The Growth of Vertical SaaS

The origins of SaaS are bound by the simple mechanics of internet speed. For those of us old enough to remember ISP’s such as Freeserve (UK) and AOL (US), initial experiences of the Internet were framed by 56k dial-up in the early-mid 1990s. In this world, B2B SaaS was simply not possible.

The Emergence of SaaS

As the internet “sped up” the range of applications grew exponentially and one major shift in the broader software industry was the shift from CPU-based software loaded from a DVD to software delivered via a browser. Of course for younger generations, many will not be familiar with the concept of “software in a box” yet that was how software was delivered in a pre SaaS world.

Another major trend in the early days of SaaS, was the dominance of horizontal applications. This meant a focus on applications that were industry agnostic and were designed without any specific industry use case in mind. These tended to align with back-office functions that were similar across different industries e.g accounting software like Xero, project management tools like Teamwork or customer support applications like Zendesk.

In recent years, as SaaS has gone more mainstream and has “Crossed the Chasm” from ‘early adopters’ to ‘the majority’, and we are now witnessing the emergence of Vertical SaaS, an idea that this article will explore in more detail. 

Vertical SaaS refers to the notion of creating software with one specific use case (or industry sector) in mind. 

For many, it runs completely counter to the ‘horizontal-first’ approach of the B2B SaaS sector to date. For a start, VC activity in B2B SaaS is high as the unit economics dictate that investment is often needed to fund the start-up phase, coupled with an opportunity of outsized returns for scaleups. VCs are often focused on the Total Addressable Market (TAM), and thus deliberately choosing to constrain your market by narrowing on a particular niche would have up until recently been considered a complete no-no. But what if the niche was sufficiently large to deliver the customers, growth numbers and requisite exit multiples VC’s desire?

Choosing to start a vertical SaaS company is a strategic bet with an important trade to consider: a focused customer base which brings better sales efficiencies, narrower product scope, and potential winner-take-all-dynamics in exchange for a smaller theoretical market size. Understanding these —dynamics are critical for crafting a vertical SaaS companies go-to-market.

—Source: Tom Tunguz

Given there has already been a number of successful Vertical SaaS exits it now represents a credible strategic option as entrepreneurs look for their source of ‘unfair advantage’. In increasingly competitive B2B SaaS markets could a vertical SaaS offering help you cut through the noise and to capture a disproportionate slice of a smaller (but sufficiently large) cake?

When it comes to building a vertical SaaS offering, the choice of the vertical is a key decision made in the formative years of the business. An ideal scenario is one where the founders have experienced the pain first-hand and are thus building a solution to a known issue which they have experience with. They may also have access to the target personas as they are probably one themselves, which again lends itself to a more closely aligned product-market fit. As the feature set matures, lock-in is more likely too as the product road map should be built on strong foundations and continue to be designed with a core use case in mind.

A fundamental strategic advantage of vertical-focused enterprise software comes from improving workflow efficiency in major industries by structuring, integrating, and analyzing big data for knowledge workers — a product strategy that can only be accomplished by being vertical-focused.

—Source: Monica Xie

In summary, there is no doubt that vertical saas has finally arrived. It now represents a compelling strategy for B2B SaaS entrepreneurs looking to raise capital and create an application that meets the needs of a particular vertical. The days where the only route to investment (and ultimate success) was via as big a Total Addressable Market (TAM) as possible, and a SaaS offering designed to cater for everyone are coming to an end.

Rather than wasting resources on generalized marketing and sales funnels, verticals enable SaaS business leaders to focus on a receptive target audience and increase perceived value. This leads to more conversions, higher retention, and ideally a lower barrier to customer acquisition, fueling success.

—Source:The Rise of Vertical SaaS and the Niche Subscription Business Model Daniella Ingrao

Alan Gleeson is the CEO and Co-Founder of Contento, a B2B SaaS content platform that helps B2B SaaS companies scale via a best-of-breed website.