Interview with Promod Haque, Norwest Venture Partners: Apigee, the API Economy, and "Sticky Infrastructure"

In Part 2 of this 3 part series on the evolution of the API Platform space, I spoke with Promod Haque of Norwest Venture Partners. His firm participated in Apigee’s recent $35 million round of funding, a company that makes an API platform. Some questions overlap between the interviews because I wanted to illuminate the similarities and differences in perspectives between an enterprise and an investor. Part 1 was Interview with Apigee CEO Chet Kapoor, on its $35 Million Funding Round.

Programmableweb - Welcome and thanks for talking with us. You have been involved with Apigee before this round?

Promod Haque - We have been involved with Apigee from day 1. Starting in about 2003, or so; that time frame.

PW - What makes you confident about your investment?

PH - There is a lot of updating of infrastructure. Mobile and cloud are changing that even further. There is an emergence of a new category of software. The API economy is a very fast growing sector. It’s an exciting opportunity to be involved with a market leader in this space.

PW - How do you assess the competition?

PH - Consolidation shows that we [Apigee and its investors] are a leader and we are winning. In any space like this you start out with 3 to 5 main players. For a variety of reasons 2 or 3 won't make it. It might be because their product won't make it, or for some other reason, and there emerges a victor. We believe it is Apigee. The fact that there are a few players out there confirms our conviction that there is a market and that we are winning market share.

Consolidation is interesting. The fact that the players are getting acquired by larger companies means we are in effect a smaller company. We are more nimble than some of the big players that are acquiring these companies.

PW - Why choose this space to invest?

PH - It’s the infrastructure. By the way, the consolidation is kind of equivalent to when Tivoli, a systems management software company, became part of IBM in the 1990s. Today there’s an emerging category in the software infrastructure space. It does not matter what vertical you are in because this change cuts across all these various veriticals, from health care to finance to ecommerce, just to name a few.

Every company has this problem that they have to solve.  Meaning they have to deal with launching, managing, worrying about the surrounding eco system, and they have to do it all as these continue to change. The best way to do that is to have an API management platform. Some companies use no platform. But as time passes and complexity increases, companies are going to start looking at their ROI and ask, what’s their return on investment to manage something they know relatively little about? Inevitably, they make a choice and say, “I’ll put my focus on what I do best,” and rely on a platform to manage all these factors that aren’t the heart of their business.

The infrastructure Apigee provides is becoming standard: telcos and financial services, are adopting. There are early and late adopters, but eventually it just becomes a standard architecture. That’s very attractive.

PW - Let me ask you about Apigee’s moat. What will protect them?

PH - The moat is you get to a point where it is not that easy to build these platforms and the barriers to entry get bigger and bigger. You need time, interfaces, an ecosystem. Then it takes a while to sell these. You can find a small group selling a management system. But it takes capital to build a platform and a sales force to assist large enterprise companies. You can't build a company with a couple million dollars. That’s one protection. Then, once you have won the accounts, it’s difficult for customers to dislodge, to move away from the platform. This is sticky infrastructure. So, your account expands with you.

Then the next phase is that the ecosystem adopts it. Large companies see that their competitors have the platform, so they buy it as well. Then this happens across multiple verticals, multiple geographies. Not with little start ups but with large companies.

This process reinforces the barriers and a lot of competitors just can’t keep up.

PW - Just to play devil’s advocate here, on the one hand, your position seems unassailable. But on the other, you sound a little like Bill Gates talking about Windows in the days right before Linux and open source. Or worse, like the CEO of Encyclopedia Britannica talking about the future of knowledge right before Wikipedia more or less wiped them out.

PH - I don't see dangers ahead. Not in the next 20 years. But here’s the thing: if someone cannibalizes this platform, we want to invest in it. That’s the beauty of where Apigee is at—it has a solid footing.  It's attracting a different set of investors who have done due diligence, not just Silicon Valley venture capital shops that are attracted to the latest technology. These are folks who work with lots of larger companies.

PW - So with a $35 million series F funding round just closed, what does that value the company at?

PH - That figure was not released. You’d have to ask Chet. [I did email him after our initial interview but a spokesperson for Apigee said the figure is not being disclosed.] However, as you can imagine from what is public, it is a nice valuation. We wrote a pretty large check. The interesting thing is that even at this kind of valuation, we can still make money. The reason is simple: growth rates.

That’s partly why Apigee attracted Blackrock. This is an investment firm with a lot of customers on Wall Street. They do a lot of money management, investing in IPOs, and in public and private companies. The fact that they see value, that they are saying it is good to get in while the company is private, is an important sign for both the company and the size of the market. Apigee could go public or it could be sold. But what’s particularly interesting about Blackrock’s interest is that it did not come in the early stages;  an investment by them at this late stage gives a lot of credibility. It is a huge endorsement.

PW - Thanks, Promod.

In Part 3 we discuss the space with Steve Willmott, CEO of 3scale, for a different take on the market and the opportunities.

Be sure to read the next Enterprise article: Interview with 3scale CEO Steve Willmott: The Case for Out-of-the-Box API Management Tools