The success of vertical software has pushed SaaS giants from Microsoft to Google to Salesforce to launch industry-focused clouds across manufacturing, health care, financial services, and others. It’s an acknowledgement by those companies that in order to compete and win against the next generation of startups, they’ll need to deepen their expertise.
The SaaS giants know that by going broad, there will be some customer needs they can’t meet. But the enterprise software industry is also cyclical, and at some point the specialists may decide they need to go broad to scale.
But right now, the rise of vertical SaaS is yet another pendulum swing in the everlasting struggle between platform players and specialists.
Going small to go big
The enterprise software industry, led by SAP, Oracle, and Microsoft, thrived for decades on the notion that the best way to win was by expanding your total addressable market as widely as you could. That meant capturing customers across industries and markets to grow at blistering pace, which worked when software was relatively new to the captains of industry.
Although the horizontal software play has been a narrative dominating enterprise tech, a growing list of vertical software companies such as ServiceTitan, Procore, and Toast are upending that narrative and shifting market sentiment.
“The market, or at least investor interest in vertical SaaS, has dramatically increased over the past few years,” said Talia Goldberg, a partner at Bessemer Venture Partners, which has been investing in vertical software for more than a decade.
One of those companies, ServiceTitan, found success by building a software platform that spans marketing, human resources, and finance for plumbers, electricians, and other trade businesses.
ServiceTitan co-founder Vahe Kuzoyan didn’t set out to start a company, but when he noticed his dad’s plumbing software was outdated and couldn’t find an alternative in the market, he decided to build the software himself. That software turned into ServiceTitan, which is now worth an estimated $9.5 billion.
But it wasn’t always easy to convince investors that there was a market for software that catered to trade industries, because field services businesses were often overlooked by investors and an industry-specific focus was viewed as limiting by venture capitalists obsessed with growth.
“The orthodoxy at that time was, you draw a box around a category of software and then you do really well in that category and then you go try to sell it to as many customers as you can,” said Kuzoyan.
As ServiceTitan grew in revenue and traction, its financial performance dimmed some of that skepticism, but its story isn’t unique.
“What [investors] missed is that you can capture significant market share in [a] vertical much more so than in any horizontal industry,” said Bessemer’s Goldberg. In the CRM space, for example, Salesforce is dominating the market with about 30% market share. But “in vertical software you can credibly get to 50% plus market share,” she said.
The reason vertical software companies are able to capture so much market share is they’re often building software for underserved or complex industries that they can understand more deeply than a bigger software company.
That’s especially true in industries such as restaurants, health care, construction, or financial services; customers want software that can help them keep up with ever-shifting regulatory environments, complicated sales processes, and unique business models.
But these are the exact types of industries that have traditionally been ignored by large software vendors.
“Despite being one of the largest industries in the world, restaurants have been underserved by technology,” said Chris Comparato, CEO of restaurant software vendor Toast. In response, restaurants have been forced to stitch together software designed for other businesses or default to manual processes to serve their needs.
“Restaurants have been plagued with a constellation of bolted-together point solutions, manual workflows and workarounds, and horizontal software providers with generic solutions who didn’t appreciate the complexity of their business,” said Comparato.
What’s great about a vertical solution is it speaks directly to the customer in the language they understand.
Vertical tools, on the other hand, solve many of these challenges by providing exactly what specific customers need and serving as the central nervous system for the businesses they serve.
But beyond the tools themselves, another advantage for vertical SaaS companies is the expertise of their sales and customer service teams.
At Toast, for example, nearly two-thirds of employees have restaurant industry experience, while ServiceTitan and Procore also employ a significant number of people with backgrounds in the trades or construction respectively.
That enables employees to address customer questions and problems in a way that employees at the cloud giants probably couldn’t.
“What’s great about a vertical solution is 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.
Jack of all trades, master of none
As more vertical software companies have found success, established vendors such as Salesforce, Microsoft, and Google have also entered the fray, launching industry-focused versions of their cloud products.
“I think it’s very telling,” said ServiceTitan’s Kuzoyan. “To me it’s actually reinforced the broader thesis that the future is vertical. Otherwise they would be creating best-in-class categories that you could then mix and match. That’s not where most of the conversation is.”
But are companies like ServiceTitan, Procore, or Toast worried about the SaaS giants moving into their space? Not really, said Kuzoyan, who noted that he loves going up against Salesforce.
That’s because vertical software companies know large SaaS giants don’t have the expertise or knowledge to meaningfully compete in their industries. And the truth is, it just doesn’t make financial sense for horizontal players to home in on any one industry.
“They’re trying to appeal and wrap a new cover on top of their offering and make a few small tweaks to serve those customers, but in reality, they’re not going and building all the tiny little features and labels and completely changing the whole workflows because it’s not worth it,” said Goldberg.
That doesn’t mean it’s all smooth sailing for vertical software companies.
ServiceTitan co-founder Vahe Kuzoyan Photo: ServiceTitan
While ServiceTitan’s Kuzoyan estimates the market for trade business software at nearly $1 trillion, and Procore’s Jenkins said the construction industry accounts for 13% of global GDP, that potential isn’t true of all industries.
“One of the other challenges with vertical software is you’ve got to find these deep verticals that have that potential, because otherwise you’re going to close off the size of markets you can go to,” said Jenkins.
And because vertical software companies are playing across fewer industries, they often have to be the leading software provider in their space in order to be a breakout success. “Whereas the No. 2 in the CRM market or the HR software market is a pretty exciting place to be … in the vertical SaaS ecosystem, the size of the prize for the No. 2 is substantially smaller,” said Goldberg.
Although it’s still early in the vertical software market, the potential is enormous. “If you look at the universe of vertical SaaS businesses, it’s a relatively nascent field; it’s not very mature,” said Kuzoyan.
While companies like Toast, Procore, and Veeva have already gone public, others such as ServiceTitan haven’t yet. While ServiceTitan wouldn’t disclose any plans to go public, Insider reported that the company confidentially filed for an IPO earlier this year.
Over the coming 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 downturn, there are opportunities in the public markets, which have been favorable to vertical SaaS players historically: private equity buyers that are interested in vertical software and also M&A opportunities, said Goldberg. “I think the opportunities and the breadth of opportunities for vertical software companies is just as large as it is for any horizontal SaaS company today. There’s no real 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’s becoming increasingly clear that you don’t have to sell to everyone to win.
The big platform players can do a lot of things, but as the saying goes, if you’re a jack of all trades, you’re a master of none.
Correction: This story was updated on Oct. 14, 2022, to reflect ServiceTitan’s most recent valuation.
Click Here For The Original Source.
————————————————————————————-