Unlocking the Potential of Vertical SaaS

Exploring the Dynamics of Vertical SaaS (vSaaS) Adoption, Challenges, and Opportunities

Hi there!

This week on Eximius Echo, we're exploring the SaaS sector, talking about Vertical SaaS (vSaaS) which represents a paradigm shift in the way industries leverage technology to streamline operations, enhance productivity, and drive innovation.

Unlike traditional horizontal SaaS solutions, which cater to broad markets, vSaaS is tailored to meet the specific needs and requirements of niche industries and verticals. As the demand for industry-specific software continues to grow, fueled by advancements in cloud computing, data analytics, and artificial intelligence, vSaaS is poised to play a pivotal role in shaping the future of digital transformation across traditional sectors. In this article, we delve into the intricacies of vSaaS, exploring its evolution, impact, challenges, and opportunities in today's dynamic business landscape.

If you’ve not heard of us, Eximius is a sector-differentiated fund focusing on FinTech, SaaS, Online Media & Gaming, and HealthTech. You can find out more here. This newsletter is an attempt to share ideas, insights, and context within the realms of our chosen sectors. Let’s dive in.

The landscape of industry-specific software has undergone a remarkable evolution in recent years, marked by staggering growth and disruptive innovations. From its modest $50 billion market cap in 2010 to an astonishing $600 billion industry in 2020, the vertical Software as a Service (vSaaS) sector has captured the imagination of entrepreneurs, investors, and businesses alike. 

With the promise of low customer churn, high NDR rates, and capital efficiency, the industry has produced several billion-dollar champions like ServiceTitan (Home services), Veeva (Life sciences), Toast (Restaurant), and Procore (Construction). These companies have shown us how industry-specific, cloud-based companies can revolutionise traditional sectors whilst generating significant business outcomes.

The Current Landscape and Potential

While vSaaS has made significant strides, numerous verticals still exhibit low adoption rates. For instance, Toast, a leading vSaaS provider for the restaurant industry, serves only 6% of US restaurants. Similarly, ServiceTitan, catering to the home services sector, has penetrated just 1% of its core Total Addressable Market (TAM). Moreover, foundational industries such as agriculture and infrastructure have been slow to embrace purpose-built software due to inherent barriers to disruption (unstructured data, small TAMs, tricky, low ACVs, etc). Simultaneously, there are also emerging new industries (e.g., electric vehicles) that could also be the beneficiaries of verticalised solutions.

Despite these challenges, there's immense growth potential. As technology continues to evolve and industries become increasingly digitised, vSaaS companies have an opportunity to address unmet needs and drive innovation across various sectors. 

Key Drivers of Adoption

The next wave of vSaaS adoption is poised to be driven by the convergence of three key trends:

• Workability of Unstructured Data: Previously, vSaaS adoption was limited to companies with modern tech stacks and structured data, excluding industries reliant on unstructured data (which comprises 80% of global data). Advances in Large Language Models (LLMs) capable of handling unstructured data workflows have sparked a significant paradigm shift, making vSaaS accessible to previously underserved industries.

• Convenience of Embedded APIs: Scaling a vSaaS company necessitates continually increasing Average Contract Values (ACVs) by adding new features and products to generate additional revenue streams - known as the “layer-cake strategy”. The pioneers of vSaaS in the early days had to do without embedded fintech and automated marketing. Nowadays, companies like Plaid and Twilio make it easier for startups to deliver more robust products and services driving their ACVs without building everything in-house.

• Receptiveness of Stakeholders: There is a growing acceptance of digital products among buyers and users. The rise of millennial decision-makers, known for their data-driven approach and tech-savviness, is driving adoption on the buyers' end. Additionally, the COVID-19 pandemic has accelerated the shift towards digital technology, overcoming adoption barriers as stakeholders recognise the need for interconnected systems to drive efficiencies across value chains.

  

The vSaaS landscape stands at the precipice of unprecedented growth and innovation. With the convergence of technological advancements, evolving consumer preferences, and an increasingly digital-first mindset, vSaaS companies are poised to revolutionise industries. From healthcare to professional services, the opportunities are vast, and the potential for transformative impact is immense. As we navigate the complexities of adoption and implementation, we must remain vigilant, agile, and forward-thinking.

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