Vertical software: a founder’s guide to success
A few years ago Bessemer published “The Industry Software Revolution,” a white-paper showcasing the fundamentals of and future opportunities in vertical software. Since then, the vertical software industry has continued to mature from a little-known underdog to a fast-growing segment in the entrepreneurial ecosystem.
In the past half decade, the market size for vertical SaaS businesses has nearly tripled to support numerous billion-dollar businesses and a new wave of cloud players that’s kept us busy.
In 2017, Bessemer has one of the largest vertical software portfolios in the venture business with more than twenty-five investments across education, real estate, construction, healthcare and more.
We published an updated report to reflect our continued enthusiasm for what is often considered a “small and sleepy” market. This time, we’ve built on learnings from past portfolio companies to provide a framework for new founders looking to build enduring vertical software.
There are many reasons but we think this is a no-brainer due to three reasons:
First, the total market cap for vertical software is big and getting bigger (now at $150 billion).
Next, vertical software companies benefit from winner-take-most dynamics in their industries.
Take Veeva, for example, which at the time I wrote this has eclipsed 60 percent market share in pharmaceutical CRM software. In vertical software, buyers select what their peers are purchasing — enabling an early leader to pull away from the pack.
Lastly, we think the exit opportunities for vertical SaaS have become more attractive in the past decade thanks to growing private equity interest in software and there is an expansion in public vertical software multiples.
The number one reason we pass on vertical software companies is that we lack confidence in the total addressable market (TAM). Our advice to founders is to choose your market wisely and run towards areas where you have domain expertise and a shot at building a $100 million ARR business.
Then, execute flawlessly. In our research, we explain the best practices in customer-led development, scaling a sales and marketing team, and vertical software benchmarking data from amazing companies in and outside Bessemer’s portfolio.
Successful vertical software founders capitalize on their market leadership to pursue “multiple acts” after they get to meaningful scale with their core product. Below, we lay out a few of the second acts we’ve seen in the past, including M&A, cross-sale of complementary products, marketplace development, and integrated payments.
We’ve mapped out the market of incumbents and new cloud entrants across the largest industries in the world.
If you are building the next vertical category killer, please reach out by emailing me at email@example.com.