Redfin IPOed at $1.2B, GrubHub at $2B, Etsy at $3.5B, Airbnb at $47B amid a global pandemic, and Uber at $75B… The common thread? Some of the largest tech IPOs over the last decade have been marketplace businesses. Many of which have implemented successful trends popularized by their B2B SaaS counterparts, much like a second mover advantage.
Over the years, there has been a strong follower function in marketplaces leveraging the most impactful developments in software-as-a-service.
There is a natural progression of founders building marketplaces embracing an API-first strategy which enables the marketplace to be built in a much more modular fashion. On the back of this trend, we wanted to know: is there literature that defines API-enabled marketplaces?
The resounding answer was no! However, trends may be observed in the SaaS world that redefined the use of APIs. First, they were predominantly leveraged by developers for internal purposes. Then, they were used to pull in 3rd party services, making the cost to build much lower and scale much quicker. Finally, they were exposed to be consumed broadly, progressing into API-as-a-product applications.[2]
We view the progression of APIs through the lens of B2B SaaS. API adoption has become commonplace across all industries. More developers than ever are employing APIs e.g. Financial Services (69%), Manufacturing (68%) and Technology (65%) [3] while Finance, Auto and Healthcare have the highest level of sophistication for API standardization to build an ecosystem around [4]. This has translated to greater efficiency, leading to an ability to monetize a la Plaid. How?
How can these applications be extended to a marketplace? My research partner Gowri and I studied 20+ API-enabled marketplaces and surveyed founders and investors to get their perspectives on what core factors contribute to the success of an API-enabled marketplace. At baseline, it is shocking how nascent the API-enabled marketplace model feels within the investor community. Only 50% of investors (n = 14) knew the model existed (!!) and even fewer were investing against the trend already.
Founders of API-enabled marketplaces are much more savvy. There is a great deal of foresight in how founders are approaching their strategy. 100% of the founders we spoke with started their company with an API-first strategy in an industry with little or no API standardization and already (or plan to) provide data benchmarking to their customers. However, providing API usage metrics to users is still not widely adopted (50%) amongst the companies we spoke with.
Overall, successful startups build with the vision of data benchmarking for their users, monetization strategies, security protocols and tracking API usage from Day 1. This mindset helped us validate our initial hypothesis (see core tenets below) with industry experts and deeper dives via one on one conversations.
The following factors and strengths will help enable the next generation of API-enabled marketplaces. For our purposes, we’ve defined 7 core tenets. The ideal (mature) profile looks something like a B2B vertically integrated company with strong industry experts for founders, an API-first identity, strong API analytics tracking, data benchmarking for its users and a monetization strategy on transactions rather than data.
I. API-first Strategy
An API-first strategy focuses on reusability and treats API as the core product for the company. APIs are managed as value generating products and are integral to the success of the business. From a marketplace perspective, an API-first approach entails not only connecting to supply and demand through APIs, but building all services on top of the core product. Perhaps the biggest opportunity is that API-enabled marketplaces define the schema for their industry, becoming the de facto data layer for all players to build around. In other words, this enables Protocol Network Effects (which arise when a communications or computational standard is declared and all nodes and node creators can plug into the network using that protocol). [6] Once a schema is defined, it is nearly impossible to rip out.
Example: Pachama is an API-enabled marketplace for nature carbon removal credits, leveraging AI to facilitate transactions. They began by integrating with projects, structuring vertically, to provide accurate data that is credible and transparent, giving more assurance to companies buying the credits to help meet their net-zero targets.
II. Founding Team
Defining the industry schema takes a practiced hand. Deep industry knowledge is especially relevant if a standard is to be defined early in the life of the company. Given this requirement, it is highly beneficial for the founding team to have industry experts paired with intimate knowledge of APIs and data extraction.
Example: CommerceBear is a SaaS/API-enabled marketplace for SMB furniture sellers to cross list on Wayfair, Amazon, Overstock, etc. The founder, Sam Vlessing, leveraged his deep knowledge of furniture manufacturing from his time at his families’ $50M turnover business in Canada, providing him with a clear understanding of the need to be an API business to start and enable acquisition of his supply side, furniture manufacturers.
“Our schema is designed to generalize the schemas required to support Inventory, Order, and Publishing workflows across all major furniture e-commerce marketplaces and retailers. Our schema constantly evolves to support new retailers and marketplaces, or an increase in the breadth of an existing integration.” — Dev Team Lead, CommerceBear
III. Vertical Integration
Because different industries have varied schemas & a clear focus leads to a defined build and value proposition, verticalization is the best starting point. It is important to understand how many data sources are available, how easily data can be extracted, how to separate the signal from noise, and what degree of data standardization is prevalent in the chosen industry. The more nascent an industry from a digitalization standpoint, the more difficult it will be to build an API-enabled marketplace in that industry but also the greater opportunity to build a moat in that industry.
Example: Reworth, a B2B cashback platform for banks and fintechs in Mexico, sources data through APIs for effective merchant selection and customized cashbacks to customers. Many banks in LATAM have just started to build APIs and hence there is not a lot of standardization in place. It is a virtuous cycle: as Reworth connects to more banks, they establish better standardization in their market.
“Most banks in (Spanish speaking) LATAM are just starting to have APIs and there are no standards yet. We try to build that (standardization) too with every bank we connect.” — Founder, Reworth
IV. B2B > B2C
There is a more attractive opportunity today for API-enabled marketplaces to succeed in B2B than B2C. Why? Because B2B only represents 10% of e-commerce transactions today in the most mature markets (and as little as 1% in emerging markets). Additionally, there’s a larger opportunity to compete in B2B with higher AOVs, robust recurrence, and a more attractive opportunity for net dollar retention.
Example: Boom & Bucket is a managed marketplace for heavy industrial equipment. They created trust between supply & demand by building robust APIs and back-office tools. They began with a classic CRM integration which is a key to creating the strong taxonomy data that ERP systems lack. They feed data into their schema from their field app for onsite-inspection. Why does this work? They guarantee that the machine is as-described, not that it is perfect (pictures are still king). AOVs are massive at $46k and at an early stage, they already see the benefit of recurrence as 10% of transactions are driven by repeat buyers.
V. Analytics Tracking
APIs drive efficiencies and revenue by providing industry specific KPIs like transaction level metadata, conversion rates or thresholds for usage that generates customer acquisition and API usage metrics such as which fields are used, how often they are used and which are key for driving the most revenue/transactions.
Example: Topsort, an API-first company for auction-based media monetization, provides real time industry specific analytics reporting for its users such as ad impressions, clicks, sales, ROAS, cost per click and conversion rates [7]. This helps its customers and customers’ customers better track, run and optimize ad campaigns.
“We believe in the power, effectiveness and flexibility of API-first approach when it comes to media monetization. That’s why we designed our suite of auction-based APIs that democratizes the secret of profitable marketplaces. Marketplaces can build, scale, and optimize their own auction based advertising platforms to get on the fast lane to profitability!” — Founder, Topsort
VI. Data Benchmarking
Data benchmarking against other customers in the industry helps businesses understand where they stand against competition and how they can improve. Analyzing API activity data enabled companies to achieve a rich understanding of the organization’s operations [8]. For example, leading organizations maintain a leaderboard highlighting top API publishers and consumers and recognize them for their achievements [9]. As the aggregated data accretes, the value of the data for each user also grows. [5]
Example: Knowde is a B2B chemicals marketplace. From the early days, the founders understood that buying chemicals was an outdated, offline process. 80% of time is on discovery, research and comparison i.e. trade shows, brochures, and PDF catalogs (!!). Knowde posited that producers and buyers were finally ready to engage online. Accordingly, they first solved the problem of discovery, research and comparison with searchable products for buyers. How? By scraping from all over the web and organizing data using Knowde’s taxonomy to create free to search and browse seller pages. They broke the chemical industry into 12 verticals, attacking each one-by-one, using search to gather intent and activity data, laying the foundation to benchmark.
VII. Monetization Strategy
API services often start off as a freemium affording frictionless adoption. As companies mature, they should look at the value their API strategy is creating for its users and monetize based on that value. As demonstrated by B2B SaaS literature, if you charge a SaaS fee to access the API itself, you likely limit usage and thus decrease data availability when compared to a usage-based model. This also means the company would need to have the infrastructure to price and bill its users dynamically. We propose three different monetization models (with a preference for #1 or #2)
Example: Blobr is a white label API developer portal for frictionless adoption. It is the “Shopify for APIs”. They provide the possibility to have a faster time to the first call with an easy onboarding, analytics for API users and API first companies to understand how they perform. On the monetization side, they provide a freemium subscription pricing model to allow easy adoption and progressively charges based on usage and users.
“Our Developer portal is designed to provide the best experience for consuming APIs with a direct impact on the adoption and retention rate. Our customers love the possibility to A/B test different distribution models for their APIs. Pricing is something that you need to test and iterate on a lot to get right. Being able to adapt the pricing and packaging of an API turns it into API products that can fit each of their user segmentation.” Founder, Blobr
When a company starts with an API-first strategy along with the core tenets mentioned throughout, it is easier to build out microservices, which in turn makes product development and iteration simpler [Figure 5]. Understanding the schema first leads to a more acute ability to find product market fit with less resistance. Given the modular nature of how engineering teams are able to build, it becomes much cleaner to kill products that are not returning value on their investment & solving user pain points. In turn, it is easier to identify where the greatest value is being created and double down on strengths. Over the long term, the architecture employed leads to a distinct product development advantage which continues to compound. So, if you want to go from 0 to 1, build faster, come to value sooner, and iterate with greater precision, this strategy is a no brainer!
Use this checklist:
If you keep the above in mind, you will set yourself and your company up for sustained success. Don’t just start strong, build strong!
Gowri Kannan
Gowri is passionate about improving resource distribution and is currently pursuing an MBA at MIT Sloan, with a focus on entrepreneurship and innovation. She has previously worked at foodpanda and Goldman Sachs, gaining valuable operational experience!
Luke Skertich
Luke is an investor at FJ Labs. Prior to FJ, he completed an MBA at the University of Chicago Booth School of Business with concentrations in Finance & Entrepreneurship. Luke was an Associate at M25 (generalist, Midwest-based fund) during his MBA, where he focused his time investing in early-stage startups. He previously worked as a Product Manager at three B2B tech start-ups in Chicago, spanning the benefits administration, fintech and human capital management spaces.
[1] https://www.linkedin.com/pulse/20141209223404-273423283-second-mover-advantage/
[2] https://thenewstack.io/creating-an-api-first-culture-and-company-part-1/
[3] https://www.devopsdigest.com/api-adoption-on-the-rise-across-all-industries
[6] https://www.nfx.com/post/network-effects-manual
[7] https://www.topsort.com/product/tech/real-time-reporting
