How Do APIs Help Businesses Build and Scale?

TL;DR

APIs help businesses build and scale by connecting specialized services instead of recreating every capability internally. Companies can focus on their core products while using external infrastructure for payments, shipping, maps, notifications, fraud prevention, and other functions, gaining faster distribution, lower costs, and access to aggregated data.

Transcript

Hi, everyone. Welcome to the a16z Podcast. I'm Sonal. We've been talking a lot about the theme of the API economy lately, from presentations to videos. But in this podcast episode, we wanted to dive into the trend more practically, hearing from those building API-first companies and their insights about what people, not only developers and technolo... Read More

Key Insights

• APIs let businesses concentrate on their core competency by obtaining supporting capabilities from specialized providers instead of developing every function internally.
• The API economy serves traditional retailers as well as internet-native companies because established businesses need technology for commerce, shipping, payments, and customer delivery experiences.
• APIs function like standardized assembly-line components, while cloud computing acts like metered electricity that can be turned on and off as needed.
• API-based development reduces time and cost by standardizing processes and combining components that were created outside the company.
• APIs and open-source software support mass distribution of software across phones, cars, refrigerators, websites, and other connected environments.
• Lyft can combine Google Maps, Twilio, and Stripe instead of building mapping, phone verification, push notifications, and payment infrastructure from end to end.
• API customers can access aggregated insights, such as fraud patterns observed across Stripe customers, without collecting all the underlying data themselves.
• External APIs reduce direct control over supporting functions, but rebuilding mature infrastructure can divert a company from the distinctive value it wants to create.

Questions & Answers

Q: What is the API economy?

The API economy is a model in which companies build products and operations by connecting specialized software services through application programming interfaces. APIs send and receive information between applications and can correspond to different organizational functions. They allow businesses to combine capabilities such as payments, shipping, maps, notifications, and fraud prevention without developing every component internally.

Q: How do APIs help businesses focus on core competencies?

APIs let a business obtain supporting capabilities from companies that specialize in those functions. A product team can avoid becoming expert in bookkeeping, accounting, payments, shipping, mapping, or notifications when those areas are not its central value. The team can direct more attention toward building its primary product and reaching customers while integrating the services it needs.

Q: Why are APIs useful for traditional retailers?

Traditional retailers often need to expand online even though e-commerce technology was not part of their original operating model. Online sales require capabilities such as storefront management, payments, warehouse coordination, shipping, and delivery to customers in many locations. APIs give these businesses a practical way to add those functions while preserving attention on their products and customer relationships.

Q: How are APIs similar to an assembly line?

APIs resemble an assembly line because they allow a product to be assembled from standardized components created by different providers. The analogy emphasizes improvements in speed and cost rather than ownership of every part. Cloud computing acts like metered electricity, while APIs and open-source software provide reusable components that distribute software across websites, phones, cars, refrigerators, and other environments.

Q: How can a company build a service using multiple APIs?

A company can combine separate providers for the supporting functions behind one customer-facing product. Lyft illustrates this approach by using Google Maps for mapping and logistics, Twilio for push notifications or phone verification, and Stripe for payments. Combining these services allows the company to offer its ride-sharing product without constructing every technical system from end to end.

Q: How do APIs provide access to data at scale?

An API provider can aggregate information across its customer base and make the resulting capability available to individual users. Stripe Radar is presented as an example because it can help prevent fraud using patterns observed across other Stripe customers. A newly started company can therefore benefit from broader fraud insights without first collecting and analyzing the same volume of information internally.

Q: What control risks come with relying on external APIs?

Relying on an external API means a company does not control every underlying component of its service or every part of the customer experience. This concern is especially important for functions such as shipping or payments that directly affect customer satisfaction. Companies must evaluate providers carefully and decide whether specialization outweighs the loss of complete end-to-end ownership.

Q: When should a company build infrastructure in-house instead of using an API?

A company should consider whether the capability is central to its distinctive value and whether rebuilding it would improve the product enough to justify the effort. The Shopify and Stripe example shows the alternative: replacing mature payment infrastructure could require returning to basic payment rails and starting largely from scratch, potentially putting Shopify behind its preferred product priorities.

Summary & Key Takeaways

• APIs give companies leverage by allowing them to combine specialized services, open-source software, and cloud infrastructure. Instead of maintaining expertise in payments, shipping, accounting, mapping, or notifications, a business can concentrate resources on its core product while relying on providers whose primary competency is operating those supporting capabilities.

• The API economy resembles an assembly line for software. Cloud computing supplies metered infrastructure, while APIs and open-source components provide standardized building blocks. This combination reduces development time and cost, supports distribution across websites and connected devices, and makes sophisticated technology accessible to businesses that did not begin as software-native companies.

• Depending on external APIs creates concerns about control, reliability, and ownership of the customer experience. However, rebuilding a mature capability internally can require returning to basic infrastructure and starting largely from scratch. Companies must decide whether a function creates distinctive value or is better entrusted to a specialized provider.

• Key Insights strengths: APIs let businesses concentrate on their core competency by obtaining supporting capabilities from specialized providers instead of developing every function internally.

• Key Insights accessibility: The API economy serves traditional retailers as well as internet-native companies because established businesses need technology for commerce, shipping, payments, and customer delivery experiences.

• Key Insights analogy: APIs function like standardized assembly-line components, while cloud computing acts like metered electricity that can be turned on and off as needed.

• Key Insights efficiency: API-based development reduces time and cost by standardizing processes and combining components that were created outside the company.

• Key Insights distribution: APIs and open-source software support mass distribution of software across phones, cars, refrigerators, websites, and other connected environments.

• Key Insights example: Lyft can combine Google Maps, Twilio, and Stripe instead of building mapping, phone verification, push notifications, and payment infrastructure from end to end.

• Key Insights data: API customers can access aggregated insights, such as fraud patterns observed across Stripe customers, without collecting all the underlying data themselves.

• Key Insights tradeoff: External APIs reduce direct control over supporting functions, but rebuilding mature infrastructure can divert a company from the distinctive value it wants to create.