Story of Twilio and how Jeff Lawson Made $72 Billion Sending OTPs

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What is Twilio & Story of Twilio?


What is Twilio


By now, I think we’re all familiar with one-time passcodes. They’re pesky but required 6 digit codes that enable two factor authentication and keep all of our accounts secure from hackers and bots. Most of us have likely never given OTPs much thought, it’s just a normal part of the modern tech world but it’s a massive industry supporting several massive players. 

You of course have your classic tech companies including Google’s Identity Platform and Amazon’s Cognito. You’ve probably also heard of Duo Mobile and Octa but have you ever heard of a company called Twilio. 

Twilio is arguably the king of automated text messages and emails with a peak market cap of over $70 billion. This means that at their peak, they were one of the top 250 largest companies in the world. But more recently, things haven’t been looking as bright for this OTP giant. In fact, Twilio stock has fallen 85% bringing their market cap all the way down to just over $12 billion. 

What is Twilio & Story of Twilio


It’s easy to write off this decline as just a byproduct of the volatile market and recession fears, but there seems to be more to Twilio’s story. Not only did they fall much further than big tech but they have yet to see any sort of recovery and when you take a look at their financial reports it all starts to make sense. 

You see, Twilio has never been a profitable company, having relied on VC funding (venture capital funding) and stock dilution to keep the business running. This strategy works out when revenue is growing exponentially but not so much when revenue starts to stall out and that’s exactly what’s happening to Twilio whose is very much stalling out at the $4 billion mark. 

Twilio Expenses graph


To make things worse, it doesn’t seem like their expenses are getting any better meaning that Twilio is currently burning well over a billion every single year. With only $3.5 billion left in the bank, this is not exactly an ideal situation for the company and it’s no wonder why investors are staying away. 

Graph Showing Twilio is currently burning well over a billion every single year


So, join me as we take a look at the rise and fall of the king of OTPs and whether Twilio will ever return to their former glory. 


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AN UNDERSERVED MARKET 

Taking a look back, Twilio didn’t start off as an OTP company because OTPs weren’t even a thing when Twilio was founded in 2007. The main guy behind Twilio was a software developer and serial entrepreneur named Jeff Lawson

Jeff Lawson Image


Jeff was a former AWS product manager who was obsessed with perfecting the user experience. In fact, Jeff strongly believes that this is the main job of software engineers, to iteratively understand customers and build better and better solutions using software. 

But despite founding 3 companies before Twilio, Jeff couldn’t help but feel that he was constantly falling short in this area, and to him, the reason was obvious, a lack of communication. 

With traditional businesses, whether it's a retail store or a restaurant, you’re constantly able to interact with your customers and get a feel for what they like, what they don’t like, and what could be improved. But with software, while you’re able to reach more customers than any traditional business, you’re also far more disconnected from your customers. 

Aside from random reviews that might pop up from time to time, there was really no way to directly communicate with customers. So Jeff started looking into ways that he could set up communication infrastructure himself, which is when he ran into a massive reality check. It turns out that building out a communications platform is far harder than building out a software platform. 


Story of Twilio


According to Jeff himself, he was used to software development timelines in the weeks ahead. Building out this communication infrastructure, however, would take 2 to 3 years and $2 to $3 million. Put off by the cost and timeline, Jeff would start looking into big tech solutions, which is when he realized that there was none, and that’s when it hit him. 

If he needs to communicate with customers, it’s likely that other developers did as well. And if there was no established solution on the market, then maybe he could be that solution. And with that, we saw the birth of Twilio: a company that was going to make communications between software companies and users easier than ever. 


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The journey to build this company, however, was by no means easy. The problem was that Jeff needed VC money and no VC really understood what he was trying to do. In fact, Jeff started off with what he deemed to be a safe pitch, a pitch to a person that he knew pretty well. But this person would end up laughing Jeff out of the room asserting that Jeff would need an insane amount of sales people to get this off the ground. 

This disappointing outcome made it clear to Jeff that he needed proof before he approached VCs, so instead of pitching, he would get to work. He would build a voice API that was completely hosted on the cloud and could make and receive phone calls, and they would launch it on November 20, 2008. 

Keep in mind, this was a couple of months before even Google Voice came out, so Twilio was very much early in the game. And as such, they were able to land some pretty big clients pretty quickly. This included the likes of Cheetos, Earth911, Tumblr, and Sony Music. 

list of initial customers of Twilio


It turned out that Twilio Voice was also super helpful for politicians who wanted to automate the process of calling voters. With these customers in his back pocket, Jeff would return to the VC table and let’s just say he would be taken a lot more seriously. 


GROWING PAINS

In early 2009, Twilio would complete a seed funding round raising $600,000. If you’re familiar with Chris Sacca from Shark Tank, he was one of Twilio’s seed investors. They would follow this up with a Series A round of funding in just a couple of months later raising $3.7 million. Now that Twilio has money, Jeff will double down on his sales effort. 

According to Jeff, the key to growing Twilio was treating developers like customers. You see, a lot of enterprise companies get into the habit of treating developers as second tier customers, and it’s no wonder why. 

GROWING PAINS OF TWILIO


When you’re serving developers, considerations like public reputation and brand image aren’t nearly as important. Not to mention, there’s only a handful of developer solutions for any given market, so developers aren’t that likely to switch to another service provider in the first place. 

So, companies often tend to treat developers as just a strategy to reach more end users and make their experience even better. As a software developer, Jeff was all too aware of this reality and he wanted Twilio to be different. 

He wants Twillio to put developers first and treat developers as customers and this has really been their strategy. They would sponsor hackathons, run hackathons, and hand out a bunch of shirts to developers. In fact, at one point, Jeff would make the prediction that Twilio would hand out more shirts to developers than Blackberry would ship phones. 

Looking back, this wasn’t too hard given that Blackberry would fall off a cliff but I think you get the idea, Twilio was reaching a lot of developers. As their reach grew, Twilio also focused on expanding their product line, which led to the creation of their text messaging API in February of 2010. 

Originally, this wasn’t meant for OTPs. Rather, it was meant for updating customers. For example, messages like “Your shipment is on the way” or “Your package is out for delivery”. 

Twilio launched their shortcode API platform


It wasn’t till mid 2011 that Twilio launched their shortcode API platform, and this is when all of Jeff’s original worries came back to life. 

With their voice API and original SMS API, infrastructure wasn’t too big of a concern because the volume wasn’t too large. But with OTPs, companies would be sending millions if tens of millions of messages daily. So not only did Twilio need strong infrastructure, but they also needed rock solid deals with carriers to process and send so many text messages. 

Twilio also had to worry about preventing spam and abuse of the platform. To be honest, Twilio never really figured out the solution to this issue, but luckily for Twilio, investors had. Back in 2007, investors didn’t quite understand the value of Twilio but by the early 2010s, they knew exactly what they were in for and they were willing to back Twilio to the moon. 

This included $12 million in late 2010, $17 million in late 2011, $130 million in 2015, and a $150 million IPO in 2016. This is really how Twilio addressed the infrastructure problem. They just raised and spent a bunch of money, but while that worked in the early days, as Twilio becomes a mature company, investors are looking for profitability and ROI which brings us into Twilio’s current crisis. 


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BREAKING POINT

The reality is that Twilio is having an extremely rough time achieving profitability. They’ve already tried doing layoffs multiple times actually. Last September, they laid off 11% of their staff and earlier this year, they laid of another 17% of their workforce. So, within the past year, they’ve cut their workforce by almost a third and they’re still burning over a billion dollars per year. 

The reality is that this situation is more a result of the industry as opposed to Twilio themselves. You see, the communications API industry has become extremely cutthroat, especially with Google and Amazon stepping into the arena. These juggernauts view the industry in a completely different light. To them, the communications API industry is just a small portion of one sector of one division of their business. 

They frankly don’t care about this sector more than just controlling it and telling their enterprise customers that they offer these solutions as well. Aka, Google and Amazon really care about their SMS business being profitable. For them, it’s all about the bigger picture. It’s about locking in Walmart and Ford as their next massive cloud customer. 

If that means that Walmart and Ford get subsidized OTPs, so be it, it’s more than worth it. The same cannot be said about Twilio, whose main business itself is communications meaning that this itself has to be profitable. And according to Twilio themselves, they don’t expect GAAP profitability till 2027. 

BREAKING POINT FOR TWILIO


With that being said, the good news is that Twilio has a really strong pool of customers including Uber, Airbnb, Instacart, Reddit, and Lyft just to name a few. And it’s unlikely that these companies will move away from Twilio anytime soon because Twilio has won over the developers at these companies with their developer first mindset. And as long as Twilio has a strong roster of customers, it’s unlikely that investors will stop supporting Twilio. 

Worst case scenario, they have a couple of rough years until they achieve profitability after which they’ll be good to go. Also, Google and Amazon are by no means trying to take down Twilio. In fact, they actually support Twilio. 


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Just recently, Twilio partnered with Google to create better AI powered virtual customer support. And Amazon has even gone as far as investing in Twilio, buying up a 1% stake in the company. But this could also be perceived as bad news. You have a strong company with strong customers that’s facing a cash flow problem. That makes them a perfect acquisition target. 

Google and Amazon could easily put up the $12 billion to buy the company. They would have a far easier time handling the expenses with their in-house infrastructure. They may even be able to achieve profitability with Twilio but even if they don’t, it doesn’t really matter because they would have a new list of customers that they could sell Google Cloud or AWS to. 

For the sake of Twilio and in hopes of preventing big tech from controlling yet another industry, hopefully, Twilio will be able to make it through on their own but only time will tell. One fallen giant that’s seemingly beating the odds is Nokia.


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