Email marketing service provider MailChimp announced last week a new $1 million dollar fund for startups building products that integrate with the service's MailChimp API. MailChimp's program is somewhat unique in that they won't be asking for equity from the companies they fund. It's a pretty attractive deal for prospective partners and a trail-blazing move for a platform in an increasingly competitive industry.
That competition gives MailChimp good reason to make a strong offer. The email marketing category is heating up and third-party developers are an important asset. Just within the last month one of one of MailChimp's competitors, ConstantContact, wrapped up a heavily promoted developer contest and another, Contactology, unveiled a new version of its API that makes a number of changes (moving from SOAP to REST, JSON formatted data) that align it more closely with developer preferences. We list 19 email marketing APIs.
The post on the MailChimp blog announcing the new fund, by co-founder and CEO Ben Chestnut, explains why the company chose this particular route to encourage integrations. It grows out of a broader attitude towards building a successful business:
Start small, fund yourself with paying projects, and build up a strong API. We think it’s a pretty smart approach, and we’d like to encourage all the startups and entrepreneurs out there to try it too.
In fact, we’ve been practicing this approach for a while now without even realizing it. A small startup would approach us with some crazy powerpoint presentation or boilerplate “revenue sharing” proposal where they’d tell us about how they’re going to send us bajillions of customers in exchange for x% of the money or something. We’d say, “Um, you don’t even have any customers right now, do you?” And they’d answer, “Um, no.” Then we’d ask them if they’ve even built a product, and they’d usually answer the same way. So, partly just to avoid more paperwork and more pitches, we’d offer them a few thousand dollars to fund their integration, and tell them that if customers like it, we’d promote it more.
Just recently we figured, “Why not turn this into an official fund, and make it a process?” It sure would beat all the other cheesy, “Integrate with us, and win an iPad!” kinda promotions. Plus, it aligns perfectly with our philosophy.
"Paying projects" is key here. MailChimp doesn't seem to be looking for novelty creations or integrations that don't substantively enhance its own product offerings. It's not surprising that he dismisses the contest model. That approach might be great for attracting attention or increasing the visibility of a service's API, but MailChimp already has an impressive list of integration partners. Exposure for its own sake doesn't seem to be what MailChip is after. When we asked Chestnut what he was looking for, he explained that he's partial to projects that align with MailChimp's own philosophy of "building apps that are useful, simple, efficient and that people love to use". Those are probably also the apps that are most likely to make money.
And the potential for serious profits in this sector is likely one of the reasons the competition for developers and third-party partners is getting more intense. Email marketing isn't cheap for large organizations—national retail chains, for example, can have lists millions of addresses long. The fact that MailChimp has been successful funding itself only from its own sales demonstrates that there's serious money to be made.
But if there's such success to be had, why share the wealth? Why not keep integration projects in house? Chestnut explained to us over email:
That's actually how we got started. It was great for "priming the pump" because then it attracted more outside companies to integrate with MailChimp. Then the first round of companies took notice, and started building their own (and better) integrations. Our integration with Wufoo is a perfect example. First, we integrated with them. They took notice, updated their own API, and integrated right back (and did an even better job). You can see our initial announcement here and how we updated it with their own integration after about 16 months. BTW, our page for accepting applications is using the Wufoo integration itself.
Taking Wufoo as the prime example, it becomes clear how the new fund—even without taking equity—is a good move for MailChimp. Given that Chestnut says the typical allocation has been $2,000–$10,000, there could easily be upwards of 200 projects funded. That's a lot of new ideas helped to get off the ground without MailChimp having to make the first move development-wise (as they did a while back with Wufoo) or really do much of anything besides write the checks. This way, the company can nurture startups with creative ideas enough to eventually take advantage of their innovations in the form of new MailChimp customers. Most of the risk involved with creating a new product or feature will remain with the outside developer. All MailChimp has to lose is its fund.
In his post Chestnut wrote that MailChimp's API has been "one of the best investments we ever made." Now it looks like MailChimp is following that up by moving beyond its own servers to invest in its API's ecosystem as well.