When people talk about SaaS, they’re usually talking about a horizontal SaaS company. Salesforce for sales, Atlassian for product development and Monday.com for project management. If these were the companies of the last decade, the next decade is going to be reserved for vertical SaaS companies.
A vertical SaaS company focusses on a single type of customer. They build ‘opinionated software’. They aren’t giving you a general CRM to manage your workflow. If you are a doctor, it’s designed for your specific use case: for example, recording you the details of your patient’s visit and ensuring it meets the required data standards for health care data.
The thesis for vertical SaaS is simple: building tech becomes easier with every passing day, and designing a 10x better experience will require you to design for a specific use case or industry. Incidentally, this does not mean you don’t need to worry about horizontal SaaS companies. You should worry about them, but try to beat them by moving faster.
In this essay, we’ll cover some of the dynamics of vertical SaaS companies.
Vertical SaaS has grown a lot
Since 2019, vertical SaaS companies have doubled in value using this handy index from Fractal. This despite SaaS and tech having a particularly tumultuous few months.
They tend to operate in large markets
Since software is not easily transferrable to other industries, your list of prospective customers is limited. As a consequence, vertical SaaS companies generally operate in very large markets:
*Private company; valuation as of June 2021
You can build a very profitable business in a niche market that is not very big, it just may not be venture-scale. This is a choice every entrepreneur makes: building without capital is a slog, but having control over your business is beautiful. You do you.
Using number of employees in the sector is another interesting way to look at the size of the prize in these markets.
Winner takes most market
The #1 player in vertical SaaS keeps most of the value.
In a horizontal SaaS market like CRM, Salesforce started as a CRM and is now seen as an “operating system” for many companies. Hubspot made its name in the “inbound marketing” domain, and is now seen as the CRM of choice for SMBs. There’s enough value for a bunch of businesses to capture.
This is less true in vertical SaaS because you focus on a specific industry. In vertical SaaS, the two most important call outs are:
- Vertical SaaS companies should strive for market leadership.
- It is hard, but not impossible, to unseat an incumbent. To do so, Bessemer recommends attacking an underserved market, addressing an overlooked problem or unseat sleepy incumbents.
Horizontal coverage is key
Vertical SaaS requires you to have great horizontal coverage. Every vertical SaaS company is a multi-product company.
One of the key selling points of a vertical SaaS company is that it aggregates software for different use cases. Separately, upselling customers with products is a critical revenue driver because, by definition, your target market is smaller.
ServiceTitan, a workflow tool for trade service companies, offers all of the following.
Of all the use cases above, financing and payments are the most interesting. Mainly because of the value a vertical SaaS player can generate from these. Take Toast, the vertical SaaS platform, for restaurants. In the last quarter, Toast made more money from its financial services arm than it did from recurring revenue (i.e. the fee restaurants pay to use the Toast product).
Designing your go-to-market
Like many SaaS companies, vertical SaaS entrants focus on SMBs or mid-market. The real question is how these companies scale.
In many industries, the number of prospective customers is low which means you have to go up market. Veeva, a vertical SaaS company for life sciences, generates $1.2 billion in subscription revenue (2021) from ~1,2k customers, implying an annual contract value of $1 million in ACV.
Another interesting initiative for vertical SaaS companies is a community-led strategy. For the right vertical, this could work wonders. Given your target customer is well defined and narrow, it makes sense to focus on community-led growth.
ServiceTitan has built a thriving community of over 45K members.
Vertical SaaS has grown significantly and will continue to do so. The biggest vertical SaaS companies choose markets that are very large. They need to be prepared to sell multiple products and become the “operating system” for their industry. In terms of GTM, most start with SMBs but expand into enterprise eventually. In addition, community-led growth is a very interesting GTM play for vertical SaaS companies.
10 lessons from a decade of vertical software investing - https://www.bvp.com/atlas/ten-lessons-from-a-decade-of-vertical-software-investing
State of vertical SaaS in 2022 - https://www.fractalsoftware.com/perspectives/state-of-vertical-saas-2022
Vertical Software Wins in Bull and Bear Markets - https://www.indexventures.com/perspectives/vertical-software-wins-in-bull-and-bear-markets/