iPaaS: The Pocket Aces of the API Economy?

An investment thesis and list of sourced companies in the iPaaS space

Vaishnavi Suresh

Aug 06, 2024

Chat, give me the TLDR on this article:

You got it!

iPaaS is an integration platform as a service. They do a bunch of things, but this article focuses on how they integrate and orchestrate APIs
This is not a sexy sector, but it’s cool and worth investing in. APIs are the cornerstone of the digital revolution, and their ecosystems are becoming more complex. We need iPaaS
This is not for the faint of heart. iPaaS usually comes with services in a bundle, which lower margins. This can be mitigated by making more “one-size-fits-all” integration solutions and productizing them. It can also be effective in cross-selling your rich marquee clients to your products
Regulation in data access —> changes in API ecosystems —> iPaaS. Target companies playing in spaces with shifting regulation
Partnerships drive the GTM of companies in this space.
We did some sourcing for you. We hope you like it

What the hell is with all of these acronyms

I swear if another tech person puts “aaS” at the end of another letter I’m gonna lose it.

So what the hell is iPaaS? What is an API Manager?

iPaaS, or integration platform as a service, is a cloud offering that facilitates connections between processes, applications, data sources, etc. They usually provide low or no-code platforms that allow you to design a specific workflow. For APIs, this usually means they provide orchestrators.

Imagine you are setting up a bank account. Usually, they get a certain set of data about you in this process — things like documents confirming your identity, your bills, your SSN, etc. Some of this data is pulled from government databases. When going through this process, you use a set of APIs to pull this data. The process of determining the order in which all of this data is pulled from the cloud and all of these processes are enacted is orchestration. Before, you had to write code to orchestrate. Now, you can just drag and drop them in place.

iPaaS platforms usually come with managed services, or teams of engineers in the iPaaS company’s payroll that do the integration for you. This is because, for some complicated processes, where you need to bundle APIs together or create new APIs, you need actual engineers. This is where these platforms can either be cash cows or money pits. More on this later.

An API Manager, on the other hand, is a platform that allows engineers to ensure the APIs they use are scalable, up to standards, and have airtight security. API Managers encompass a wide variety of tools, but some common ones include documentation, analytics, and compliance.

Will iPaaS be the next big thing?

Short answer: This is not a sexy industry. Innately, you can’t make a bad startup in this space and ride the wave of its tech trigger. But if you play your cards right, you can milk a cash cow. Here is why…

According to a 2020 study published by SlashData, 90% of developers use APIs. In the state of tech right now, if you are not on the cloud, you’re behind.

The evolution of APIs has been an incredible catalyst for the growth of integration platforms. Before, APIs were seen as necessary building blocks for software. You can think of them as the bricks that build a house. In the past 10 years, however, there has been a shift in which APIs have become the product. There is no better example of this than microservices, a sector with a CAGR of 21.6%.

The API revolution comes hand-in-hand with the need for iPaaS solutions. With increasingly complex architecture dictating the core services for many companies, companies need integration services to help them manage this.

The perfect example of this comes from a McKinsey Interview describing Emirates NBD’s 2017 IT transformation. In 2017, Emirates had a complex tech stack. This meant integration cost a lot. They decided to build an API-centric architecture that contained services such as API management, which ultimately helped them reduce integration costs and increase efficiency.

This growth is enhanced further by the growth of sectors such as fintech. With growth in tech comes regulation of tech and the data it stores. This means changes in API ecosystems and the rise in the API economy. The perfect example of this is open banking and the enforcement of PSD2 in 2016. Fintechs now have access to a treasure trove of data accessible only through open APIs, open APIs that had to be integrated, managed, and orchestrated.

Risks in the iPaaS space

Like I said, if you want to win in the iPaaS space, you have to play your cards right. This is no sector for the weak.

In the most finance-bro manner, I would like to point to MuleSoft’s 2017 10(k), their final annual filing before their 2018 acquisition by Salesforce. Let's break up the problems here:

Long sales cycle

One of the risks MuleSoft outlined was its long sales cycle. With larger customers, using a platform such as Mulesoft was a significant strategic decision. Just take a look at their current base pricing.

The pricing makes sense — integration and API management are expensive. But dropping this much money takes way more than a cursory glance and a firm handshake. The resources a company needs to withstand these sales cycles are steep.

However, if we were to say that avoiding investment in sectors with long sales cycles is wise, we would be the fools here. This means that you should be keenly aware of the SG+A on a prospect’s income statement before you send them that term sheet. And for founders, don’t ride the wave of a big marquee client and throw that money away. Who knows how long it will take to get the next one?

Low margins in service offerings

iPaaS solutions usually come paired with professional services, which essentially help with all of the major integrations that your clients want to contract away. These integrations require you to have employees on your payroll dedicated to helping your client with these integrations. You can imagine that margins can suffer when you have to pay multiple employees upwards of $100k just to take care of one customer. And in 2017, MuleSoft admitted this.

This risk can be mitigated. In speaking with Padma Subramanian, founder and CEO of Fyrii.ai, services offerings may be low margin, but they still bring in significant revenue for the company. Padma mentioned how her service offerings almost doubled her topline. Additionally, it gave her the ability to bundle in her high-margin API management platform and sell high-value contracts to marquee clients, pulling them away from MuleSoft and other established players.

Additionally, after speaking with Zeev Avidan, Co-Founder and CPO at OpenLegacy, mitigating this risk comes from developing repeatable solutions that have limited customization. If your local bank comes to you for a solution to integrate and orchestrate KYC APIs, you can develop this and sell it as a unified API solution. Padma agreed with this, saying her business is moving to productize these major services.

With integration being so labor-intensive, it serves as a good moat. If you have an effective business model and strategy, you can mitigate this risk and reap the benefits of a space that is hard to break into.

So maybe 2017 MuleSoft just got it wrong.

Regulatory Catalysts

In our conversation, Zeev mentioned that regulation stands at the cusp of growth in the iPaaS space. As we said before, regulation changes data access, which changes API architecture, which means you need iPaaS.

If you’re like me, you automatically thought of open banking. But it doesn’t stop there. In a study of API integration in Ghanaian digital music platforms, researchers found that regulatory bodies impacted companies’ API ecosystems. Specifically, Ghana’s digitalization policies pushed the use of APIs. As such, we can see how regulation that prompts or restricts digital data sharing creates obstacles that the API economy addresses.

It was not just formal bodies of regulation. The study also found that norms dictated the API usage by these companies. As people began using more mobile devices in Ghana, the increase in mobile payments skyrocketed and impacted the company’s API usage.

This means that everything from AI to cannabis is open game.

Partnerships and GTM

The iPaaS space is unique because if you carve your niche out well, you can have a lot of potential for co-opetition. The best example is OpenLegacy, an integration platform for legacy systems. When speaking with Zeev, he was quick to correct me in saying they do not compete with iPaaS companies. They collaborate with them.

Debra Mendez, Global Marketing Director at OpenLegacy, mentioned that they have a two-pronged approach. For one, they try to sell directly to marquee clients. The next prong is partnering with iPaaS solutions such as Workato and Boomi. They get a portion of these companies’ required spend contracts in exchange for providing the integration for legacy systems. In addition to these VAR (value-added reseller) partnerships, they also have ISV (Independent Software Vendor) and SI (System Integration) partnerships which account for a bulk of their revenue.

Loads of companies do these types of partnerships. MuleSoft has a massive ecosystem of SIs and VARs they can partner with.

For founders, this means you can either fight for your marquee clients or run off a niche offering to build relationships. Zeev advises, however, that you build personal relationships with these clients, so you don’t always run through your VAR for communication.

Final Thoughts

iPaaS can be your next cash cow. The playbook here is to invest in geographies and spaces at the cusp of massive regulatory changes (cough cough open banking). Make sure they find a way to mitigate the low margins on services. Scope out their partnerships, not just their marquee clients. Make sure they are smart about their expenses. And make sure their founders have read this piece : )

My two cents on companies to invest in are found below: