The Virtues of Vertical SaaS
In the consumer world, it’s often necessary to chase (or front-run) major consumer trends. For a product to take off, you need to be in the zeitgeist. The best companies tend to get ahead of the wave and become the dominant player for that trend; many others will follow suit and try to steal eyeballs and wallet share.
B2B and enterprise SaaS don’t have to follow suit. There are certainly segments in B2B that attract a lot of attention (and competition) — marketing tech, sales tech, big data, etc. These tend to be painpoints that many employees (and investors) experience over their careers and want to set out to improve. There’s been a lot of funding in these spaces historically and there have been several prominent examples of successful outcomes. Success tends to attract followers, and these spaces quickly inundate with competition.
However, interesting opportunities in B2B are often less obvious, and less sexy. The beauty of B2B is that there is incredible depth within each silo. While there are the obvious verticals that have seen a lot of innovation (healthcare, finance, insurance more recently), there are a lot more esoteric niches the further you dig in: instead of general insurance, software for life insurance. Instead of general logistics, logistics for waste management. Instead of broader healthcare, software for managing veterinary offices.
As long as there are customers with distinct painpoints and a willingness to pay, there’s an interesting potential business opportunity. It may be harder to identify these painpoints as the vertical specificity by definition makes them more difficult to find; however, you often see employees spin out to create the solution they wish existed when they were on the team.
There also tends to be a lot less competition for these opportunities. The existing solutions that customers rely on are often repurposed versions of horizontal software or legacy industry-specific solutions that have traded hands. Because entrepreneurs and VCs have historically viewed vertical SaaS as perhaps being a less likely path to unicorn status, fewer dollars have flowed into these spaces over the past decade. As a result, startups are often able to get a running head start and may go months (or years) before others catch on — whether new entrants, or the existing players. With less competition, there is also often less churn — RFPs are less common and there are fewer alternatives to turn to.
Back to that point about folks fearing lack of sufficient opportunity size for vertically focused companies… The vast, vast majority of exits occur under $500M (90%+ according to some datasets), and many of these are “niche” software companies. In many cases, it is a much more attractive (and statistically likely) outcome for a founder to own the majority of a business that exits for $50-$250M than to own 5% of a business that exits for $1B after 10 years of annual fundraises. There also tends to be a lot more buyers for these types of companies — legacy players often look to buy-vs.-build given lack of engineering talent and the financial buyers market (growth and private equity shops) is incredibly active in this segment. Vertical SaaS lends itself well to producing real EBITDA — an attractive characteristic that appeals to both strategics and financial buyers.
What’s important for these types of businesses, though, is to properly capitalize. Where we’ve seen companies get stuck is when they fundraise (and sell ownership) in pursuit of a billion dollar outcome, and then inevitably hit the growth headwinds that come from a necessarily smaller TAM. However, if a founder is smart in keeping their preference stack low, creatively leveraging non-dilutive finance, and appropriately balancing growth vs. profitability, vertical SaaS can result in a phenomenal outcome.
The more boring, the more niche, often the more golden the opportunity.
