and why?
Ying: It is vital for VSPN. As an esports total solutions provider aiming to build a sustainable global esports ecosystem, data and R&D allows us to give our fans a richer experience. The research center will allow us to continually improve as a company and develop the industry.
TC: You are the cofounder and chairman and CEO by title. What is the role of cofounder Ethan Teng?
Ying: Ethan Teng is Co-founder and president of VSPN. Ethan as one of the most important partners of VSPN, with his dedicated esports industry experience, he plays a vital role in leading and managing the company’s strategic goal setting and day to day management.
TC: What is the nature of the strategic relationship with Tencent?
Ying: VSPN is a key partner of Tencent in the esports industry. With Tencent’s support, VSPN has built a leading position in esports tournament content production. Since the emergence of esports in China, our deep-rooted industry expertise has helped further develop the esports ecosystem to grow and mature. Alongside Tencent we will continue to generate new opportunities within the industry.
TC: What made you choose these partners and why? What was the strategic thinking behind these decisions?
Ying: Together with Kuaishou, VSPN aims to establish an esports short-form video ecosystem to diversify existing content, and to build the connections between top quality creators and channels. With an extensive portfolio in the consumer and TMT sectors, both Tiantu Capital and SIG will utilize their industry insights and expertise to aid VSPN’s strategic development. With our investors, we will empower esports to be the new sports for the next generation.
TC: In addition to the core esports tournament and content production business, VSPN has branded esports venues. How important are these other businesses – like the venues – to the core offering of VSPN? What sort of growth do you expect in the next few years?
Ying: Regardless of business lines, VSPN’s core mission is to provide the best eSports experiences for our fans. And these experiences include not just online viewing experiences, but also offline ones where fans physically attend. We see our offline business as a natural way to extend our services to our fans; it is an important supplement to our overall offerings. We expect to grow it per our fans’ and partner’s demands.
TC: Mobile esports, especially the KPL and PUBG MOBILE (or Peacekeeper Elite in China), have attracted more and more female audiences. What is the future of eSports among women / girls?
Ying: Mobile gaming has really helped extend eSports’ reach to female participants and audiences. Rightfully so, we see a future of eSports where female participants take a more prominent role than they have done. Not just on stage as athletes, but also off stage as fans and more importantly backstage as top quality producers and decision-makers in the industry. The impact of having more female fans, athletes and professionals is exciting and will be hugely beneficial to the wider industry.
TC: What is the future of esports in Augmented Reality?
Ying: We think eSports in its full form will look and feel a lot different from what we’ve seen so far in sports and entertainment. The possibility of integrating real world gaming and virtual competitions is fascinating. VSPN is only beginning to test the boundaries of new technologies such as AR, VR. The emergence of these technologies will help us create fresher experiences, and the possibilities are endless.
TC: Please tell us more about your personal history?
Ying: Firstly, thank you for having me – it is a real pleasure to speak to TechCrunch and be able to announce our fundraise to the world. I have been working in the gaming and esports industry all my life and I’m excited about the future. With the team at VSPN we are proud to be pioneers in the esports industry.
I live between Beijing and Shanghai, but I spend a lot of my time travelling to other Chinese cities like Xi’an, Chengdu, Guangzhou and Shenzhen where we have esports arenas and business interests. Usually I travel internationally to some of our overseas operations and competitions, so I look forward to that when travel becomes easier.
I am a fan of traditional sports too and an avid football fan. I follow some of the European leagues – whenever I can, I go to matches to enjoy the atmosphere; I went to Stamford Bridge early this year and loved it, but seeing the AC vs Inter Derby live is hard to beat…
TC: Why did you get into this business and how?
Ying: Mostly because I am a HUGE gaming fan! I’ve been playing computer games since I was a teenager and enjoy playing all types. Earlier this year I played COD Warzone as soon as it came out and often play PUBG Mobile; I’m extremely lucky to be in an industry which I’ve loved since I was very young. It’s a great way to connect with friends and I am proud to have worked in game development and publishing for my whole career. 5 years ago, esports seemed like the obvious next step because of the competitive element. We saw the beginnings of a trend and founded VSPN with a world-class team to make that potential a reality.
VSPN is very proud to be leading the world in a relatively new industry. We think esports will continue to grow exponentially and will be an incredibly important part of the entertainment industry in years to come. To lead a Chinese company with a global future is really exciting.
TC: What motivates you as a businessman?
Ying: Bringing new forms of entertainment to millions of people around the world and building a global business. TC: Who inspires you most in the business world?
There are so many fantastic businessmen in China who are doing some really innovative things at the moment. For example, the live-streaming industry has become enormous in 2020 due to the pandemic and has offered entrepreneurs a new way to sell products and engage with new audiences.
If I had to name one it would be Mark Ren (COO at Tencent Holdings) – he is an exceptional businessman. The way he has helped create sustainable ecosystems in the entertainment space and captured trends is something every businessman should aspire to. This is something VSPN works hard at and we are very proud to be such close partners of Tencent. TC: What is your opinion of Silicon Valley?
Ying: It’s an amazing place and has shown the world how technology can improve lives all over the world. For many years it has led the world as a centre for creativity and innovation and continues to be an inspiration to entrepreneurs around the world. In China, we have lots of Silicon Valleys! TC: Is there anything else you’d like to say to TechCrunch readers?
Ying: This has been a challenging year for many businesses and the esports industry has had to adapt, but I think the world has seen how big esports is and how it can bring communities and cultures together. As the industry grows there will bigger and bigger online and offline tournaments across the world, especially with 5G and mobile gaming becoming even more popular. We look forward to being at the forefront of esports for competitors all over the world and hopefully some of your readers will enjoy watching our original content and tournaments.
Finally, with celebrities and big brands seeing live streaming and casual gaming as a new way to engage with a wider audience, the future for VSPN is very, very bright.
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