Compounding Growth Loops for API-First Companies

A common API-First company’s North Star metric is developer adoption, and the number of developers in an API-ecosystem tends to compound naturally in four growth loops that reinforce each other .

1. The Developer Experience (DX) Loop: Developers who explore (and eventually thrive) with the API will build compounding resources online that are key to great DX. Years of developers using the API leads to questions and answers on StackOverflow or pull requests and wrapper libraries contributed openly on GitHub. A groundswell of organic activity emerges around a successful API where developers help each other get through issues they encountered in the past together because developers are more altruistic than typical enterprise purchasers. This organic pool of resources and support gets indexed by Google’s crawler. The next generation of developers that are looking to solve a relevant problem will discover the API via Google. This brings us back to the start of the loop and increases developer adoption of the API.

2. The Consumption-to-Paid-Acquisition Growth Loop: The most direct business model to make money from an API is to charge for its usage. This consumption-based business model means that an API’s cash flow grows as: (A) more developers integrate the API into more apps, and (B) as the developers’ apps grow, their API consumption grows.

First, developers integrate the API into more new apps. Each new app built will grow in usage over time, which leads to more API consumption. So, each individual app increases its spend with the API over time. As the API accumulates more cash flow, the business has more cash available for marketing to acquire the next cohort of developers. This leads to more developer adoption and the loop is complete.

Related to this loop is the concept of net-negative churn: A given cohort of API customers will be larger one year later, as long as the usage of the customers who churn during the year does not exceed the natural expansion of the remaining customers’ usage. API-First companies with net-negative churn compound in growth even if they fail to add new cohorts of customers (a magical characteristic unique to subscription-based business models). Not all API-First companies will have net-negative churn, but the best ones all do.

3. The “Keeping Up with the Joneses” Growth Loop: As the API gets integrated by developers into new products, the API is being integrated for a reason that is likely aligned with the app’s end-customers’ goals. Stated more directly: the API makes apps better. A company might use an API to add a new feature (like SMS-based interaction (Twilio) or a better checkout payment flow (Stripe)) that makes its product more compelling and competitive. That company’s competitors will eventually notice the change and (probably) follow suit. So, for the best APIs, integration by one competitor will lead to a Red Queen Race. One product thriving thanks to an API causes competitors to adopt that same API, which closes the loop and adds more developers into the API’s compounding loops.

4. Data Exhaust Growth Loop: Last, many APIs get better as they get used more, thanks to a data feedback loop. As more developers integrate the API into their apps, the data and metadata that gets generated by usage of the API helps guide future improvements to the API. For example, when ecommerce merchants accept credit cards, they’re liable for chargebacks and susceptible to fraudulent chargeback claims. It’s very frustrating for merchants who have to provide evidence to contest chargeback fraud, and often it is easier to simply write off the fraud as a loss than to fight back. As Stripe’s API grew more popular, they saw more data and metadata about chargebacks. This is the data exhaust from the usage of the API. Stripe then developed machine learning algorithms to reduce chargeback fraud and improve the Stripe API for future users. (Not every API will have a compelling data exhaust growth loop. For example, if an API generates stock quotes, that usage isn’t adding data that will affect the stock quotes in the future. But this loop does exist for many APIs).

These four loops combine and reinforce each other. So, let’s look at the full picture as a whole now that we have decomposed it into its 4 component parts.

This compounding advantage becomes an enduring moat over time, which is why Stripe and Twilio are so highly successful despite pixel-for-pixel copycat clones of both services launching repeatedly over the past decade.

These characteristics are (mostly) universally true for API-First companies and are significant advantages over non-API competitors that don’t focus on API-First distribution and developer experience. That said, not all API-First companies are created equal. Some will have stronger growth loops than others based on execution choices and general quality.

From here, I want to explore some side-avenue characteristics of API-First companies that are less universally true, but, to me, even more interesting.

from API-First: LEGOs for Business, Spidey Sense by Andrew Parker