B2B Vertical SaaS: 2017 Table Stakes

Last year in my 2016 predictions post one of the trends to watch was “B2B Vertical Software”. Since I’ve been asked for an update here’s my take for 2017.

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Industry specific knowledge is still key for success

This is an aspect that hasn’t change in the past years. If you want to succeed within a vertical (agriculture tech, legal tech…) you still need to deeply understand every facet of this industry. From its macro components such as the global value chain to more specific aspects such as people behavior and habits. “Why Did Beepi Fail? What Does It Mean For Online Car Sales?” illustrates really well how not deeply understanding the specificities of a market can kill a company, even if it has raised tens of millions $.

It doesn’t mean that you must have worked in a particular vertical / industry to launch your company but rather that if you don’t initially have enough industry knowledge you need to hire (or get surrounded by) insiders and you also need to do your homework and build this knowledge yourself. Speaking from a VC standpoint it’s crucial for us to see founders who are experts in their field and if not, who show an above the average appetite for learning and analyzing.

Incumbents are now fighting back

One of the main allures of launching a vertical software is the opportunity to disrupt old school incumbents that have been here for years and are not innovating anymore. Hence the common theme of bringing user friendly software in low digitized industries. But the situation is changing fast and in many industries traditional players are not just sitting ducks but are now fighting back. They’ve been warned enough that they risk to be “Uberized”.

What Kyle Hill wrote in “There’s No Magic in Venture-Backed Home Care“ particularly struck me:

“We underestimated the ability for home care agencies to adopt new technology. A majority of the 20,000 home care agencies are financially efficient, software enabled and have entrenched relationships within their local communities. While file cabinets are still popular, they are not sitting in the stone ages with technology.“

Whether it’s old school incumbents or smaller scale traditional players (agencies, consulting firms, cabinets…) don’t underestimate their capacity to evolve and to use the very weapons that are threatening them. This trend will probably accelerate in the months / years to come.

Straight copy-pasting of horizontal companies’ playbook can kill you

It’s more a consequence of the previous two points than really a standalone one but applying “out of the box” the playbook of successful horizontal software companies (whether it’s for product, sales, marketing or else) can kill you. You need to adapt the myriad of learnings shared online to your particular vertical.

Horizontal software platforms are a game changer for vertical startups

I spoke about this topic in depth here but we’re entering the age of big B2B horizontal software platforms. Companies such as Salesforce, Hubspot or Docusign are now building ecosystems of third party tools around their core software. And this is a game changer for vertical B2B startups.

The main reason is that there are more and more opportunities to build “verticalized” versions or smaller addons for these platforms. Instead of building a CRM software from scratch for a specific industry you can built it on top of Salesforce platform directly by adding the missing / specific features required. This is what Veeva did for the pharmaceutical and life sciences industries and it’s now a public company worth Billions of $. But it’s also true for smaller vertical startups which build and monetize smaller Salesforce “addons”.

These platforms can be a great shortcut not only to build vertical software but also for distribution. You might argue that the main risk is to be copied by the platforms themselves. Well it’s true but for the vast majority of niches it makes no sense for a platform operator to copy you, simply because the revenue generated is not needle moving for them.

We’ll see more self funded and profitable vertical software startups

I believe that we’ll see more and more bootstrapped and profitable vertical software companies because:

  • more and more founders are aware of the risks and benefits of the VC model and now want to go the bootstrapped way.
  • many industry specific needs are better addressed by laser focused tools rather than big products full of features.
  • software platforms make building and distributing vertical products easier and more cost effective.

A great illustration of these points is the story of Distrokid a software that helps musician “get their music into iTunes, Spotify, Amazon, Google Play, and more”.