Vertical SaaS is about expanding revenue.

It's like,

'We're not just your taco stand; we're your full Mexican restaurant, mariachi band, and fiesta planner!'

The Potential of Vertical SaaS Companies  

• Why Read:

  • Valuable insights for founders on the potential, growth strategies, and success factors of vertical SaaS companies.

• Featuring:

  • Alexandre Dewez (@alexandre_dewez), VC at Eurazeo

• Link: 

  • “Learnings on Vertical SaaS from Toast & Procore”

Key Concepts and Tactics:

• Recognizing the Potential of Vertical SaaS Companies:

  • Point: Public and private markets have realized that vertical SaaS companies can become highly valuable businesses, despite initially slow growth.

  • "The first learning is that public and private markets' perception of Vertical Software businesses has become more positive over the past few years. Not so long ago, we heard multiple times that

    • i) these businesses were taking a very long time to build

    • ii) the growth rates, often in the double-digit %age points <$50M in ARR (rather than triple-digit %age points), weren't compatible with venture outcomes."

  • "Long story short, it is now much clearer that, although they take a long time to build, vertical software businesses can become very valuable. However, it might be that the lion's share of value creation happens more than 10 years after starting."

• Understanding Market Penetration and Growth Potential:

  • Point: Despite being established for years, many vertical SaaS companies still have low market penetration, indicating significant growth potential.

  • "On the one hand, the “why now,” i.e., what drives adoption, is often linked to a broad but often slow digitization of an industry that just takes a long time. Unlike developers who will adopt new technologies very fast (which explains dev tools' very fast growth rates), industry practitioners vertical by vertical will switch software less frequently, be harder to convince, but ultimately be “stickier.”"

  • "Despite being in business for >20 years and valued at >$10bn in public markets, Procore only has <2% of US construction companies and <1% globally."

• Leveraging Economies of Scale and Product Expansion:

  • Point: Vertical SaaS companies benefit from economies of scale and can expand their product suites to increase customer value and market share.

  • "Another lesson learned from examining the comprehensiveness of these companies' products is that Vertical Software businesses benefit from strong economies of scale."

  • "On the ACV/LTV side, each new product feature helps companies increase ARPAs, provides additional arguments to convince customers, and ultimately allows companies to spend more on acquisition while maintaining good CAC/LTV ratios."

  • "On the acquisition side, once a company reaches a certain market share, word of mouth and referrals kick in, ultimately making vertical software businesses more efficient from a sales and marketing standpoint than their horizontal counterparts."

• Exploring Multi-Product Expansion Strategies:

  • Point: Vertical SaaS companies can expand beyond workflow features into areas like fintech, B2B marketplaces, logistics tech, or ad tech.

  • "Speaking of expansion strategies, as explained in more detail in our "Vertical Software 2.0" blog post, product expansion strategies often go beyond building more workflow features. Vertical software businesses can expand by building fintech, B2B marketplace, Logistics tech, or ad tech value propositions on top of their software."

• Identifying New Market Entry Strategies:

  • Point: Companies are finding innovative ways to digitize industries without starting with traditional workflow software.

  • "Returning to the "slow why now" point, we've seen more vertical software businesses try to digitize a market without starting with a workflow software value proposition."

    • "Wikifarmer is trying to digitize the farmer's market by starting with a B2B marketplace value proposition that helps farmers sell with fewer intermediaries."

  • "Ultimately, we believe that every company will likely fight to be in a defensible competitive position, which often means owning the industry's system of records."

• Assessing the "Right to Win" in a Market Segment:

  • Point: Evaluate the potential for market dominance based on initial value propositions and expansion strategies.

  • "Reflecting on the key success factors of vertical software businesses, we keep wondering about the extent to which an initial value proposition gives a company the "right to win" in a market segment that is hopefully large enough."

  • "Is the company more likely to go upmarket or expand the product suite? If they go upmarket, which competitors will they run into? How will the market ultimately be segmented?"

5 Lessons Learned Building MVPs

Why Read: 

• A practical framework for rapid product development, validation, and improvement, helping founders efficiently create successful MVPs.

Featuring:

• Noah Kagan (@noahkagan), Chief Sumo & CEO at AppSumo

• Link:

• “5 Lessons From My Newest Startup”

Key Concepts and Tactics:

• Using Prioritization Checklists for Product Development:

  • Point: Implement a prioritization framework to evaluate potential product ideas.

  • "At AppSumo Originals, we use a similar 3-step framework:

    • 1) Hyped AF – Are we hyped AF about this?

    • 2) New Buyers – does this serve the customers we want to attract?

    • 3) Ease of Creation – is this a relatively easy product to create?

    • 4) Word of Mouth – All three of our previous winners had virality baked into the product"

• Validating Ideas Before Full Development:

  • Point: Test market interest and willingness to pay before investing heavily in product development.

  • "We validate the idea BEFORE we fully build it out. ... Before building BreezeDoc, we asked people in our Zone of Influence if they'd be interested in a DocuSign alternative. Even more importantly, we asked if they'd be interested in pre-buying."

• Implementing a 30-day MVP Process:

  • Point: Use a three-phase approach to rapidly develop and refine your minimum viable product.

  • "Our 30-day MVP process has 3 phases:

    • Phase 1: First Beta Version

    • Phase 2: Customer Feedback

    • Phase 3: Marketing Experiments"

• Working Closely with Customers:

  • Point: Continuously engage with customers for feedback and product improvement.

  • "We TALK to them as much as possible ... We talk to our customers AGAIN and get feedback: How's it going? We reach out early (and often repeatedly) to get feedback, What do you hate/what is broken? What's missing?"

• Tracking Key Performance Indicators:

  • Point: Identify and monitor crucial metrics to gauge product success and user engagement.

  • "We look at several Key Performance Indicators (KPIs):

    • # of new signups per day

    • % new signups creating a document within 7 days of signup

    • Total # of documents created per day

    • Conversion rate % of free to paid customers"

• Focusing on Improvement Over Expansion:

  • Point: Prioritize enhancing existing products rather than constantly creating new ones.

  • "Instead of building more new things, we're focused on improving the apps that people want."

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