Welcome new subscribers! This newsletter dives into one topic within technology that I’ve been digging into lately. Appreciate all feedback as I actively try to refine and improve these ideas.
In this week’s post, I try to articulate why I think Twilio has ample room to grow and is an extremely promising business in the long-term.
Twilio has been getting a lot of airtime the past few weeks, delaying me from releasing this piece that I had been very slowly working on. As a quick summary of recent events:
Twilio rumored to be acquiring Segment for $3.2B (now official)
Twilio launched a handful of new products at its annual conference, Twilio Signal
Microsoft launches Azure Communication Services as a competitor
Nonetheless, I remain excited about the company’s outlook and believe they have the type of durable business that can eclipse $100B in value. I’ll caveat that this analysis is primarily qualitative rather than valuation-centric, but I hope to illuminate some of the enduring strengths of the business.
There’s lots of information about Twilio in the early days and how they were one of the first to popularize the API business model, but less on the strategic moves they’ve made more recently. I’ll quickly summarize the business pre-IPO, but spend most of the time discussing how they’ve positioned themselves into new large and growing markets. In case you’re unfamiliar with what Twilio does, this 2 minute video is a good starting place.
The API Economy
I promise to spend the majority of my words on Twilio, but I think it’s foundational to understand the API business model that they helped pioneer. Over the history of computing, large complex products have been broken into their component parts. You start with businesses that span a large part of the product ecosystem, but as the market grows, it becomes attractive for companies to specialize in smaller segments. The API is just another progression in this trend, enabling developers to work with smaller building blocks than before. It follows that new businesses like Twilio were built by providing useful primitives for developers.
Source: Tyler Jewell
These API businesses allow companies to focus. Businesses prefer to focus on allocating R&D resources where they can provide the most differentiated value. Spending tons of resources to do something that yields no competitive advantage is suboptimal and better served by some other party, like Twilio, Stripe, etc.
Twilio has built such an incredible business because it checks all the boxes on what I think makes an ideal API business.
Applicability: Twilio solved a universal problem because communication takes shape in some form or another across industries and business size. It’s important to note that Twilio wasn’t just for “the big tech giants”. Even today, they have a fairly even split across business size with revenues split 36% enterprise, 28% mid-market, and 36% growth (ie startups).
Technical Barrier: The status quo prior to Twilio was that developers would need to navigate telecommunications providers to build voice or SMS functionalities. The complexity served as a barrier to a typical development team adopting and incorporating things like voice and SMS altogether. Lowering the technical barrier expanded the otherwise small market.
Important Problem: Perhaps this is obvious, but facilitating communication is important to businesses. If you were looking for your Uber and you couldn’t easily text or call them, it’d be a bad experience. In other words, Uber’s business materially benefits from leveraging Twilio (improved retention, revenue, NPS), which makes the business case for using Twilio compelling.
Standardized: While Twilio solved an important problem, it also wasn’t the core differentiation for its customers. It’s quite unlikely that you’d choose between Uber or Lyft on the basis of how their text functionalities compared. If text or voice was a point of meaningful differentiation, those companies would choose to build it in-house sooner rather than later. Amazon CTO, Werner Vogels, also encouraged companies to “stop spending money on undifferentiated heavy lifting” in positioning AWS and all of its services.
Powers a Growing Market: Possibly the most underappreciated factor for infrastructure company success is that they should enable some large, growing market. It’s what Amazon Web Services did for cloud software and what Stripe did for ecommerce. Similarly, Twilio enabled another large trend: business-to-customer mobile communication. When Twilio was founded, users spent 20 minutes on their phone per day, which has more than 10x’d today! As a result, businesses had no choice but to meet their customers where they are, their mobile device. By the time the market took off, Twilio was the best way for businesses to do just that.
Twilio Grows Up
A common criticism I’ve seen about Twilio and many other API businesses is that they are likely to be commoditized. Yes, they’ve built something novel and important, but can they sustain the head-start they have when others start following the trend? There are two reasons Twilio was able to sustain their first-mover advantage and transition from just a high-flying tech startup to $35B+ public company.
1: Developer Community & GTM
The first act was creating a strong brand with developers, an end customer that turned out to be more valuable than people initially thought. Twilio took a go-to-market approach that wasn’t easy to replicate, especially by legacy telecommunications players. Twilio’s competitors today include companies like Bandwidth and Vonage, who only began to consider the developer-led approach years later. Neither competitor was willing to depart from their existing traditional enterprise sales model. By contrast, Twilio had little interest in direct sales:
“The company’s initial sales and marketing approach has been to use contests, promotions and social marketing targeting the web development community to generate viral buzz and word-of-mouth referrals. They have a part-time contractor on staff that focuses on direct sales but this has not been an active focus for the company. Likewise, they haven’t put in place any channel sales efforts” -- Bessemer Seed Investment Memo
Outside of having limited competition for developer attention, Twilio also benefited from the rise of the developer within an organization. A limited supply of developers and an explosion of software gave developers more autonomy in the tools they used. Twilio was one of a few companies that had won the hearts of developers, meaning they would bring it with them to new companies or new teams.
The last point to mention here is that the TAM associated with developers has grown to become tremendous. As they choose the tools they work with, it allowed Twilio to leverage the trust they build to serve them with more and more products as I’ll expand on in reason #2. Twilio CEO, Jeff Lawson, spells it out plainly:
“If you’re a communications API, if you’re infrastructure as a service, or if you’re a SaaS product. What you’re fundamentally telling your customer is, ‘Trust me to run this part of your business for you.’”
2: Building a Product Portfolio
The second act of Twilio’s rise was building new products to expand their market size and provide more value to each customer. While this has really materialized today, it was the company’s philosophy from the start.
“There is all sorts of advice you get: focus focus focus... find a niche, get rich. I’ve always rejected that advice... We were a one product company in 2008 with Twilio voice, and in 2010, just two years later, we launched a second product, Twilio SMS. We’ve continued that pace of innovation.” -- CEO, Jeff Lawson on SaaStr podcast
We’ve become accustomed to seeing businesses build out a suite of products, but it’s not always the case with high-growth startups. When you’re trying to scale one successful product, the process of discovering products 2-through-n can seem like a distraction. However, it’s the constant release of new products that has helped Twilio both retain and expand its current customers as well as expand their addressable universe of customers.
They’ve done this both with internal R&D, but have also been aggressive in making acquisitions to fill large gaps in their quest to be the communications platform.
SMS: Released two years into Twilo’s life, SMS took off as texting became ubiquitous. Airbnb, Doordash, and dozens of marketplaces use it as a way to facilitate communications while preserving consumer privacy. (Imagine if you had to give your real number to every Uber driver…)
Video: With the TikToks and Zooms of the world ushering in a new wave of video, Twilio can power the video-based businesses of the world. They acquired a player in the space back in 2016 which is paying dividends today. On a small base, Twilio video has grown 599% YoY in the first half of 2020.
Email: Last year, Twilio acquired SendGrid for $2B, by far its largest acquisition at the time. SendGrid and Twilio had very similar approaches (developer-first, platform-as-a-service), but focused on different channels of communication. The acquisition gave Twilio access to an incredibly large channel in email.
Chat / WhatsApp / Fax: There’s a host of other solutions they’ve added, which allows them to attack new markets. For example, their decision to build a WhatsApp product early has given them the breadth to win outside the US. That said, who uses fax??
This strategy has allowed them to diversify their business across product lines while expanding deeper into each of their customers. Twilio can move away from its low margin messaging (45%) products towards higher margin voice (74%) and email (87%) services.
The Next Act for Twilio
The first act for Twilio was building it’s developer community and brand equity on the back of the voice and SMS product.
The second act was broadening their product portfolio quickly in order to defend against competition and cement their lock-in with customers.
I believe we are now seeing that the third act is leveraging their various channel APIs to sell new broader customer-oriented solutions and services. New product launches seem to build on the building blocks of Twilio’s existing products into more packaged solutions for specific use cases or verticals. Twilio is less and less about enabling modes of communication and more about creating a holistic customer engagement platform:
Last week, at Twilio Signal (its annual developer and customer conference), they announced new products that continue to push them from communication to customer engagement:
Contact Center (Twilio Flex): The Flex product is one of their newer solutions, and is symbolic of a next-wave of Twilio’s growth. They built a contact center solution because they could see that’s how their existing customers were using their products already. Who better to build a contact center than the company that provides the infrastructure for those communications already. The product line already has 600+ customers and is growing 184% YoY in the first half of 2020.
Twilio Video WebRTC Go: Twilio already had a programmable video product, but this more narrowly is focused on enabling 1:1 video apps (think telehealth, tutoring, etc). The standout component of this was the generous 100,000 free minutes per month that they are indefinitely offering. It’s a fantastic way for them to compete against the numerous startups that are being funded to build video APIs.
Segment Acquisition: Twilio is acquiring Segment for $3.2B (which would make it the largest acquisition they’ve made). Segment is a customer data platform that helps route all the customer data generated in different places to wherever it needs to go within an organization (marketing, engineering, etc). In some ways Twilio’s original APIs contribute to the problem that Segment solves. For example, you use Twilio SMS to provide notifications to your customer, but that sits separately from all your other info on that customer. Segment can help bring together various data sources to provide a true understanding of your customer. Segment brings visibility to many of Twilio’s customer engagement tools.
The stable growth of their core SMS and voice business affords them the foundation to find the next big thing. Jeff Lawson has been very clear about the pace of innovation that they are striving for and I imagine we’ll continue to see acquisitions and product launches that expand Twilio’s surface area.
The landscape of communication-adjacent companies is fairly expansive, but given Twilio’s market leadership I want to just highlight the two categories of companies that I believe actually matter in this market:
The Cloud Giants: Microsoft, Amazon, Google
Last month, Microsoft announced Azure Communications Services as a Twilio competitor. I couldn’t be less surprised by this move, given Microsoft has all the right pieces to serve this market. While Twilio has an incredible community of 10 million developers, Microsoft has 50 million developers on GitHub alone. On top of that, Microsoft Teams has been spreading like wildfire at large enterprises, making communication a larger part of the Microsoft story. Microsoft is able to deliver their products at scale like Twilio, which could drive prices and margins down for both players.
Amazon recently launched their Interactive Video Service, which offers a livestreaming API/SDK. In other words, they repackaged Twitch (which they own) into a developer-facing solution. Lastly, Google Firebase offers a long tail of developer tools that are widely adopted, but their communication footprint is limited. There still may be a world where they leverage their speech-to-text APIs to push deeper into communications. Needless to say, big tech has its hand in every big market and is something I’ll be keeping an eye on.
Like many large companies, Twilio will not win or participate in every market. One such example is in 1-to-many video communications. Agora excels in this space, serving businesses that need live-streaming or broadcasting use cases. They built out the global infrastructure to deliver a low-latency product which Twilio doesn’t really participate in. As Agora grows, I wouldn’t be surprised to see them budding heads with Twilio in other categories.
As another example, MessageBird raised a Series C round at a $3B valuation with similar products to Twilio. Their differentiation has been in part by focusing on the less-crowded markets of Europe, LATAM, and Southeast Asia. Though startups will continue to capture pieces of the market, Twilio is rightfully focused on finding the next big problem they can solve, leveraging both their scale and customer footprint.
Twilio’s stock has 10x’d since their 2016 IPO, so I think it’s easy to consider the company’s growth prospects as already having materialized. In my opinion, the business has done an incredible job of consistently unlocking TAM with new products and services. The following image shows how the addressable market has grown from $45B to $62B. With the Segment acquisition, they now view the market as $79B according to their press release.
Source: Twilio Investor Day + Segment Announcement
The trends that propelled Twilio have not yielded. The developer continues to command decision-making power and budget in a software-driven world. Similarly, communication has only become more important with multi-channel communications. No company is better suited than Twilio to capture a disproportionate share of these growing markets.
Nandu | @nanduanilal
As a disclosure, I own shares of multiple stocks mentioned above ($TWLO, $API, $MSFT $AMZN). They’re all great, but this isn’t investment advice, just my perspective on this business.