Cloud communications platform Twilio, which offers a suite of APIs for text messaging, VoIP and voice, has filed its S-1 with the U.S. Securities and Exchange Commission (SEC), setting the stage for the company to raise up to $100 million in an initial public offering (IPO).
Not only is Twilio's pending IPO in the spotlight because a successful debut could pave the way for other tech companies to proceed with their IPO plans during fidgety market times, it will represent one of the first IPOs of a pure-play API provider.
What Twilio's IPO Might Mean for the API Economy
Twilio wouldn't be the first company in the API economy to go public. For instance, API management provider Apigee went public last year and a number of companies that operate popular developer platforms, such as Facebook and Twitter, have been publicly traded for years.
But Twilio could be a bellwether for just how warmly the public equity markets will treat pure-play API providers. While the public markets have seen volatility in this year, Twilio's S-1 filing leaves little doubt: it's possible to build a real business – and a fast-growing one at that – by serving developers with an API platform.
What's more, as some analysts have noted, is that investments in API providers like Twilio could offer an ideal means for investors to bet on the growth of fast-growing companies that are still private, including Uber and AirBnB, as well as some of the most widely used communications apps, such as Facebook-owned WhatsApp, which is also a large Twilio customer.
If a good number of investors are swayed by this proposition, it could pave the way for other API providers to tap the public markets successfully in the coming years.
So what does Twilio's business look like? Here's what we learned from the company's S-1.
Despite the fact that it launched its first offering in 2008, Twilio is still a fast-growing company. Total revenue grew by 88% between 2014 and 2015, from $88.8 million to $166.9 million. According to the company's CEO, Jeff Lawson, Twilio is adding $1 million in annual recurring revenue (ARR) every seven days.
Of course, revenue is not profit, and like many fast-growing tech companies, Twilio is not yet profitable. The company is investing heavily in growing its business, and reported a net loss of $35.5 million in 2015. While some observers point out that Twilio could turn off its growth engine and reach profitability, others suggest that in today's market, a lack of profitability could make investors a bit more wary of Twilio despite its impressive growth.
A Focus on Developers
Twilio makes no secret that its business is focused on developers, developers, developers. Its S-1 states...
We believe the future of communications will be written in software, by the developers of the world — our customers. By empowering them, our mission is to fuel the future of communications.
Twilio refers to its model as a "developer-first platform approach" and explains that "our Business Model for Innovators empowers developers by reducing friction and upfront costs, encouraging experimentation and enabling developers to grow as customers as their ideas succeed."
Ultimately, Twilio's strategy aims to make its platform ubiquitous...
Our goal is for Twilio to be in the toolkit of every software developer in the world. As of March 31, 2016, over 900,000 developer accounts had been registered on our platform. Because big ideas often start small, we encourage developers to experiment and iterate on our platform. We love when developers explore what they can do with Twilio, because one day they may have a business problem that they will use our products to solve.
Lots of Developers = Lots of Customers
Not surprisingly, offering pick axes and shovels to nearly a million developers to date means that Twilio is serving a lot of paying customers.
The company reported 28,648 Active Customer Accounts as of March 31. Active Customer Accounts are defined as accounts that have produced recognized revenue of at least $5 in the past month.
Despite the fact that some very large organizations, including Uber, AirBnB, Box, Coca-Cola and the American Red Cross, rely on its platform, Twilio's revenue base appears to be fairly diversified. Its two largest customer accounts accounted for under 20% of its revenue last year.
Will that figure grow or shrink? While Twilo has, to date, grown largely on the back of its self-serve model, it is now adopting an enterprise sales approach to acquire larger customers...
We recently began to supplement our self-service model with a sales effort aimed at engaging larger potential customers, strategic leads and existing customers through an enterprise sales approach. Our sales organization targets technical leaders and business leaders who are seeking to leverage software to drive competitive differentiation. As we educate these leaders on the benefits of developing applications incorporating our products to differentiate their business, they often consult with their developers regarding implementation. We believe that developers are often advocates for our products as a result of our developer-focused approach. Our sales organization includes sales development, inside sales and field sales personnel.
The Best Customer Support is No Customer Support
"We have designed our products and platform to be self-service and require minimal customer support," Twilio states in its S-1. Key to that is the availability of SDKs, documentation and tutorials. Where customers need greater assistance, Twilio offers email support at no cost.
Customers wanting guaranteed availability and turnaround times can pay for additional support, but Twilio revealed that it generates "insignificant" revenue from paid support, highlighting a reality for many API providers, especially those in competitive markets: many if not most customers expect good enough self-serve experience and support, at no additional cost, or they'll take their business to providers who can provide it.
Reliability and performance are of great importance to any API provider, and that's especially true for a provider offering telephony APIs. So it's not surprising that Twilio's infrastructure spans the globe. The company's S-1 revealed that it has "22 cloud data centers in seven regions around the world" and has direct relationships with numerous global network service providers.
Twilio is also increasingly looking to woo developers overseas. Its primary focus today is Europe, which it says has twice as many developers as North America.
Because Twilio has limited control of some of its biggest costs, namely the fees it pays to telecom providers, it would seem that the company's ability to deliver a reliable service and keep developers happy will be crucial to staying ahead of the competition.
And that competition is growing. By one estimate, the addressable market Twilio serves is expected to be worth nearly $50 billion in the coming years, so it's no surprise that Twilio isn't the only player in the space. Competitors include Tropo, which was acquired by Cisco in 2015, as well as Nexmo, which was acquired by Vonage last month. There are also upstarts like Plivo, and some speculate that large platform providers like Amazon AWS could enter Twilio's market and gain traction with relative ease.
What is Twilio Worth?
One of the more interesting aspects of Twilio's IPO to note – drawing the methodologies behind some of today's crazy startup valuations into question – is the disparity between the valuation of one of Twilio's closest competitors, Nexmo, and Twilio itself.
Nexmo reported revenues of $61 million for 2015 and was acquired by Vonage for $235 million (a ~3.9x multiple). As noted above, Twilio reported revenues of $166 million in 2015, the same year that, based on a $100 million round of funding, it joined the ranks of unicorns, privately-held companies valued at $1 billion or more. According to the Wall Street Journal, Twilio was last valued at $1 billion, implying a revenue multiple of 6x.
Twilio's rapid growth probably has a lot to do with that higher multiple, and one analyst expects Twilio to trade at a similar multiple of its estimated 2017 revenue, which could produce a valuation of $1.7 to $2 billion when its shares debut.
Such a valuation would almost certainly be welcomed by Twilio and its investors, who will no doubt be looking for the company to maintain its valuation during the IPO process and avoid becoming a member of the group of tech companies that have entered the public markets only to see their public market valuations drop below their private market valuations.