Vertical SAAS in 2023: Generative AI and More
A simple, foundational mantra for building a successful startup is this assessment: what’s your customers’ willingness to buy your product? There are several factors that go into this assessment but understanding that one burning need and solving for it is a great starting point. We think there is an inherent need that a product should start with, and as you build more, every subsequent customer should get more value as the product becomes better and more nuanced.
There is no better example of this than in Vertical SAAS. Purpose-built software, solving industry-specific problems, getting into the weeds of customer businesses, evolving with consumer behavior, and changing industry dynamics: Vertical SAAS is transformative when done well, and we have seen several examples of successful companies in the world of Vertical SAAS.
At Vertex Ventures, we have been actively investing across Vertical SAAS for years. Our portfolio includes successful investments in Financial Services, Intellectual Property, Hospitality, Food & Beverages, and so on, with more on the way. Vertical SAAS is an area we have had early belief in and continue to believe Indian companies have an extremely strong advantage.
Introduction: A brief Vertical SAAS Explainer with the help of ChatGPT
When I started thinking about this blog, I had a very serious blank page problem. What can be written about Vertical SAAS that’s already not been written? There are several unicorns in the space, some from India, and VCs have been making vertical SAAS market maps for a long time now! I thought of using Chat GPT to get over the blank page problem and asked it to generate an ‘interesting opening paragraph outlining the Vertical SAAS opportunity’. Here is how it went. It’s hilarious, not my writing style, and yet, an analogy I have never heard of before.
As the sun rises in the digital horizon, a compelling business prospect is becoming increasingly apparent: Vertical SaaS. Imagine a skyscraper in the bustling city of modern commerce, its towering stature extending beyond the clouds. Instead of floors teeming with people, it’s replete with silos of specialized software solutions, each customized for specific industries or niches. This innovative business model, characterized by its remarkable depth and precision, is revolutionizing the software industry. It has carved out its prominent niche in the marketplace, emerging as the go-to avenue for organizations aiming to scale operations, optimize productivity, and capitalize on digital trends. As the technology landscape continues to evolve, the prospects for vertical SaaS have never been greater, offering entrepreneurs and investors a golden opportunity to climb aboard this rapidly ascending business express.
This got me thinking about the Generative AI opportunity, more broadly, the AI opportunity in Vertical SAAS, and what lies ahead for Vertical SAAS companies.
The Vertical SAAS Investment Thesis that has Remaind Relevant for a Decade
I suppose we start with the fundamentals: what is the core thesis in Vertical SAAS? This has largely remained the same over the last decade. Simplistically, we believe software that helps companies become more efficient is going to be valuable. Particularly in so-called dusty, old-world industries that don’t grow much and face constant pressures with changing customer preferences, this is a winning formula.
Diving a little deeper, efficiency via software can come from several avenues:
· Can you acquire your customers more efficiently, and reach them faster-better-cheaper?
· Can you manage your teams, especially on the field, better? Do more with less perhaps?
· Can you deal with customer complaints and requests better?
· Most importantly, can you digitize the workflows that form the backbone of your organization?
At the core of vertical SAAS lies a custom-built workflow that replaces a traditional pen and paper-based process and becomes the central nervous system of these traditional businesses. Over time, this workflow platform becomes indispensable, with large parts of the organization relying on it.
We Gotta Talk About Generative AI now, Right?
I am assuming that readers here really aren’t living under a rock, and therefore, have heard ramblings that Generative AI is the next platform shift. Hype from Twitter threads aside, some of the most respected Venture Capital Investors and Founders alike have come out and identified it as such. Notwithstanding doomsday theories (there are many, I dont want to digress), that there is little doubt that Generative AI will probably be extremely relevant extremely quickly. A lot of it comes from some groundbreaking research that’s leading to transformative business model shifts.
Don’t get me wrong, there is a lot of hype going around, simply because Venture Capital probably needs AI more than AI needs Venture Capital. You see, our industry is coming off of a massive binge over the last two years, and now going through some intense indigestion. There are a lot of investors who, probably for the first time in their careers, are dealing with 50%-80% of their portfolio in dire situations. As a result, a lot of investors need a new panacea, and for some good reason, Generative AI looks like it. There is no doubt that we will be in a contained, AI-only bubble for the next couple of years and waste a lot of money in the bargain. Again, this is not to say that we will not see any successes, I am just not sure whether they will be worth the hype for the ecosystem.
The Excitement about Generative AI in Vertical SAAS
There is a reason for setting this context in the form of a rant, and I will get to it, but before that, I do want to outline a few things that excite me about how generative AI could potentially transform the world of Vertical SAAS.
Better, faster, more customizable Workflows
Let’s start at the core, the workflow. There is little doubt that the best way to impact dusty, old-world businesses is to help them build digital workflows. For instance, I highly doubt anyone is happy filling out a paper form to apply for a credit card. The challenge in building great workflows lies in the fact that workflows for different customers vary ever so slightly, and this leads to a couple of problems.
First, in the world of enterprise workflows, the implementation cycles extend for months, and Vertical SAAS companies are willing to do this because, well, you get paid handsomely for customization. Yet, despite the effort, deployments are seldom flexible to accommodate incremental changes in workflows.
Second, in the world of SMB and Mid-market workflows, there is limited flexibility, and invariably, the customer has to tweak a few things to adapt to the SAAS platform, rather than the other way around.
I believe generative AI can be transformational in the world of workflows. In an ideal world — and we are likely a few years from realizing this — all a customer needs to do is to write a few contextual paragraphs, and the AI will adapt the product to meet your needs. Implementation cycles will collapse, and the product will truly bend to meet the customer’s requirements, not the other way around.
Customer service at the speed of thought
The next obvious application is in customer service. Generative AI has the potential to truly revolutionize customer service.
I am one to hold the opinion that AI — when done well — will act as a force multiplier for many jobs that employ a lot of desk workers. Customer Service sits on top of this pile. We aren’t far from a world where models trained on public datasets but tuned narrowly to private datasets can cut-down time to support. For instance, a large part of Customer Support in Vertical SAAS is non-technical support teams fielding technical queries from customers, which eventually get buried in a maze of tickets and email threads.
Generative AI models can rely on a corpus of internal documentation, prior case resolutions, and other internal artifacts to deliver significantly faster support, and customer delight is not far behind.
Never worrying about integrations
The third application of generative AI is in integrations. A great advantage of building a Vertical SAAS company is that it addresses mile-deep use cases, reducing the need for numerous integrations with disparate services. However, there is often the need for a few. And in many cases, these are custom or legacy, on-prem applications that may not have the easiest interfaces to integrate with. Generative AI, over time, can significantly simplify this process. An agent can perform the bulk of the work, and a small team of specialists can ensure the delivery of any integration needed for the product to function well.
Awesome reporting, and more
The last application, somewhat linked to integrations, lies in data movement and analysis. A well-discovered challenge of the SAAS world is that there is too much data sitting in too many silos, none of it talking to each other. Importantly, a lot of such data is not even available for analysis without investing in expensive data tooling. Business users, the core Vertical SAAS user and buyer constituent, are often restricted to the reporting templates provided by these platforms, with little to no flexibility. Reporting and analysis is such a bottleneck, we have heard of companies losing to competition because they have ‘more reporting templates’ than us.
I think Code Interpreter from OpenAI is just a starting point of how incredible analytics tooling can be built, and (hopefully) be embedded inside Vertical SAAS platforms. Going further, plugins and code-interpreter can hopefully allow cross-pollination of data across multiple siloed applications, enabling great analysis, maybe even leading to Utopia!
The Last Bit: Does Generative AI Completely Upend Vertical SAAS?
If you haven’t skipped straight to this section, you probably have some idea about why the intersection of Generative AI and Vertical SAAS is such an intriguing business opportunity. Well, does this mean that every VC dollar needs to rush to this thesis?
My submission is, not really, no. I base this on a very simple point of view: generative AI is a platform revolution, much in the way the cloud was. By this I mean foundational models in Generative AI will be available universally, and would probably be as easy to integrate and use as tools such as GitHub Copilot. As a result, I think every company that wants to use Generative AI would be able to do so and provide 80–90% of what could be construed as a great experience out of the box. All this, without investing much in the way of core AI capabilities.
I think this is an important consideration because, with 80–90% of the capability being made available to anyone, distribution takes center stage. Let me illustrate this with a couple of examples. We have seen several platforms emerge offering AI generated presentations from a few lines of description. My contention is that once Google Slides and Microsoft Powerpoint embed some form of generative AI capabilities within their existing platforms, the value offered by standalone presentation making tools will be significantly lower. The standalone tool might perform mauve 20–25% better, but a vast majority of the user base will likely continue to use the platforms they are already used to, rather than shift to brand new platforms. The same applies for Photoshop, Canva, Notion, and so on.
I believe Generative AI will not necessarily upend entire segments in Vertical SAAS. It would rather create a new layer of disruptors, much, in the same way, cloud-native vertical SAAS platforms disrupted legacy incumbents. The nuance here, though, is that almost all modern Vertical SAAS companies — across verticals, geographies, and market segments — are planning a core generative AI feature in their roadmaps. As a result, it’s not going to be extremely easy to fund a Vertical SAAS vendor in a crowded market just because they are Generative AI native!
If the above holds, what are VCs really looking for in Vertical SAAS? Here, I don’t think there are any good answers, but some plausible frameworks. I for one will share one that works for me, illustrated here.
In a nutshell, the most important facet for me is the ability to start focused, and yet have a vision to build a platform. Generative AI will be a core theme that enables success. In many cases, it can truly lead to disrupting incumbents or finding new business models previously undiscovered. However, at its core, a Vertical SAAS platform solving focused use cases in potentially large Target Market Segments initially, then moving either (a) upmarket or otherwise (from mid-market to enterprise or vice versa), or (b) to capture adjacent revenue streams including payments, services, marketplaces, etc, are the most attractive to Venture investors, particularly to this Venture Investor.
If you are building in the world of Vertical SAAS, or thinking about the cross-section of Vertical SAAS and generative AI, please do reach out to us at https://www.vertexventures.sg/apply.
