A few years ago, we published the initial version of our vertical SaaS manifesto. Since then, we have seen vertical SaaS continue to evolve—especially as new forms of monetization arise and augment the traditional software-based model. Accordingly, we have updated this piece to reflect the changing face of vertical SaaS, deeper insights into pricing and packaging, and the emerging importance of B2B payments in vertical SaaS in a new Bonus Law. At Bessemer, we are more confident than ever about the continued proliferation of software in every industry and we look forward to backing the next great vertical software founders doing so.
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What we came to learn through investments like Shopify, Procore, Toast, ServiceTitan, Mindbody, nCino, Disco, and many others, is that vertical software companies could grow to be much larger than we expected. By focusing on a vertical market, these companies are able to trade market size for market share and in some cases achieve 50%+ market penetration. In vertical markets, one or two vendors often dominate and capture most of the value. Today, every industry runs on software, making the vertical software opportunity more valuable than ever before.
With the benefit of watching from the sidelines, we’ve tried to capture a decade of lessons on how to build industry-defining vertical software companies.
For an aspiring vertical software business, market leadership is the prize. Over the past decade, we’ve seen three successful paths to market leadership:
1. Attack an underserved market: Historically, the most valuable vertical software businesses have been built by serving industries that have lacked access to software. Simply put, it’s much easier to capture leadership in a greenfield market without incumbents.
In this spirit, Procore‘s* founder, Tooey Courtemanche, realized that the construction industry was woefully underserved by existing software products. He took advantage of mobile Internet access on the job site to build a modern way for the construction industry to collaborate in the cloud. Procore has grown to lead the industry with an end-to-end construction management platform, creating a multi-billion company in the process.
"Attacking an underserved market” can take different shapes in the trajectory of a startup:
2. Address an overlooked problem: Once an industry has been served by a vertical market leader, they can be very difficult to unseat. In more mature markets, we’ve seen new leaders emerge by attacking problems that are poorly addressed by market-leading incumbents.
For example, nCino* found an opportunity to digitize the processing of commercial loans inside of banks. Banks had plenty of software vendors (including massive incumbents like FIS and Ellie Mae) but no one was paying attention to the commercial loan origination process.
Look under the hood of a company in any industry and you’ll find dozens of business processes that have yet to be productized or poorly served. These are ripe for a best-of-breed market-leading vertical solution.
To get a taste for what underserved problems look like in a specific vertical, check out Mike Droesch's supply chain roadmap.
3. Unseat sleepy incumbents: Existing market leaders have big advantages making it extremely difficult to unseat incumbents. In the auto industry, three 40+ year old software companies—CDK, R&R, and Cox—have chased away dozens of new entrants over the years and grown to over $100 billion in value.
However, time and time again, we’ve seen exceptional founders leverage a platform shift to unseat incumbents. This is often driven by a technology catalyst that gives new entrants an unfair advantage.
*We saw our portfolio company Toast pull this off in the restaurant point of sale (POS) market. Many thought this market would be forever dominated by NCR and Oracle. But Toast’s founders had three radical insights:**
With a vastly superior tablet-based product at a disruptive price point, Toast was able to take massive share from NCR/Oracle in less than a decade and build a $500+ million revenue business.
Unseating incumbents is difficult but with a product that is better or cheaper, new entrants can overcome the switching costs that give vertical incumbents their advantage. However, this is the toughest path to market leadership because it requires your new solution to be wildly cheaper or better (or both).
Examples include:
Developer platforms: In , Bessemer published the eight laws of developer platforms, a set of best practices for developer-oriented software companies, an emerging category at the time. In category’s growth has since exceeded our wildest expectations.
With every industry hiring developers and digitizing their business, we’re seeing the emergence of vertically-focused developer platforms.
In financial services, APIs like Plaid, Stripe, Adyen, Marqeta, Alloy**, and [Lithic](https://lithic.com/) facilitate payments, data sharing, and other payments-specific capabilities.
In retail, “headless” e-commerce platforms and API-driven tools like Shippo* are giving developers more control over the retail experience.
We’re starting to see developer platforms emerge in other verticals like healthcare, travel, education, and telecom.
Looking ahead, we expect to see the rise of vertically-focused developer platforms as even the most traditional industries increase their investment in software and IT. For further reading on developer platforms, read Ethan Kurzweil’s newest laws on this unique type of software model.
There is one thing that separates the good from the truly great in vertical software—a “layer cake” strategy of building additional products to sell into their core vertical market.
To put this in perspective, look at Veeva, the leader in software for the life sciences industry. Veeva got its start by selling CRM software for pharma sales reps. Before the company hit market saturation in the CRM market, Veeva’s founder started to work on the company’s next act. In , Veeva launched Veeva Vault, a new product line serving not only the sales function but also the research and clinical operations functions.
While Veeva’s CRM product continues to grow at an impressive 10-15% annual growth rate, Vault has driven the majority of the company's recent growth. Year after year, Vault has steadily expanded in breadth with dozens of products. Thanks to this layer cake strategy, the company has sustained a revenue growth rate of about 30% over nearly a decade.
Today, Veeva is approaching $2 billion in revenue and showing no signs of slowing.
The key lesson from the Veeva experience is that vertical software CEOs need to start thinking about their “next act” years before their core product starts to slow. It can take two to three years to launch a new product and grow it to a meaningful scale.
When it comes to building new products to cross-sell into an existing customer base, we’ve seen a few tactics used successfully:
In the early days, it can be tempting to work on many products concurrently, but focus is key. The most important lesson we’ve learned from watching portfolio companies on this journey is that it requires ruthless prioritization. As a resource-constrained startup, limit yourself to one “next act” at a time until you’ve built a mature multi-product muscle.
However, once you get to $100+ million of ARR, you no longer have the luxury of being hyper-focused. You’re now dealing with the complexity of a multi-product company selling into multiple market segments.
Instead of trying to manage by committee, Veeva has a product owner and GTM owner for each of its products and market segments. These "two in a box" owners are focused full-time on their piece of the layer cake. Their financial incentives are tied to the success of the new product, and they are given an independent team to move quickly and execute without dependencies elsewhere in the company. Typically, their compensation is tied to the success of this new product and they are made to feel like true owners(Working Backwards does a nice job of explaining how Amazon does this). Having a clear owner (and arming them with resources to be autonomous) is the best way to manage multi-product complexity at scale.
Market-leading vertical software companies have the luxury of adding “integrated services” like payment processing to their layer cake. Most financial services like payment processing, payroll, and lending are a commodity. As the trusted software vendor to your vertical, you have the right to win against generic third-party providers by delivering a vertical-specific offering that is often more usable, more affordable, and better integrated with your software.
The beauty of this approach is that you’re not asking customers to reach into their pockets and buy more software. Instead, you’re replacing something that customers are already paying for which makes the cross-sell feel “free” and lowers sales friction.
Over the past few years, we have seen an explosion in these kinds of integrated services including:
Payroll: Like payment processing, payroll is a commodity service dominated by generic providers. Vertical software companies are in a unique position to build fully integrated payroll processing solutions like Restaurant365* and Toast are doing in the restaurant vertical. An integrated payroll offering can deliver industry-specific features, reduce the need for accounting reconciliation, and provide better service than generic legacy providers, like ADP or Paychex.
The dollars in payroll are massive—representing $10-$25 per employee per month depending on the industry and depth of functionality. And the opportunity has become much more actionable in recent years thanks to a new ecosystem of third-party providers that make it easier to deliver integrated payroll such as Gusto, CheckHQ, and Zeal.
Vertical software companies can further leverage card issuing to pay employees via debit card rather than check or direct deposit. Through this, employees access wages faster, employers benefit from happier employees, and the software company issuing the payroll cards captures interchange revenue in the process. Toast, for example, is launching the Toast Pay Card which provides employees with instant access to wages and tips once a shift is finished. The Toast Pay Card has a variety of benefits including providing instant and early wage access, reducing operational overhead of paper checks, and eliminating the requirement of a bank account for the employee which is important in an industry where many are unbanked.
As vertical software companies explore ways to leverage their role as the “operating system” for their businesses, we see them branching out into other lucrative integrated services, which we dive into as the first prediction in State of the Cloud .
Most vertical software companies built their businesses by solving problems for internal business users, often overlooking consumer end-users in the process.
With many internal problems solved by a prior generation of software, we are seeing newer success stories in vertical software focus on consumer experience and “systems of engagement” to unlock new opportunities.
Take Brightwheel, a provider of software to the childcare market. Brightwheel’s founder Dave Vasen realized that parents want to see what their kids are doing and communicate with their childcare providers. By focusing on the needs of the childcare consumer, Brightwheel created a new category for childcare software that did not exist before and is now bigger than most of the incumbents.
Similarly, Blend built a multi-billion dollar public company by arming banks with software to process online mortgage applications. The industry was full of incumbent software providers but all were focused on internal use cases. Blend was the first to approach banking software from the perspective of the bank’s customer.
The vertical software business that also interfaces with end-consumers can monetize those consumers in creative ways:
The vertical software business that also interfaces with end-consumers can monetize those consumers in creative ways:
Consumer lending: ServiceTitan has partnered with a lender to make it easy for its home services companies to provide financing for their end-consumers when they are making a big purchase. ServiceTitan helps its customers close more sales by providing the consumers with instant financing. And ServiceTitan earns a meaningful commission for facilitating the transaction.
Many of the most valuable vertical technology companies like FICO, Esri, Verisk, CoreLogic, Refinitiv, and IMS are data businesses at their core. They have grown to billions in revenue by selling data to vertical markets and have many of the qualities that make software businesses so attractive (high margins, recurring revenue, barriers to entry, operating leverage, etc.)
To date, few application software companies have built data businesses. But we think this is one of the under-served opportunities to grow revenue and build deeper moats.
Value creation can occur in a few different ways:
These plays (data plumbing, benchmarking, machine learning, and selling data) were tough to pull off in the on-premise software world. Data lived in the customer’s server. Now data resides in the cloud and is accessible to software vendors in a way that was never possible before.
Pricing and packaging is hard. Most software companies default to gut decisions and rarely make changes. It is a missed opportunity. Pricing efforts are free ways to drive revenue growth, requiring no incremental R&D or GTM investment. In vertical markets, where logos are sparse, getting the most value out of each customer is critical.
We’ve found that many of our portfolio companies go years without revisiting pricing. Below are good signals that it’s time to run new pricing experiments:
Even when companies realize it is time to revisit pricing, oftentimes they become paralyzed by the complexity of pricing. Most pricing questions don’t have simple answers. What is the right pricing model (e.g. usage-based, seat-based, two-part tarrif, etc.)? What is the right price point for each customer persona? What are the right contract terms? How do I implement pricing changes?
If there is one piece of pricing advice we can impart it is this—pricing is never done. As your product and company matures and evolves, so too should your pricing model. However, pricing is challenging and in the face of such complexity, it is easy to kick the can down the road. Instead, try the following:
Simple experiments can include:
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There are plenty of valuable resources that will inspire countless pricing and packaging experiments. We would recommend starting with the following:
Vertical software companies often get their start focused on the SMB or mid-market—selling four or five-figure deals. In some verticals, there are enough customers to build a massive business in this market segment, especially if you can deliver a great layer cake (Shopify or Toast are good examples). However, in many verticals, there are too few logos to build a big SMB/mid-market vertical software business. The only way to sustain high rates of growth is to move upmarket.
The commercial lending software company nCino began by catering to the small banks and credit unions willing to work with a startup. These were initially five-figure deals. As the product matured and nCino built a reputation in the industry, the company began to move up-market with six-figure deals to larger banks. Today, nCino has over 20 customers paying over $1 million per year, including some of the largest national banks in America.
In nCino’s case, there were only about five thousand banks in the US. Without six-figure deals, our portfolio company would have never achieved IPO scale.
The march up-market can also be dangerous—hijacking a company’s product roadmap, distracting the team, and exposing the company to new risks. Adam Fisher recently discussed best practices to make the ascent upmarket.
As Adam explains, there are a few winning strategies we’ve observed over the years:
If you start on the march up-market, you will need to be thoughtful about adapting for the enterprise. You’ll need to mature the product, harness an enterprise sales motion, reposition your marketing efforts, and build an implementation/success team to drive customer adoption. It can be hard to learn enterprise on the job and your best bet will be to hire team members with enterprise experience.
Acquisitions can be used to accelerate the vertical software layer cake. Given your vertical focus, you are in a good position to buy a product and cross-sell to your customer base. M&A can also help you consolidate the market and get to the coveted market leadership position. For these reasons, vertical software companies tend to be more acquisitive than horizontal players.
However, the majority of acquisitions are value destructive and M&A should be used cautiously. The best acquisitions have a very clear and immediate financial ROI. The worst are often rationalized using strategic value and optimistic future growth assumptions.
Most successful software acquisitions fall into one of two buckets:
Even when the ROI is strong, acquisitions can destroy value due to weak post-merger integration. Any acquisition needs to have a thoughtful post-close game plan across three areas:
Find a trusted leader who will be accountable for building the plan and then owning the post-merger execution. Because the failure rate in M&A is high, make sure to start small. In our experience, the smaller deals tend to be the most likely to succeed.
If you ever find yourself in the fortunate position of being a market leader, don’t wait for the next generation to take your throne. Over the years, we’ve watched vertical software companies use the following strategies to fortify their competitive positions:
1. Take advantage of scale—As a market leader, you have more revenue than the competition, enabling you to invest more in product and GTM than your competitors. This is a virtuous feedback loop. Use the revenue to build your layer cake and become the one-stop-shop for customers. Outmaneuver or commoditize adjacent point solutions before they can become real threats. Use your large GTM engine to outsell and out-market your competition. Amplify your brand to win over risk-averse customers who want to buy from the market leader, rather than an upstart.
2. Increase your switching costs—Your deepest competitive moat may be making it painful for your customers to switch (even if new entrants have better products or lower prices). We’ve seen a few smart approaches to driving higher switching costs:
3. Build a platform—Vertical software companies can enable their customers to collaborate with other companies in their industry. This may be the deepest moat in software-- by becoming the platform upon which the entire industry does its work, you can unlock powerful network effects.
The platform play often encompasses a few different strategies:
This is the path that Procore is taking in the construction industry. Procore is making it possible for all the key stakeholders in a construction project to collaborate. It is delivering an open API with pre-built third-party integrations. And it is making it easy for developers to build applications on top of Procore. The company’s long-term vision is for the entire construction process to be run on Procore. Its prize is to be the dominant platform for the $10 trillion-dollar global construction industry.
In the early innings of your company’s life, it’s all about growth and customer acquisition. But once you’ve reached a market leadership position, draw inspiration from vertical leaders and work to deepen your competitive moats.
Not all software companies are destined to IPO. As a CEO, you need to regularly take stock and work backwards from your desired path.
IPO: The IPO path requires hyper-growth at scale. You need to be at $100 million+ of recurring revenue and growing over 30% at a minimum. You need a massive TAM that can support a plan that gets you to hundreds of millions in ARR after the IPO so that buyers in the IPO see a credible opportunity to make a big return.
For most companies, this proves to be a tall order. Less than 30 vertical software companies have gone public in the past decade. Most simply do not have the growth rate or market size to support the IPO path.
There is no shame in getting off the IPO and steering your business toward a more viable exit strategy. There is nothing worse than burning lots of capital in a reckless attempt to maintain hyper-growth only to find that you’re pushing on a string.
Strategic Exit: Once you’re off the IPO path, your best bet is to position your business for acquisition by a strategic acquirer.
This involves a few key steps:
Identify buyers: Identify the companies active in your market or those who may enter your market in the future. Get connected to their CEOs through your investors or advisors under the guise of a potential GTM partnership or informal conversation.
Build personal relationships with the individuals most likely to champion an acquisition (ideally the acquirer’s CEO). Invest time in these relationships. Acquisitions are made by people, not by companies. You need to convince a CEO or P&L owner that you are the strategic solution to their problems.
Strategic value goes beyond financial value. It is driven either by competitive dynamics or a transformative growth opportunity. When building relationships with potential acquirers help them understand:
— How you can help them beat the competition
— How you can help them earn more money from their existing customers
— How you can help them enter an adjacent market and unlock dramatic growth in their business
Invest in the relationships. Do not hire a banker to put up a “for sale” sign. Instead, wait for one of the strategic acquirers to lean in with an offer. Once they do, you can hire a banker and use the inbound interest to catalyze conversations with other buyers to create a competitive dynamic.
Private Equity Exit: When you’re ready to exit, you should position for a private equity buyer while cultivating your strategic options. This way you have the luxury of both options. In recent years, there have been situations where PE buyers have been even higher multiples than strategics.
PE buyers are exclusively motivated by financial value and look at a specific set of metrics in a software business. To maximize value in a PE exit, you need to optimize for the following metrics:
If you’ve positioned your business well, you can engage both strategic and PE buyers. By attracting as many potential bidders as possible, you can drive attractive auction dynamics and get top dollar in a competitive sale process.
To attract the largest number of prospective buyers and the highest valuation, it helps to be a “rule of 40” company (ARR growth % + FCF margin % is greater than 40; the higher the better) and to show profitability (cash flow breakeven at a minimum).
Businesses that are growing and profitable command the highest multiples but at a minimum, you want to either position as a 40%+ growth company operating at breakeven (trading on a revenue multiple) or a low-growth company that is highly profitable (trading on an EBITDA multiple). A <30% growth company running at breakeven or burning cash will attract the lowest level of interest among PE buyers.* If your DNA is oriented toward growth and you’re struggling to maintain growth, hire a CEO who knows how to drive profitability and is willing to do the heavy lifting to maximize value for your team and your shareholders.
As we look to the next horizon of vertical SaaS, embedded fintech providers have made it easier for software companies to deliver innovative B2B payments and spend management products.
Paper checks still account for half of B2B payment volume in the United States. Vertical software providers are uniquely positioned to digitize these payment flows online and help payors pay their vendors electronically. Given that traditional ACH and paper checks are largely seen as free, the most significant issue is how to make money from those payment flows.
We’ve seen a handful of business models emerge in B2B payments in recent years:
Faster payment methods: The most profitable forms of B2B payment monetization largely rely on charging for speed of payment. Faster payment options include virtual credit cards, fast ACH, and fast check. For example, AvidXChange’s most profitable payment mechanism is virtual credit card. This is a one-time virtual card that is sent via or API to recipients of B2B payments. Fund recipients pay extra for virtual credit card (in the form of credit card processing fees) because it gives them access to the funds within 1 day rather than waiting up to 3 business days for an ACH to clear. In addition, virtual cards also entail rich remittance data and reduce the risk of fraud as compared to ACH transfers. Similarly, Bill.com offers both ‘Pay Faster by ACH’ and ‘Pay Faster by Check’ which are faster forms of traditional payments by leveraging Same Day ACH and expedited shipping of checks to deliver faster payments. Bill.com is able to charge $9.99 for faster ACH and $9.99-$19.99 for faster check.
We’re also seeing a new frontier of B2B payments emerge in the form of companies like Brex, Ramp, Divvy (now part of Bill.com), etc. These combine expense management software with company-issued debit/credit cards to make it easier for their employees to pay for things.
The spend management vendors replace the traditional employee purchasing process. Rather than using purchase orders/invoices or by paying for items out of pocket and then getting reimbursed, spend management vendors arm employees with virtual and physical cards to buy things.
This can be a lucrative business model because the issuer of the card (Brex, Ramp, Divvy, etc.) captures a % of the spend on those cards ranging from 1%-3% (before processing fees). The rise of embedded card-issuing platforms like Marqeta, Lithic*, and Stripe, have made it easier than ever for software companies to issue cards to its customers.
We may see vertical-specific spend management platforms will emerge to provide software and debit/credit cards that are tailored to their end users through offerings like:
The opportunities in B2B payments and vertical-specific card issuing remain highly speculative. We haven't yet seen many vertical software businesses unlock the potential of B2B payments, but we expect it will inspire a new wave of opportunity in the years ahead.
With more than a decade of investing in vertical software companies under our belts, we have grown increasingly enthusiastic about the future potential for vertical software. If you’re a founder building a software company and are raising capital or have questions about this white paper, please reach out at [](
Special thanks to Trevor Neff, Mary D’Onofrio, Ethan Kurzweil, Kent Bennett, Charles Birnbaum, Connor Watumull, Ariel Sterman, and Christine Deakers for their contributions to this piece.
*Indicates a Bessemer portfolio company
Various heavy appliances consume large amounts of electricity when in use. These heavy appliances provide an opportunity to save money by running them during the cheaper rates when possible. Taking the time to understand how different routines can affect cost is a great way to start saving. The following table helps give an estimate of the cost difference between running different appliances at different rates and times.
Appliance Use kWh/Month Daytime Cost/Month* Evening Peak Cost/Month* Overnight Cost/Month* Range, large surface unit 15 min/day 18 kWh $3.14 $9.41 $6.27 Oven 2 hrs/day 25.6 kWh $4.46 $13.38 $8.92 Clothes washer 6 hrs/wk 6.12 kWh $1.07 $3.20 $2.13 Clothes dryer 6 hrs/wk 66.96 kWh $11.67 $35.00 $23.33 Monthly Total $20.34 $60.99 $40.65*Rates and calculations are an approximation based on approved time-of-use rates for Oahu, Maui and Hawaii Island.
A home battery system can store energy during the day so that it can be used during the evening. The battery system can gather energy from your storage system or from the grid during the cheaper daytime rate. Using your home battery's electricity during the evening can offset the higher peak price of electricity.
Some devices can still use electricity even when you consider them off. Unplugging TVs, printers, and videogame consoles when not in use can help save electricity throughout the whole day. An advanced power strip can make this easier by preventing electrical flow unless a specific device is turned on. For example you can have it so that your consoles, disc players and stereo are only able to use electricity when the TV is on.
Charge your electric vehicle when rates are low. Electric vehicles have many benefits already but also have synergy with Time of Use rates. Charging your vehicles during low rate periods can make that electric vehicle provide even more cost savings. Some electric vehicles make this easier by allowing you to set when it will charge.
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