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What VCs look for in API startups

with Chris Birrell, Managing Partner at Func Ventures

Chris Birrell, an investor specializing in API startups, shares his insights on what he looks for before investing in API-enabled services. He discusses his background in computer science and his experience in the tech industry, which led him to become an investor. Chris introduces the 'SUPERIOR' Framework that he uses to evaluate API startups, focusing on attributes such as solving difficult problems, uncovering unique solutions, and pathways to profitability and exit. He also highlights the opportunities and challenges in the API space, particularly in the context of AI and globalizing businesses.

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Jon Scheele (00:00)

We often discuss treating APIs as products. The ultimate test of an API product is how much it gets used. But perhaps an even bigger test is whether someone will invest in your API enabled service. So who better to discuss this with than someone who specializes in investing in API startups. I'm very pleased to welcome Chris Birrell to share what he looks for before investing. Welcome, Chris.

Chris Birrell (00:27)

Thanks, Jon. It's an absolute honor to be on your show.

Jon Scheele (00:32)

Great. So I'm looking forward to this conversation. But I guess before we start, well, I have to ask, how did you decide to specialise in this particular area? Often investors will decide to apply a filter based on their own understanding. Warren Buffett often says, I will only invest in businesses that I understand. So what brought you to this stage of specializing in investing in API startups.

Chris Birrell (01:03)

Very good question. And if I have 1 % of the wisdom of Warren Buffett, then I'll probably do pretty well. So let me start from kind of where I was educated in Western Australia, graduated with computer science degree and spent the first eight years of my career writing at the very early stages of C++. And I could probably dream in C++. I basically was immersed in that coding bubble of a young engineer, learning his trade and trying to do the best he can. And in those days, I was writing front end software for Windows and I had a book on my desk that was basically the Windows API, which was basically 3,000 calls to do everything from, you know, open a window to draw a scroll bar and make things move around the screen. So that was my early experience as a coder.

I then got the opportunity to move to Asia exactly 30 years ago this year. I got a job as a C++ programmer at the Hong Kong Jockey Club in Hong Kong. I wasn't a jockey. I was fortunate enough to work on the encryption and networking systems at the time that were in the clear. So there was no encryption. So we built a pretty much proprietary networking protocol and system that encrypted all their betting and made it fast and worked with the old VAXs and so forth. So it was a pretty challenging project. And what it taught me was that IT was not about coding. IT was about a little bit of coding, a hell of a lot of testing and a massive amount of operations. So I got to see that whole kind of from a holistic point of view and soon found myself actually running the project.

And running a pretty big team, pretty big budget. Then I actually joined my first startup. I was fortunate enough to meet a gentleman who became my mentor actually and was starting up a company in Silicon Valley called Dazcom. And I moved to the US and started their professional services business. And we were all fortunate enough to get acquired by IBM a couple of years ago. So that was my first taste of startup land and I obviously loved it.

Then subsequently went into three additional companies that all had exits. So I was very fortunate in my career and I did every job from programming to setting up help desks to setting up QA labs, running sales teams, pretty much everything. So I got to see the kind of whole life cycle. A couple of observations that really informed my decision to move into being an investor was, during that journey of those four different companies, each one of them got bigger. And as they got bigger, they got less innovative because they had to worry about their incumbent customers. And as they got bigger and started making more money, creating new products became less important. So there was a lot of M&A going on. So I was actually on the acquisition teams that probably participated in about 20 acquisitions. And I really loved that side of the business where we could see the young entrepreneurs building something new. And because I've had a fairly long career, I was also at the beginning of the SaaS movement. So I saw how disruptive that was. Once I got into my early 50s, I actually watched a video by Jack Ma, which actually is quite a famous video, you can Google it, that says, as an engineer, there's basically different stages of your career.

In your 20s, you should work for a good boss. In your 30s, that's when you go start a company or join a small company. In your 40s is when you make your money. And beyond that, 50s plus is when you invest in the young people. So I took his advice. After the last exit, I was the CIO at a company called Blue Coat. We got acquired by Symantec for four and a half billion in 2016.

I did my three year handcuff and I was already ready to go at that point, but I needed to clip that coupon. Learned a lot from Symantec because it's such a big company and a big franchise, but my heart was really in investing. So I started investing in 2019 fairly broadly initially in tech. Some of them went well, some of them didn't go well.

I started to learn the kind of wisdom around backing the right founder, not necessarily just the product, but I also started to realize that what I was really interested in was actually the future of software. And once again, because I've been around a while, I've been around the beginning of the internet, for example. 1993 was when Netscape first came out, was called Mosaic in those days.

Google didn't get started till 1998. So I could see this coming wave of AI and I didn't want to be like every other VC and say, hey, I'm an AI VC. What I really thought was, well, the AI orchestration layer is going to be so important in the user interface, voice recognition. Where's the actual value going to? And if you study disruptive theory, people like Clayton Christensen, you'll see that the value often goes to the subsystems.

So in the computer industry, very famously, companies like Intel, AMD, Microsoft through Microsoft Windows operating system captured a lot of the value and the hardware box itself became commoditized. So I believe that's what's happening with the top layer of SaaS. The user interface layer is becoming commoditized and the value is really in the actual workflow.

What's the software actually doing? What transactions are being made? What physical actions occurring in the real world? And how's that being leveraged? So that's really, sorry, a bit of a long -winded story, but that's how I got into becoming an API VC.

Jon Scheele (07:07)

Okay, so we talk a lot about composability, how if enough systems expose APIs, then you can create entirely new businesses, workflows from those different components. But I guess that means you have to decide, well, what are the components that are going to be useful in that overall ecosystem? And what are the sort of models for thinking about that? So most of us are familiar with the business model of Twilio or Stripe, who publish an API and that's pretty much the only way you can consume their service, messaging or payments, is through their API. Or if you don't actually want to connect directly to the API, then one of their SDKs or frameworks that help you to do that. But what are the other sort of structures that you see in terms of business models that you find attractive?

Chris Birrell (08:21)

Yeah, that's a great question. So as a VC, we have to try to imagine what products are going to be doing well in five years from now. So what are the types of systems that will be built and where will the enterprise value be captured? I was fortunate enough during my role at Blue Coat as the CIO, I was the economic buyer of software there and we had a pretty big budget. And I could see already at that point, back in 2012 to 2016, I was in that role, the value going to the cloud and the amount of spend that we were moving away from our traditional rack and stack model to the cloud. I think the same thing is going to happen with the whole evolution of the three major ecosystems: AI, blockchain, and IoT. And all of those ecosystems will need APIs to operate.

Now in terms of the actual frameworks that are out there, I looked at a few different frameworks to identify the business model and actually came up with my own variation. I'll very quickly talk about it. There's more available if people want to contact me on it. It's called the SUPERIOR framework. Each letter stands for a particular attribute I look for and sort of beginning with the first letter S, down to the last letter, the second R. And I would say the first couple are the most important, and I'll spend a bit more time on those. The first one is that the API or the API platform that you're building needs to be solving a difficult problem in a very narrow and deep way, but it also has to be very scalable. It has to be done at the right economics. And it also has to be written in such a way that it's sticky, that it has some kind of a network effect, and that it's easy to get started using it. So there's lots in that, but basically, solving the difficult problem is really the most important thing. If you look at Stripe, I mean, Stripe, people might say, it's just a payment gateway, but the way they solve it is they solve it across pretty much all currencies, geographies. They take away the onboarding process pain.

They take away the process of treasury and banking and all those things that a retailer has to deal with. So it's really deep. The second letter, the U, stands for uncovering unique and novel solutions. So if you look at the way that the API is being used, it's a leading indicator that that's actually something important. And if you look at the early days of Stripe and Twilio, they were actually used by Uber. So Uber was an application that came about with the advent of the mobile phone, obviously, but without companies like Stripe and Twilio, they never would have been able to build that application so quickly and get it to market and globalize it so quickly without those platforms. The P stands for Pathways to Profitability and Exit. Very important these days that you don't just create a science experiment and you have a beautiful API that that works nicely and everyone loves it without actually making money. So you've got to be able to build something that's compelling enough that people will actually pay for it. And then very quickly, the rest are E for ecosystem. I talked about that before. R for regional, meaning we're looking for things that are regionally specific but can create global businesses. I for impact, which is important to many investors. O for ownership around patents and copyright. And the second R for regulatory tailwinds. So something like a KYC API, for example, is very important with the regulations tightening up around bank regulations and exchange regulations around who the actual account holder is. So yeah, I call it the SUPERIOR framework. It's been developed over the last 12 months or so, basically through my knowledge and experience, both as an engineer and an investor.

Jon Scheele (12:29)

Okay, so that's a pretty comprehensive sort of framework for thinking things through. So what are the things that you feel are transferable, and not necessarily transferable? Because what we see a lot of VCs do is that they look for a business model that works in one geography and then they say, well, why don't we do that in another geography? And you've seen this with e-commerce.

In this part of the world, you have the likes of Lazada and Shopee and Tokopedia that have essentially copied the Amazon e-commerce model, but then they've had to localize it a little bit more. We've also seen Uber being copied by Grab and Gojek, but they in particular found that they needed to customize things a little bit. In Gojek, for example, a lot of their a lot of their drivers weren't drivers, they were motorcycle riders. And they had a different model that you would not have thought of outside Southeast Asia. Also, while Grab initially used Google Maps for their navigation, but then they discovered that, in Singapore, it might be fine, but in Indonesia, the Philippines, it doesn't work so well when a lot of people live off the main track. Google had created all their maps by doing what they do everywhere else, loading up a car with cameras and then driving it down the main street. But Grab found that they had to deliver things to people who were down an alleyway. The motorcycle rider didn't really have a Google map that could be relied on. And so they decided to create their own mapping service by asking the same riders to strap a camera to their helmet and ride down these narrow alleyways so they could map them. So what are the sorts of things that you can see could be transferred from other parts of the world, but maybe need some sort of unique adaptation to work locally?

Chris Birrell (14:53)

Yeah, very, very relevant question because the way I look at it is I look at it as the other way around. I look at the problem of globalizing as an opportunity. So I look for APIs that are actually able to help companies that want to globalize. And the same thing that Stripe did. So Stripe created all these payment gateways that could be used in any country. I invested in a company, it's actually based out of Singapore called Asia Verify.

They have made the process of onboarding companies very easy for people that don't read other languages. So they have across 14 countries now in Asia, they have scanned over 100 million company documents and they can tell you in English who are their directors, who are the UBOs, and they can create links between them across all of those geographies. So that's an example of where the regional problem becomes an advantage.

And one of the other advantages of being in the subsystem layer, not necessarily directly interfacing to consumers, is you don't get those problems occurring too much, as much as you do if you were actually trying to create a consumer problem. So we actually like to work with those companies that actually have those challenges, and in some cases, turn them around to be advantages.

Jon Scheele (16:14)

So you prefer to operate at the business-to-business level rather than the business-to-consumer level?

Chris Birrell (16:22)

Yeah, absolutely. That's really where I see in the API layer, the value being at that level. I can't imagine a consumer, or at least not yet, possibly in the future, creating their own prompts in ChatGPT to call their API that's connected to their refrigerator or whatever. But yeah, perhaps in the future. That's an interesting idea, Jon.

Jon Scheele (16:47)

Well, I guess a lot of people like to tinker and you know, a lot of people who like cars, for example, they will strip them down and they will take them apart and they'll maintain them themselves. Motorcycle riders in particular. I trained as an electronic engineer. I like to open things up and take a look at what electronics are inside. But of course, it's not exactly the same because when you used to be able to solder and desolder things with a hand soldering iron, but most of these circuit boards now are surface mount, assembled by robots, and you can't do that. So you're essentially swapping out entire cards and other components to be able to take something apart. But yeah, you know, I like having the ability to change something. And I would imagine that even once everything is digital, people still want to be able to look inside. And I think that's the challenge with some of these AI models is the lack of transparency of them and how they came up with the answers. So getting back to the opportunities, what are the key opportunities that you see coming up in the near to medium term?

Chris Birrell (18:13)

Yeah, I mean, the real opportunities for me in this area, I believe, is that the way that APIs are now designed and built is actually a lot more rapid and faster. So the people that are coming to me with their business plans now are coming up with ideas that you wouldn't have dreamed about two, three years ago because of the advent of co-pilots and AI, but they actually are real businesses.

For example, a gentleman in Australia has developed a platform for what he calls mobile wallet customer experience. So a platform that allows a small business to develop a Google or Apple card and then through it, through his API layer, send messages to the phone, create unique customer experiences for retailers through that platform fairly seamlessly that wouldn't have been possible a couple of years ago.

Also, the growth of things like KYC, I mentioned before with Asia Verify, Frankie One, which is a Melbourne based fintech. Incidentally, they just got voted fintech of the year in Australia last week, is now growing internationally and providing an API layer for all massive companies across the world. They started out with Australian banks and Afterpay, but now they're actually globalizing because the KYC problem is massive now in terms of compliance across the world. So problems like that in the finance system, in retail are being solved by very innovative entrepreneurs through API layers.

Jon Scheele (19:47)

Okay, but what are some of the challenges? Because what I can see happens in computing as in other industries is that once you start to standardize on things an API does help to standardize the communications between systems, then you also open yourself up to being substituted for something else. And we've seen examples of that. So you go on AWS, initially they were offering you a Windows server or a Red Hat Linux server. And now you can get their own white-labeled Linux server. I would expect as an API becomes so much commonly understood that that sort of substitution is also possible. So what do you look for in a company that's published an API, what are the risks and how do you overcome the risk of simply being substituted away by another firm that provides a similar looking API that does a similar thing?

Chris Birrell (20:57)

Yeah, I think that's always been the problem, though, Jon. I think always has been a problem where, you know, I'm creating a SaaS product that does something or other and then another, someone's going to come and compete with me. That will never change. I think what I look for is really that solving the difficult problem so there's actually some kind of moat. And secondly, the actual entrepreneur, either the individual or the team, they have to be really outstanding individuals. They have to have incredible resilience, incredible powers of not just technical ability, but also the ability to sell. And my SUPERIOR framework actually is a huge matrix. Think of it as a huge matrix. And I go into each one of those eight attributes. I go into detail around not just the actual problem itself, but the founder, the traction, the market size of all of those different attributes. And I really think it's a lot to do with the actual problem that you're solving has to be difficult enough. It can't be just easily replicable, but then it's also about the founder. The founder has to be a pretty amazing individual.

Jon Scheele (22:11)

Okay, so at the apidays Singapore Conference, which was just a little while ago, we had the big end of town and also a number of startups presenting. What really excited you about the conversations that you had or presentations that you saw there?

Chris Birrell (22:35)

It was an amazing conference, actually. It was probably the best conference I've been to in Singapore this year. What I would say is that it's really the AI has got everybody abuzz. The way of thinking about developing software is now quite different to where it was even just 12 months ago. So when you're actually an architecture team inside a big company or whether you're a startup founder, you actually are approaching the problem in a slightly different way now.

And you have to be very mindful of first of all, not just creating something generic that the next version of chatGPT is just going to completely wipe you out, but also be smart enough to figure out, well, actually this particular API is actually very useful to a chat bot or to a blockchain smart contract or to an IoT device. So you've got to actually be cognizant of those ecosystems.

So yeah, a lot of chat around AI and where the architectural teams are thinking about that now in the stack.

Jon Scheele (23:41)

I guess in that respect, the game is still the same. It's making sure that you have a service that other people will want to consume, but you have to be aware of how these ecosystems are developing and changing and what's going to be useful to those ecosystems. Yeah.

Chris Birrell (23:58)

Yeah, that's right. How are you going to get somebody to write you a check every month?

So I was fortunate enough to when I was a CIO to see that the trend in spend and my CFO would come to me every month and ask me to cut my budget. So the strength of an API is to survive that budget cut in a sense, because a lot of the CIOs today are being asked to find up to about 20% of their budget to invest in AI without getting any additional headroom in their budgets.

So that's really the test of whether you're an API, if you're an API company, whether you're gonna survive or not, can you be important enough to be on the priority list of a CIO who's actually got the power to spend the money?

Jon Scheele (24:43)

Yeah, I guess we all have to justify the value that we provide all the time and that treadmill is not going to change. Treadmill is probably a bad word because it implies you're going to do the same thing constantly, but actually you have to keep finding new things to bring new value to things. So,

Thanks very much for sharing all that, Chris. Where can people get in touch with you?

Chris Birrell (25:15)

On LinkedIn, it's probably the easiest, or go to, f -u -n -c dot v -c.

Jon Scheele (25:23)

Okay, great. Thanks very much and appreciate you sharing those insights and look forward to hearing more about your activities in future.

Chris Birrell (25:39)

Thanks, Jon, it's been an absolute pleasure.

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