🦄 vol. 36
startups, infrastructure and the api economy 🍇
Your favourite politicians throw it around in speeches and you’ve probably heard your CEO talk about it in company-wide meetings too... infrastructure!
Infrastructure refers to the basic systems and services that a country or an organisation needs in order to function properly. For example:
In the context of a country, infrastructure is composed of public and private physical structures such as roads, water supply, sewerage, electrical grids, telecommunications, internet connectivity, etc.
In the context of a fintech startup, infrastructure involves the IT infrastructure necessary for compute and storage components, as well as financial infrastructure which involves integrations into banks and global payment systems.
Businesses run on top of infrastructure 🎢
Infrastructure is an essential prerequisite to enable economic activity. For example, an e-commerce and delivery business like Takealot’s needs include:
IT infrastructure: to host and develop their web application.
Physical infrastructure: roads to effectively deliver goods, electricity to power their warehouses, internet connectivity for their customers to be able to access their application.
There are a lot of moving parts.
The scenario… 🤔
You have an idea for a software startup, you’ve done thorough market research, you’ve ideated and defined the product scope. So what is the next step?
You build a Minimum Viable Product (MVP) - this is a version of your application with sufficient functionality to attract early-adopter customers. Building an MVP gives you several benefits:
An early market entry which can lead to a competitive advantage.
It is ideally low-cost compared to spending budget on building out something that may not work.
Gives market validation through early testing and feedback of the idea with actual users.
It is an iteration towards a fully-fledged product.
And prototyping has never been more cost-efficient or easy 🎮
Traditionally, a startup had to acquire and run all their hardware and software. From a hardware perspective, this included all the computers, databases and networking components required to host a particular application (for perspective one industrial server can cost north of R100 000).
For startups that have real world dependencies such as integration with financial service providers (FSP) like banks, they would have to form partnerships with the FSPs and build and maintain the integrations into them. This is a huge upfront capital and time investment into non-product related functionality.
Enter the API Economy 🌐
An API (Application Programming Interface) is a software intermediary that allows two applications to talk to each other. Essentially applications can request information and get information back from each other.
In the 90s and early 2000s, there were very few software companies compared to now. Think of Microsoft, Oracle and the like. These companies owned and wrote every piece of software within their products. As software companies multiplied and the industry matured, a (software) supply chain developed.
Similar to how different parts of the iPhone are manufactured all over the world by highly specialised companies manufacturing processor chips or antennae for the finished product… so too is the production of software becoming specialised.
But rather than chips or antennae, software companies in the software supply chain deliver reusable code that developers can call through defined APIs.
Looking at the illustration below:
Pictured on the left, as a traditional fintech startup, “your company” would own everything from the hardware to the implementation of the bank integration and then the actual product that is providing value to end-users.
Within the API economy pictured on the right, “your company” could run its infrastructure in the cloud on a provider like AWS or Google Cloud and rely on Stitch Money, who has already done the heavy lifting in compliance and implementation of bank integrations.
Not owning the IT infrastructure or bank integration layer significantly reduces the capital investment of getting an MVP off the ground, and leaves “your company” to focus on building out the product and experience. 🥳
Africa, the state of things 🌍
In the last couple of years, we’ve seen many “enabling” software companies pop up that solve infrastructural problems. To name a couple:
Paystack - Enabling online and offline payments across Africa.
Stitch - APIs access to African financial accounts.
Union54 - APIs for card issuing and management.
These (all relatively young) companies help solve for the complexity (and upfront cost) of building out the vital foundations needed to layer on a final product.
That being said, there are definitely many more exciting products to be created on top of these offerings, and many more such infrastructural gaps to be filled that will enable the implementation of other exciting products as the API economy expands.
claude
remember sash’s take on wordle? turns out the new york times benefitted from the acquisition…
for elon musk content unrelated to his twitter takeover, matt enjoyed his forward-looking interview at a recent ted event
a little old but karl enjoyed this breakdown on twitter’s pre-acquisition valuation by the valuation king, damodaran