Twilio’s Second Act

Twilio rode its API to a $66B valuation. Now it’s trying to become the Universal Switchboard for the internet.

Today is a special treat. I’ve long admired the work of Byrne Hobart over at The Diff. His newsletter is one of the best around when it comes to tech and finance analysis. Turns out he likes my work too (maybe with slightly less fanboy admiration then I have for him). So we teamed up to write today’s four thousand word deep dive into Twilio. 

Twilio is valuable to study not just in an “oh that’s cool” sorta way, but because their example offers concrete, actionable ways to improve your business/investing. Each aspect of their business is impressive—from their stock performance having a ~1,400% increase over the last 5 years, to their aggressive M&A strategy (9+ deals totaling over $5B), and a unique product/pricing strategy. Twilio invented an entirely new type of company (developer driven, API powered) and is now working to create its second act. Let’s get it. 

Note: Please let me know if there are other writers you would like to see me team up with. I have two more newsletter collabs (with other tech/finance writers of Byrne’s stature) in the works but would love to hear from my community who they would be interested in. 

Twilio 101

Much of a developer’s life consists of being told to do the impossible by people who have no idea what they are talking about. Whether it is the Product Manager who can’t code or the CEO who thinks reading a16z’s content marketing makes him a technical leader; their idea may sound good but is usually unobtainable. These managerial requests can occasionally be resolved with a liberal amount of copy & pasting from places like Github or StackOverflow. Sometimes however, the tasks being demanded are beyond the immediate capabilities of clever code. As an example, regions of the market like finance, telecommunications, healthcare—all the powerful institutions of yesteryear—are not set up to interface with someone typing into a text editor at 2am trying to hit sprint goals. They just don’t care about the small fry coder at a startup. If you were a developer trying to make something that relied on access to these institutions ~15 years ago you would be screwed. 

One of the biggest problems in 2009 was that developers were increasingly being asked to text or call customers, directly from their apps. This was incredibly hard to do. It involved brokering deals with telecoms and other communications infrastructure providers. You likely know the frustration of trying to Verizon to give you a clear contract for your iPhone 12 so you can sympathize with the agony that accompanies deals to get commercial access.  

Twilio had settled on the novel solution of building APIs to solve this problem. Application Programming Interfaces (APIs) allow developers to insert a few simple lines of code into their program that then allows them to use someone else’s application. In plain human speak, developers could write a million lines of code telling a program to send a text OR they could just use a three-line API call to leverage the million lines of code Twilio has already written. But it isn’t just “oh let’s use Twilio’s code to make computers do stuff.” What makes this so powerful is the code also contains the agreements Twilio had in place with Telcos. By using their Twilio’s API you instantly gained access to their partnership privileges on top of all their fancy shmancy code. 

This sounds cool! But it is difficult for people to grok how powerful being able to communicate with customers is. Developers are not customers to be intellectually engaged by 4x4 charts. When Jeff Lawson strode across the stage at the SF New Tech meetup to demo his startup Twilio in 2009, he was trying to solve this product marketing problem. 

In his own words (via Stratechery):

“I turned to my co-founder...John and I said “John, how many people can be on a conference [call]?”. At the time it was like fifty, and I said “Is there any way you can make it three hundred?” and he was like “I don’t know, I don’t think we’ve tested it”. “Can you just do it?” and he was like “Okay” and so I invented that demo on my way over to the meetup. We’re just going to build it live, because you can do it in three lines of code, and I probably had slideware somewhere that I could’ve used, but I’m like “Who wants to see slides?”

When you have a mobile app or something, oftentimes, what you might do is demo it or show people what it does. I remember thinking, “Well, how do I demo Twilio?” It was like, “Well, I think the best way to demo it is just to, as they say, do it live,” and so we did...There’s a One More Thing which is I can use the API to pull a list of everyone who called in. You do it and then you say, “Oh, I forgot one thing,” and you write another line of code and it dials everyone in the audience and all the phones start ringing and everyone in the audience picks up their phone and that’s the encore. We’ve done that demo so many times because it’s fun, it’s entertaining, and it actually works. It really gets the mind of developers in particular going, “Oh, wow. He did that in three minutes. What can I do with that thing?” And it turned out to be just the best way to pitch Twilio.” 

This pitch, and the lightning in a bottle energy it captured, encapsulates what Twilio is. It is a developer-focused business that allows anyone to quickly and easily set up communication channels with their customers via API. Their APIs give developers an easy way to build customer communications channels like texts, calls, chat, emails, and videos. They are an infrastructure play—similar to the work of Stripe with payments which Bryne has written brilliantly about. Twilio is focused on selling tools that allow developers to easily incorporate customer communications into their products. It is a business that is focused on selling components that allow customers to deliver an end service. In a retail housing boom, they are selling a power drill. This strategy has served them incredibly well with 5,450+ employees in 26 countries, a 62% year over year increase in Q1 revenue to $590M, and over 235K active customer accounts.

Because they are focused on helping customers build stuff versus trying to rent seek or arbitrarily flex pricing power, they can do some fascinating things around pricing and GTM strategy.

To unlock the remainder of the article and see the value of Twilio's developer evangelists, the strategy behind its M&A moves, and what the grand ambition of the company is, please subscribe. Your money goes to me the writer and enables me to continue to publish in-depth, highly actionable research.

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