BCV Principal Zeeza Cole and Headline Investor Taylor Brandt wrote this article in collaboration. You can follow them on Twitter here and here to keep up with their thoughts on the venture landscape, the future of work, vertical SaaS and more.
Why Today’s Climate is the Perfect Time for Vertical SaaS to Shine
Industry-specific software – known as Vertical SaaS – has become increasingly popular among investors over the past decade. Unicorn valuations for companies across industries like construction (Procore), dining (Toast), and wellness (Mindbody) demonstrate that industry-specific, cloud-based software companies can become large companies, offer a highly attractive business model for investors and fundamentally transform historically manual industries. While there have been a number of large outcomes, investors are now on the lookout for the next generation of Vertical SaaS startups. As with any industry, however, the space continues to evolve. Even over this past decade, there are changes in end user behavior and new technological advances that have given way to new, and often larger, opportunities than previously expected.
In this article, we will discuss some of the critical tailwinds we expect will contribute to a new wave of startups and potential areas in which they may emerge. In an effort to capture a comprehensive view of the companies capitalizing on these tailwinds, we will also be sharing a Vertical SaaS 50 list as a follow up to this article in the coming weeks, highlighting our selection of the top 50 high growth potential Vertical SaaS companies. We have already compiled over 200 emerging early stage Vertical SaaS companies and would love your input to find the most inspiring ones. This list will include emerging, early stage (pre-seed through Series A) US based companies. If you are a vertical SaaS founder, or know someone building in the space, nominate them here!
The early stages of this Vertical SaaS revolution were largely defined by new end user behavior, specifically a new tech-savvy buyer, and emerging technologies, namely the rise of cloud and mobile. This current stage is no different, though the tailwinds for both have slightly evolved – digitization has permeated not only the buyer but the end user and there are new technologies and data readily available.
- Digitization Knock-on Effects – While many industries saw an increase in a tech-savvy buyer, engagement with end users was not as consistent. Today, however, workers are rapidly becoming more comfortable in a digital world and at a greater pace than ever before. COVID was a forcing mechanism for many workers to incorporate technology into their lives in new ways – both inside and outside the context of their work. Now even the most manual-process-heavy industries are staffed by workers who are more comfortable with digitization – and therefore more likely to adopt new software at work – than they would have been just three years ago. Regulatory drivers have also accelerated this adoption within industries, such as the Electronic Logging Devices mandate (2017) and the Inflation Reduction Act (2022).
- More Millennial Buyers – As Millennials continue to become a greater proportion of business decision-makers, demand for digitization at work will further increase. New buyers will seek solutions that are tailored to their preferences, and digitally native generations are likely to make business choices that reflect this demographic shift.
- Foundational Technologies Have Improved – Cloud and mobile helped transform vertical SaaS offerings; they helped transition workflows from pen and paper but beyond that, they were able to support end users in the field and offer more collaborative experiences. Today, startups are leveraging technologies in a similar manner. They build their software on a foundation of newer capabilities that were not readily available to the first wave of Vertical SaaS giants, such as embedded fintech, automated marketing, generative AI, and even basic API improvements. Companies like Plaid, Twilio, and Open AI make it easier for new players to deliver more robust products and services without building everything in-house. Specialized software can more closely resemble a ‘one-stop-shop’ than ever before, streamlining the end-user experience and building loyalty.
- Data is Increasingly Accessible – Data availability, including vertical-specific data from companies like Rutter (Commerce), Axle (Trucking), and Agave (Construction), allows developers to focus on building differentiated solutions without the nuisance of managing constant data integrations and access. Though security and privacy must be prioritized, data availability encourages innovation in new fields as more entrepreneurs have the opportunity to build solutions around datasets that were previously unavailable or difficult to access.
The next group of Vertical SaaS winners will benefit from these macro tailwinds to deliver consumerized digital products that are both highly-specialized and deeply integrated within their respective industries. We believe the changes outlined will create opportunities for the next wave of software in three main areas:
- Automation Still Hasn’t Reached Every Industry – There are still large industries, such as agriculture and entertainment, that have not yet broadly adopted purpose-built software. We believe the tailwinds #1 and #2 outlined above create a better environment than ever before for new digitization opportunities in industries with historically limited automation. Simultaneously, there are also new industries (e.g., climate-focused heat pumps, Electric Vehicles, etc.) that are emerging that could benefit from verticalized solutions.
- Reinventing Early Vertical SaaS Winners – Many companies have already adapted this strategy though we believe there remains a large opportunity as there are a number of multi-decade-old Vertical SaaS incumbents who have technologically slowed as they have accrued significant technical debt and larger enterprise customers. We believe that as opportunities to reinvent specific industry pain points arise, nimble innovators will be better positioned to serve those needs. This is possible due to the foundational technology improvements – e.g., higher quality APIs, embedded fintech – outlined in Tailwind #3.
- Depth Over Breadth – Many early Vertical SaaS winners expanded horizontally to extend their addressable markets – while this enabled them to become a comprehensive tool for their end users it increased the chances that some processes could be underserved. One example of this can be seen in software tailored to home services workers across specializations like HVAC, Plumbing, Electrical, Cleaning, and Roofing. Though companies like Housecall Pro serve this industry, Roofr emerged to uniquely address roofing needs. The rise of companies serving deeper problems could be aided by industry specific data as highlighted in Tailwind #4. However, the question of depth vs. breadth is likely to split investors, as highly-specialized solutions have an inherently shorter value runway which may limit TAM.
We are excited to support and invest in founders building the next generation of best in class Vertical SaaS companies. As mentioned above, we will be publishing a Vertical SaaS list in the coming weeks. If you are a vertical SaaS founder, or know someone building in the space, please reach out to us (firstname.lastname@example.org & email@example.com) and/or nominate them here!
It was such an honor to work with Taylor on this piece; she is a great friend, investor and collaborator. BCV and Headline have a long history of investing in the space with investments like Housecall Pro, Trucksmarter, Homebase, Appfolio, Grin, Autoleap and Finley. Though it has been a strong sector, we believe the opportunity is even greater in the coming years and are excited to find and invest in the next generation of Vertical SaaS companies.