Twilio (NYSE:TWLO) has been getting a variety of airtime the previous few weeks, delaying me from releasing this piece that I had been very slowly engaged on. As a fast abstract of latest occasions:
Nonetheless, I stay excited in regards to the firm’s outlook and consider they’ve the kind of sturdy enterprise that may eclipse $100B in worth. I’ll caveat that this evaluation is primarily qualitative reasonably than valuation-centric, however I hope to light up a number of the enduring strengths of the enterprise.
There’s numerous details about Twilio within the early days and the way they had been one of many first to popularize the API enterprise mannequin, however much less on the strategic strikes they’ve made extra not too long ago. I’ll shortly summarize the enterprise pre-IPO, however spend more often than not discussing how they’ve positioned themselves into new massive and rising markets. In case you’re unfamiliar with what Twilio does, this 2 minute video is an efficient beginning place.
The API Financial system
I promise to spend the vast majority of my phrases on Twilio, however I believe it’s foundational to know the API enterprise mannequin that they helped pioneer. Over the historical past of computing, massive advanced merchandise have been damaged into their part components. You begin with companies that span a big a part of the product ecosystem, however because the market grows, it turns into engaging for firms to specialise in smaller segments. The API is simply one other development on this development, enabling builders to work with smaller constructing blocks than earlier than. It follows that new companies like Twilio had been constructed by offering helpful primitives for builders.
Supply: Tyler Jewell
These API companies permit firms to focus. Companies favor to focus on allocating R&D assets the place they’ll present essentially the most differentiated worth. Spending tons of assets to do one thing that yields no aggressive benefit is suboptimal and higher served by another occasion, like Twilio, Stripe, and many others.
Twilio has constructed such an unbelievable enterprise as a result of it checks all of the packing containers on what I believe makes a super API enterprise.
Applicability: Twilio solved a common downside as a result of communication takes form in some type or one other throughout industries and enterprise measurement. It’s necessary to notice that Twilio wasn’t only for “the large tech giants”. Even as we speak, they’ve a reasonably even break up throughout enterprise measurement with revenues break up 36% enterprise, 28% mid-market, and 36% development (ie startups).
Technical Barrier: The established order previous to Twilio was that builders would wish to navigate telecommunications suppliers to construct voice or SMS functionalities. The complexity served as a barrier to a typical growth staff adopting and incorporating issues like voice and SMS altogether. Decreasing the technical barrier expanded the in any other case small market.
Necessary Drawback: Maybe that is apparent, however facilitating communication is necessary to companies. When you had been on the lookout for your Uber (NYSE:UBER) and also you couldn’t simply textual content or name the driving force, it’d be a nasty expertise. In different phrases, Uber’s enterprise materially advantages from leveraging Twilio (improved retention, income, NPS), which makes the enterprise case for utilizing Twilio compelling.
Standardized: Whereas Twilio solved an necessary downside, it additionally wasn’t the core differentiation for its clients. It’s fairly unlikely that you just’d select between ridesharing apps on the idea of SMS functionalities. If textual content or voice was some extent of significant differentiation, these firms would select to construct it in-house sooner reasonably than later. Amazon (NASDAQ:AMZN) CTO, Werner Vogels, additionally inspired firms to “cease spending cash on undifferentiated heavy lifting” in positioning AWS and all of its companies.
Powers a Rising Market: Probably essentially the most underappreciated issue for infrastructure firm success is that they need to allow some massive, rising market. It’s what Amazon Net Companies did for cloud software program and what Stripe did for ecommerce. Equally, Twilio enabled one other massive development: business-to-customer cellular communication. When Twilio was based, customers spent 20 minutes on their cellphone per day, which has greater than 10x’d as we speak! In consequence, companies had no alternative however to fulfill their clients the place they’re, their cellular system. By the point the market took off, Twilio was the easiest way for companies to do exactly that.
Twilio Grows Up
A typical criticism I’ve seen about Twilio and plenty of different API companies is that they’re more likely to be commoditized. Sure, they’ve constructed one thing novel and necessary, however can they maintain the head-start they’ve when others begin following the development? There are two causes Twilio was capable of maintain their first-mover benefit and transition from only a high-flying tech startup to $35B+ public firm.
1: Developer Group & GTM
The primary act was creating a robust model with builders, an finish buyer that turned out to be extra precious than folks initially thought. Twilio took a go-to-market method that wasn’t simple to copy, particularly by legacy telecommunications gamers. Twilio’s opponents as we speak embody firms like Bandwidth (NASDAQ:BAND) and Vonage (NASDAQ:VG), who solely started to contemplate the developer-led method years later. Neither competitor was prepared to depart from their current conventional enterprise gross sales mannequin. Against this, Twilio had little curiosity in direct gross sales:
The corporate’s preliminary gross sales and advertising method has been to make use of contests, promotions and social advertising focusing on the online growth neighborhood to generate viral buzz and word-of-mouth referrals. They’ve a part-time contractor on workers that focuses on direct gross sales however this has not been an energetic focus for the corporate. Likewise, they haven’t put in place any channel gross sales efforts.– Bessemer Seed Investment Memo, 2009
Exterior of getting restricted competitors for developer consideration, Twilio additionally benefited from the rise of the developer inside a company. A restricted provide of builders and an explosion of software program gave builders extra autonomy within the instruments they used. Twilio was one of some firms that had received the hearts of builders, that means they might carry it with them to new firms or new groups.
The final level to say right here is that the TAM related to builders has grown to turn out to be great. As they select the instruments they work with, it allowed Twilio to leverage the belief they construct to serve them with increasingly merchandise as I’ll broaden on in purpose #2. Twilio CEO, Jeff Lawson, spells it out plainly:
When you’re a communications API, should you’re infrastructure as a service, or should you’re a SaaS product. What you’re essentially telling your buyer is, ‘belief me to run this a part of what you are promoting for you’.– Jeff Lawson, SaaStr Podcast #218
2: Constructing a Product Portfolio
The second act of Twilio’s rise was constructing new merchandise to broaden their market measurement and supply extra worth to every buyer. Whereas this has actually materialized as we speak, it was the corporate’s philosophy from the beginning.
There may be all kinds of recommendation you get: focus focus focus… discover a area of interest, get wealthy. I’ve at all times rejected that recommendation… We had been a one product firm in 2008 with Twilio voice, and in 2010, simply two years later, we launched a second product, Twilio SMS. We’ve continued that tempo of innovation.– CEO, Jeff Lawson on SaaStr podcast
We’ve turn out to be accustomed to seeing companies construct out a collection of merchandise, but it surely’s not at all times the case with high-growth startups. If you’re making an attempt to scale one profitable product, the method of discovering merchandise 2-through-n can seem to be a distraction. Nevertheless, it’s the fixed launch of recent merchandise that has helped Twilio each retain and broaden its present clients in addition to broaden their addressable universe of shoppers.
They’ve carried out this each with inner R&D, however have additionally been aggressive in making acquisitions to fill massive gaps of their quest to be the communications platform.
SMS: Launched two years into Twilo’s life, SMS took off as texting grew to become ubiquitous. Airbnb, Doordash, and dozens of marketplaces use it as a strategy to facilitate communications whereas preserving client privateness. (Think about should you needed to give your actual quantity to each Uber driver…)
Video: As TikTok and Zoom (ZOOM) have ushered within the present wave of video merchandise, Twilio can energy the video-based companies of the longer term. They acquired a player in the space back in 2016 which is paying dividends as we speak. On a small base, Twilio video has grown 599% YoY within the first half of 2020.
Electronic mail: Final yr, Twilio acquired SendGrid for $2B, by far its largest acquisition on the time. SendGrid and Twilio had very comparable approaches (developer-first, platform-as-a-service), however centered on totally different channels of communication. The acquisition gave Twilio entry to an extremely massive channel in e-mail.
Chat / WhatsApp / Fax: There’s a bunch of different options they’ve added, which permits them to assault new markets. For instance, their determination to construct a WhatsApp product early has given them the breadth to win outdoors the US. That stated, who makes use of fax??
This technique has allowed them to diversify their enterprise throughout product strains whereas increasing deeper into every of their clients. Twilio can transfer away from its low margin messaging (45%) merchandise in the direction of increased margin voice (74%) and e-mail (87%) companies.
Supply: Twilio 2020 Investor Day
The Subsequent Act for Twilio
The primary act for Twilio was constructing its developer neighborhood and model fairness on the again of the voice and SMS product.
The second act was broadening their product portfolio shortly with a view to defend in opposition to competitors and cement their lock-in with clients.
I consider we are actually seeing that the third act is leveraging their varied channel APIs to promote new broader customer-oriented options and companies. New product launches appear to construct on the constructing blocks of Twilio’s current merchandise into extra packaged options for particular use instances or verticals. Twilio is much less and fewer about enabling modes of communication and extra about making a holistic buyer engagement platform:
Final week, at Twilio Sign (its annual developer and buyer convention), they introduced new merchandise that proceed to push them from communication to buyer engagement:
Contact Middle (Twilio Flex): The Flex product is one in every of their newer options, and is symbolic of a next-wave of Twilio’s development. They constructed a contact middle answer as a result of they might see that’s how their current clients had been utilizing their merchandise already. Who higher to construct a contact middle than the corporate that gives the infrastructure for these communications already. The product line already has 600+ clients and is rising 184% YoY within the first half of 2020.
Twilio Video WebRTC Go: Twilio already had a programmable video product, however this extra narrowly is targeted on enabling 1:1 video apps (suppose telehealth, tutoring, and many others). The standout part of this was the beneficiant 100,000 free minutes monthly that they’re indefinitely providing. It’s a incredible method for them to compete in opposition to the quite a few startups which are being funded to construct video APIs.
Section Acquisition: Twilio is acquiring Segment for $3.2B (which might make it the biggest acquisition they’ve made). Section is a buyer knowledge platform that helps route all the shopper knowledge generated in other places to wherever it must go inside a company (advertising, engineering, and many others). In some methods Twilio’s authentic APIs contribute to the issue that Section solves. For instance, you employ Twilio SMS to offer notifications to your buyer, however that sits individually from all of your different information on that buyer. Section may help carry collectively varied knowledge sources to offer a real understanding of your buyer. Section brings visibility to lots of Twilio’s buyer engagement instruments.
Supply: Twilio + Section Announcement
The steady development of their core SMS and voice enterprise affords them the inspiration to seek out the subsequent massive factor. Jeff Lawson has been very clear in regards to the tempo of innovation that they’re striving for and I think about we’ll proceed to see acquisitions and product launches that broaden Twilio’s floor space.
The panorama of communication-adjacent firms is pretty expansive, however given Twilio’s market management I wish to simply spotlight the 2 classes of firms that I consider really matter on this market:
The Cloud Giants: Microsoft, Amazon, Google
Final month, Microsoft introduced Azure Communications Services as a Twilio competitor. I couldn’t be much less stunned by this transfer, given Microsoft has all the proper items to serve this market. Whereas Twilio has an unbelievable neighborhood of 10 million builders, Microsoft has 50 million builders on GitHub alone. On high of that, Microsoft Groups has been spreading like wildfire at massive enterprises, making communication a bigger a part of the Microsoft story. Microsoft is ready to ship their merchandise at scale like Twilio, which might drive costs and margins down for each gamers.
Amazon not too long ago launched their Interactive Video Service, which gives a livestreaming API/SDK. In different phrases, they repackaged Twitch (which they personal) right into a developer-facing answer. Lastly, Google Firebase gives a protracted tail of developer instruments which are extensively adopted, however their communication footprint is restricted. There nonetheless could also be a world the place they leverage their speech-to-text APIs to push deeper into communications. Evidently, massive tech has its hand in each massive market and is one thing I’ll be keeping track of.
Area of interest Rivals
Like many massive firms, Twilio is not going to win or take part in each market. One such instance is in 1-to-many video communications. Agora (NASDAQ:API) excels on this house, serving companies that want live-streaming or broadcasting use instances. They constructed out the worldwide infrastructure to ship a low-latency product which Twilio doesn’t actually take part in. As Agora grows, I wouldn’t be stunned to see them budding heads with Twilio in different classes.
As one other instance, MessageBird raised a Series C round at a $3B valuation with comparable merchandise to Twilio. Their differentiation has been partly by specializing in the less-crowded markets of Europe, LATAM, and Southeast Asia. Although startups will proceed to seize items of the market, Twilio is rightfully centered on discovering the subsequent massive downside they’ll clear up, leveraging each their scale and buyer footprint.
Twilio’s inventory has 10x’d since their 2016 IPO, so I believe it’s simple to contemplate the corporate’s development prospects as already having materialized. For my part, the enterprise has carried out an unbelievable job of constantly unlocking TAM with new services and products. The next picture reveals how the addressable market has grown from $45B to $62B. With the Section acquisition, they now view the market as $79B based on their press release.
Supply: Twilio Investor Day + Section Announcement
The tendencies that propelled Twilio haven’t yielded. The developer continues to command decision-making energy and price range in a software-driven world. Equally, communication has solely turn out to be extra necessary with multi-channel communications. No firm is best suited than Twilio to seize a disproportionate share of those rising markets.
Disclosure: I’m/we’re lengthy TWLO.