The success of vertical software has driven SaaS giants from Microsoft to Google to Salesforce to launch industry-focused clouds in manufacturing, healthcare, financial services and others. It is a recognition by these companies that to compete and win against the next generation of startups, they will need to deepen their expertise.
SaaS giants know that as they expand, there will be customer needs that they cannot meet. But the enterprise software industry is also cyclical, and at some point specialists may decide they need to scale up.
But right now, the rise of vertical SaaS is another pendulum swing in the eternal struggle between platform players and specialists.
Go small to go big
The enterprise software industry, led by SAP, Oracle, and Microsoft, thrived for decades on the idea that the best way to win was to expand your total addressable market as widely as possible. This meant attracting customers in all industries and markets to grow at a breakneck pace, which worked when the software was relatively new to captains of industry.
Although the horizontal software game has been a dominant narrative in enterprise technology, a growing list of vertical software vendors such as ServiceTitan, Procore, and Toast are upending that narrative and changing market sentiment.
“The market, or at least investor interest in vertical SaaS, has grown significantly over the past few years,” said Talia Goldberg, partner at Bessemer Venture Partners, which has invested in vertical software for over a decade.
One such company, ServiceTitan, has found success by creating a software platform that spans marketing, human resources, and finance for plumbers, electricians, and other business enterprises.
ServiceTitan co-founder Vahe Kuzoyan had no intention of starting a business, but when he noticed his dad’s plumbing software was outdated and he couldn’t find an alternative on the market, he decided to create the software himself. This software became ServiceTitan, which is now worth an estimated $9.5 billion.
But it was not always easy to convince investors that there was a market for software aimed at commercial industries, as field service companies were often overlooked by investors and an industry-specific focus was seen as limiting by growth-obsessed venture capitalists.
“The orthodoxy back then was that you draw a box around a software category, then you do really well in that category, and then you try to sell it to as many customers as you can,” Kuzoyan said.
While ServiceTitan has increased revenue and traction, its financial performance has mitigated some of that skepticism, but its story is not unique.
“What [investors] missed is that you can capture a large market share in [a] vertical much more than in any horizontal industry,” Bessemer’s Goldberg said. In the CRM space, for example, Salesforce dominates the market with around 30% market share. But “in software verticals, you can credibly get more than 50% market share,” she said.
The reason vertical software vendors are able to capture so much market share is that they often create software for underserved or complex industries that they may understand more deeply than a larger software company.
This is especially true in sectors such as restaurants, healthcare, construction or financial services; customers want software that can help them keep pace with ever-changing regulatory environments, complex sales processes, and unique business models.
But these are exactly the kinds of industries that have traditionally been ignored by large software companies.
“Despite being one of the biggest industries in the world, restaurants have been underserved by technology,” said Chris Comparato, CEO of restaurant software provider Toast. In response, restaurants have been forced to assemble software designed for other businesses or default to manual processes to meet their needs.
“Restaurants have been struggling with a constellation of bolt-on point solutions, manual workflows and workarounds, and horizontal software vendors with generic solutions that don’t appreciate the complexity of their business,” said Comparato.
What’s great about a vertical solution is that it speaks directly to the customer in the language they understand.
Vertical tools, on the other hand, solve many of these challenges by delivering exactly what specific customers need and serving as the central nervous system for the businesses they serve.
But beyond the tools themselves, another benefit for vertical SaaS companies is the expertise of their sales and customer service teams.
At Toast, for example, nearly two-thirds of employees have experience in the restaurant industry, while ServiceTitan and Procore also employ significant numbers of people with trades or construction backgrounds, respectively.
This allows employees to respond to customer questions and issues in a way employees of cloud giants probably couldn’t.
“The great thing about a vertical solution is that it speaks directly to the customer in the language they understand,” said Wyatt Jenkins, senior vice president of product at construction software company Procore. . In other words, “we authentically speak the language of construction,” he said.
Handyman, master of nothing
As more vertical software vendors have found success, established vendors such as Salesforce, Microsoft and Google have also entered the fray, releasing industry-focused versions of their cloud products.
“I think it’s very telling,” ServiceTitan’s Kuzoyan said. “For me, it actually reinforced the larger thesis that the future is vertical. Otherwise, they would create top-notch categories that you could then mix and match. This is not where most of the conversation takes place.
But are companies like ServiceTitan, Procore or Toast worried about the arrival of SaaS giants in their space? Not really, said Kuzoyan, who noted that he loves taking on Salesforce.
Indeed, vertical software publishers know that the big SaaS giants do not have the expertise or the knowledge to be truly competitive in their sectors. And the truth is, it just doesn’t make financial sense for horizontal players to focus on one industry.
“They’re trying to appeal and wrap a new cover on top of their offering and make some little tweaks to serve those customers, but really they’re not going to build all the tiny little features and labels and completely change the des entire workflows because it’s not worth it,” Goldberg said.
That doesn’t mean all is well for vertical software vendors.
Vahe Kuzoyan, co-founder of ServiceTitan Photo: ServiceTitan
While ServiceTitan’s Kuzoyan estimates the commercial software market at nearly $1 trillion and Procore’s Jenkins said the construction industry accounts for 13% of global GDP, this potential is not true for all industries. .
“One of the other challenges with software verticals is that you have to find those deep verticals that have that potential, because otherwise you’re going to shut down the size of the markets that you can access,” Jenkins said.
And because vertical software companies operate in fewer industries, they often have to be the leading software provider in their field to be a resounding success. “While #2 in the CRM market or HR software market is a pretty exciting place…in the vertical SaaS ecosystem, the price size for #2 is significantly smaller,” Goldberg said.
Although it is still early in the software vertical market, the potential is enormous. “If you look at the universe of vertical SaaS companies, it’s a relatively nascent field; it’s not very mature,” Kuzoyan said.
While companies like Toast, Procore, and Veeva have already gone public, others like ServiceTitan have yet to. While ServiceTitan would not disclose any plans to go public, Insider reported that the company filed confidentially for an IPO earlier this year.
Over the next few years, we can expect more vertical software companies to emerge, go public, or even be acquired by some of the horizontal SaaS giants.
Despite the recent slowdown, there are opportunities in the public markets, historically favorable to vertical SaaS players: private equity buyers interested in vertical software and also M&A opportunities, Goldberg said. “I think the opportunities and scope of opportunities for vertical ISVs are just as great as for any horizontal SaaS business today. There really isn’t a difference. »
As industry-focused companies continue to prove they can compete with the SaaS giants, and as the SaaS giants themselves move into industry territory, it is becoming increasingly clear that ‘you don’t have to sell to everyone to win.
Great platformers can do a lot of things, but as the saying goes, if you’re a jack-of-all-trades, you can’t master any of them.
Correction: This story was updated on October 14, 2022 to reflect ServiceTitan’s latest review.