Twilio and Stripe are seeing explosive growth in 2020, highlighting a major software industry trend that's getting gobs of VC investment

Whether you know it or not, you probably use apps built with application programming interfaces every day. 

APIs are tools that link together data and features from multiple different apps to allow them to essentially "talk" to each other. People can make payments on DoorDash or Postmates thanks to Stripe's APIs, make calls directly from Airbnb and Yelp's apps thanks to Twilio's APIs, and get location updates on Uber thanks to Google Maps' APIs. 

API use has become has become so critical for companies, that there's been an outcropping of firms that specialize in building APIs specific to categories like security, payments, feature management, search, shipping, content management, databases, and more. And many of those companies are seeing strong growth. 

For instance, the e-commerce platform Shopify's stock price has more than doubled since the beginning of the year, while the cloud communications platform Twilio has seen its stock nearly triple. And in April, the payments platform Stripe raised $600 million in funding at a whopping $36 billion valuation. 

Experts don't see this growth slowing down either, citing the need for companies to use APIs to build more effective products faster as they move to a cloud-based software model. And as companies move their businesses online during the coronavirus pandemic, the growth of API companies has accelerated, too.  

"[Using APIs] unleashes flexibility – the ability for you to take code and help you innovate," Chee Chew, chief product officer at Twilio, told Business Insider. "It also allows you to take code and change it and adapt readily."

The value of using an API 

Developers love APIs because they allow them to build better products, more quickly. They essentially offer developers a prepackaged solution for a given capability that they can easily customize. Sure, developers could build those same functionalities themselves, but they would be starting from scratch on something that has already been created by domain experts.

Using APIs built by companies that specialize in them, like Twilio and Stripe, allows developers to cut out some steps, which speeds up the app-building process, comes with built in reliability, and still allows plenty of flexibility. 

"They become building blocks for developers to build on it faster," the CEO of API development platform Postman, Abhinav Asthana, told Business Insider. "Developers are driven by consumer and business needs. Consumers want broader functionality. [APIs are] the fastest way to build it and focus on what the company is good at."

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Why API startups are so hot right now

About 20 years ago, integrating APIs into your project was a much more complex process, according to Gartner research analyst Mark O'Neill, but it's become a "hot area" because that has changed. 

"APIs as a concept are not new, but what is new is what skills are there, and there's a lower barrier of entry and more usage for APIs," O'Neill told Business Insider. As companies like Stripe and Twilio have seen such success, "investor interest" has risen as well, he said. 

For instance, startups like Auth0, MessageBird, Netlify, Postman, RapidAPI, Solo.io, Stedi, Strapi, and Stripe have all raised funding this year. 

Bessemer partner Ethan Kurzweil says his firm has been looking into API companies since about 2011, but venture capitalists are now even more interested.

Read more: Twilio chief product officer says the firm's $3.2 billion acquisition of Segment will help it give small companies the data-crunching superpowers of huge enterprises

"All these companies that have APIs, like Okta, Atlassian – they have all done really well. In the private markets, it's similarly reflected. There's the same kind of buying pattern," Kurzweil told Business Insider. "There's more interest now than before."

API companies also are becoming more specialized. For example, travel API startups like Duffel and Impala have emerged, and the company Foursquare has even transitioned into an API company to provide location data.

As APIs become more specialized and companies increasingly move to the cloud, cofounder and CEO of web hosting startup Netlify Matt Biilmann predicts that in the future, there will be an API for every possible use case. 

"The more we take this architectural approach of figuring out how we as developers build things as developers, it's easy to separate out functionality," Biilmann told Business Insider. "The more we do that, the more opportunities there are to come in and build APIs."

Tech giants are investing heavily in APIs, too

And it's not just startups that are leaning into APIs, either. For many tech giants, they have also become a major source of business. Cloud providers like Amazon Web Services, Microsoft, and Google Cloud build specialized APIs for their services.  For example, the Google Maps APIs have become widely used by companies like Uber, Walt Disney, Trulia, Allstate, and more.

Recent years have brought a surge of mega-acquisitions in the space, too. 

For example, Adobe acquired the e-commerce API platform Magento and the marketing API company Marketo for a combined $6.4 billion, while Salesforce acquired the API company MuleSoft for $6.5 billion in 2018. Twilio recently acquired the customer data API startup Segment for $3.2 billion.

"There is a need for bringing this type of connectivity of data and for sharing data between multiple applications and multiple platforms," Siti Panigrahi, managing director at Mizuho, told Business Insider.

In addition, financial services companies have increasing interest in banking APIs that can help them easily comply with financial regulations. For example, Mastercard is acquiring Finicity and Visa plans to acquire Plaid (although it's facing an antitrust lawsuit). In both cases, a legacy credit card company is bringing on an API startup.

The coronavirus pandemic increased the need for APIs

There's also a greater need for APIs as even traditionally brick-and-mortar businesses have had to digitize.

In a survey of over 13,500 tech employees conducted by Postman, 84% of respondents said that APIs play a significant role in digital transformation initiatives. 

"Almost everything is being digitally driven," Postman's Asthana said. "Because of that, there is much more demand for APIs. Every business will have a virtual storefront. That is powered through APIs. They need to build their own software and for that, they need to acquire APIs."

APIs for digital commerce, healthcare, and logistics have become even more widely used as companies react to the pandemic. In a short time, companies have had to completely re-architect so that their businesses are available online, and building with APIs speeds up that process.

Nearly half of the respondents for Postman's survey said they will increase their investment of time and resources into APIs over the next year, despite a tough economic environment.

"One of the things that help is that organizations are trying to create solutions as fast as possible," Forrester principal analyst Jeffrey Hammond, said. "You don't want to go out and build that out of scratch."

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