/imagine a vast network of connected apps that envelops a company with data flowing everywhere, 2d illustration (courtesy midjourney)

The Age of Vertical SaaS

Understanding Airtable's Market Opportunity (Part 2)

Disclosure: I am an Airtable shareholder. These thoughts are 99% human and 1% machine. Read Part 1 Unlocking Practical Data.

Do you know what's hot right now? ChatGPT. Do you know what else is hot right now? Vertical SaaS. It's not as hot as ChatGPT, but it's still hot.

Don't believe me? Here's what Jason Lemkin has to say:

Vertical SaaS is software for specific industries.

Vertical SaaS is software designed and built to sell into a specific industry like tech, media & entertainment, consumer retail, financial services, healthcare, etc.

People are excited about vertical SaaS because everything else being equal, a customer is more likely to choose software that is customized for their industry over its horizontal alternative. Why? Less effort and cost spent configuring and customizing workflows to meet industry-specific characteristics and requirements. Most customizations made to off-the-shelf software are essentially acts of verticalization.

What does vertical SaaS have to do with Airtable? Suppose most customizations to off-the-shelf software are implicit acts of verticalization. In that case, every app built on Airtable is essentially a vertical SaaS app customized to the extreme for a single customer. Even an OKR tracking app, which you think would be the same for most companies, will look different the moment it has to fit into a company's unique processes and org design.

Airtable will capture a huge percentage of the vertical SaaS market—especially in the enterprise. But you'll never know this is happening because most enterprise customers don't talk about the internal apps they build. Why would they?

Imagine you're an entertainment studio, and you built an app that manages the post-production process for hundreds of original productions. This app has been adopted by thousands of employees and is considered a mission-critical application. At some point between when the app was conceived to where it is now, it was likely an excellent vertical SaaS app that other studios could use too. But it's not your core business; you would never want to share your secret sauce with competitors.

Does this mean Airtable will go after companies like Salesforce or Workday? Unlikely. Airtable isn't going after well-established category leaders. Airtable is going after the vertical SaaS apps in the middle tail. What is the middle tail?!

The Software Middle Tail

ERP. CRM. SCM. PLM. BI. HCM. HRIS. LMS. CWM. ITSM. EHR.

I bet you recognized at least a few of the acronyms above but glazed over the rest because they are irrelevant to you. These are what I call big categories. They got so big they became acronyms.😛

Here's what I found on Google when I searched for the market size of a few top-of-mind big categories:

These are massive markets. For fun, I added the bingo card generator category at the end, which I'm guessing is a ~$2M market.

A few observations:

• Most of these categories are horizontal, meaning they go after many industries. If you want a big market, you have to go broad.
• There aren't many big categories, and we shouldn't expect many new ones to emerge yearly.
• Every category has a leader (ex: CRM & Salesforce).

So what is a middle-tail software category? Let's assume middle tail is anything between $25M to $500M in market size. If we could somehow expand the chart above to include every single software category that has ever existed or could exist, it might look something like this:

Software creation is infinite, with new categories emerging every other week. It would be cool if someone could build a chart with every discrete software category.

Folks like Jason Lemkin are excited about the potential of vertical SaaS companies focusing on big categories with massive markets. He's probably less excited about opportunities in the middle tail which will undoubtedly consist of hundreds or thousands of smaller vertical SaaS categories.

The middle tail remains a vast ocean of opportunity. But we'll not see many middle-tail category leaders emerge victorious because Airtable will (quietly) consume many of these opportunities.

A few reasons for this:

1. VCs aren't going to funnel massive amounts of cash into companies going after $70M markets. But, without cash, you can't hire the top talent needed to build delightful, powerful, secure, and customizable software.
2. Vertical SaaS requires specialized knowledge from experts in the field, making the pool of potential founders small. Of course, you might disagree and say you don't need founders to be industry experts, but it's pretty hard to be excited about a space in which you have zero experience or interest for seven years.
3. Many teams within the enterprise today are improvising their vertical work app via spreadsheets, email, Slack, and project management tools (e.g., Asana, Smartsheet, Monday, ClickUp, Notion, etc.). You'll need sales muscle to replace these duct tape solutions, creating a significant barrier to winning the enterprise.

But this isn't a zero-sum game. The middle tail is growing, and there are lots of successful businesses building random vertical apps that we would only know about if we worked in the industry and had a specific use case we were searching for.

If a single vendor wanted to capture a big swath of middle-tail vertical SaaS opportunities, it would need to create a different app platform. One that could unlock the value of practical data. One that could democratize software creation by enabling non-technical industry experts to build their own vertical SaaS apps. Where are we going to find a platform like that?!

Airtable's Advantage in the Middle Tail

Three reasons why Airtable will (quietly) dominate vertical SaaS apps:

1. Apps built on Airtable are 10x more valuable than off-the-shelf software because every app shares data by default.
2. The license cost of each N+1 app trends toward zero.
3. Procurement, risk, onboarding & training, and new feature cost for each N+1 app trend toward zero.

Apps built on Airtable are 10x more valuable due to network effects

Apps are more powerful and useful when they work seamlessly in cross-functional data-sharing workflows. On Airtable, whenever someone adds a new practical data set to the network or enriches an existing data set, the value compounds for everyone else working off that data.

Let's use that entertainment studio example again because it's helpful to illustrate this point. I'm not an expert in this industry, but I've learned a lot about it through Airtable. Producing original TV and film content is challenging due to the extreme pressure to crank out hot new TV shows and movies. In addition, production is an operational nightmare because the content is being produced all around the globe.

Here's a diagram of how a leading entertainment studio might build connected apps on top of Airtable. Within each app are practical data sets that are all connected as well.

The value of Airtable is not in a single app but in a network of connected apps, all sharing practical data sets.

Notice how every app connects to one central app that keeps track of all the titles. If teams bought each of these apps off the shelf, they would be creating a nightmare scenario of siloed tools and data.

License cost trends toward zero

Airtable is sold by seat. There's no limit to the number of apps a customer can build or use. That means the more apps that get built, the cheaper every app becomes. For enterprises, this represents substantial cost savings which is why many customers choose to consolidate siloed vertical apps on top of Airtable.

Procurement and governance costs trend toward zero

Let's look at a very rudimentary equation for measuring the value of software (click on the image to enlarge):

Business value consultants hate me.

For N+1 apps:

Procurement trends toward zero because you only need to procure Airtable once.

Governance and risk trend toward zero because all the apps live on the same platform and share enterprise controls and granular permissions.

Onboarding and education costs are low because each app's user interface is similar. The more apps get adopted, the more people become familiar with the UX of all other apps.

The opportunity cost of new features is low because, unlike off-the-shelf software, you can build new features yourself. As a result, you don't have to beg the vendor to make a feature for you and wait at the bottom of their backlog.

N+1 Airtable business value.

The net-net: it’s imperative that Airtable continues to promote builders within every enterprise organization. The bigger the connected app network, the stronger the moat.

Airtable's Disadvantages

There are some significant disadvantages to Airtable. The biggest is that customers need someone to build and configure every app. It's 10x easier to build on Airtable than Salesforce and ServiceNow, but it's still app-building. For serious apps, you need to understand database and interface design.

Another disadvantage is that customers must maintain an internal team of people trained on Airtable and know how all the connected apps interact.

There is a massive community of folks who build on Airtable.

Finally, selling a platform vision to an enterprise customer takes work. Airtable exists in a crowded market with competitors coming from every direction.

Conclusion

For people who still see Airtable as a spreadsheet or project management tool, it takes time to see the business's true potential. The real value is unlocked when teams can operationalize their practical data (highly industry-specific) and enable teams to build powerful apps on top of shared data.

If you got value from this story, please give me a clap or leave me a comment. I'd love to hear your thoughts on this dynamic and fascinating space of no-code/low-code apps.

Please consider following this publication to be notified when I publish content related to product marketing and software. Read Part 3, Autonomous Software and The Holy Grail of SaaS.

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