Introducing the Vertical SaaS Knowledge Project

Introducing the Vertical SaaS Knowledge Project

When I first started investing in Vertical & SMB SaaS 10 years ago, to be a vertical software entrepreneur was to be underestimated. You were deluged with (allegedly) insurmountable challenges. “Your market is too small!” “The sales motion is too hard.” “Those customers can’t produce enough revenue to justify your time.” 

Over the past decade, the investing world has caught up a bit, and has become enamored with the idea of embedded payments. But the framework and language remain clumsy. One sniff of a post-Covid pullback and investors run the hills. 

At Tidemark, we know the opportunity in Vertical SaaS is just starting to unfold. The opportunity to expand is way beyond payments. It’s payroll, merchant card, insurance, lending, and much more. And the true frontier for Vertical SaaS companies is to extend beyond their customers to serve their customers’ customers, customers' suppliers, and customers’ employees. 

I’ve been fortunate to work with a dozen Vertical & SMB SaaS companies, most of whom have reached hundreds of millions in revenue – CCC in automotive (NYSE: CCCS), Toast in restaurant (NYSE: TOST), Siteminder in hotels (ASX: SDR), Dutchie in cannabis, Freshworks in customer experience (NASDAQ: FRSH), Avetta in industrial, Legalzoom in legal (NASDAQ: LZ), Kajabi in the creator economy, Klook in tours and activities, Xero (ASX: XRO) and Karbon in accounting. At Tidemark, we know that not every company will win their category, but those Vertical SaaS companies who do can become some of the best businesses in the world.    

Vertical and SMB SaaS aren’t just great businesses; they can be incredible platforms. In contrast to their horizontal peers, Vertical SaaS companies are inherently multi-product, can achieve a high market share percentage, and enjoy network effects. And as they extend forward and back through the value chain, Vertical SaaS companies can bring multiple stakeholders on the software backplane and transform industries.  

We are calling this project the Vertical SaaS Knowledge Project (aka the VSKP). While we will continue to give our stump speech on why Vertical SaaS is great, the VSKP is more focused on giving Vertical SaaS leaders a guide on how to grow. In this project, we will cover practical topics with a pragmatic depth. Our content will contain novel strategic frameworks, some practical examples, and case studies demonstrating successful deployment of these strategies.

To do this, we’ve built a strategy scaffolding to help explore the frontiers of what is possible. (If you are looking for somewhere to start, you should check out my original essay from 2020.) This guide will be split into three avenues of exploration. First is an exploration of the most important step in winning a vertical—owning the control point in your category and winning location market share.

Win the Category

Winning the Category requires owning the control point and scaling locations. In human language, that means a Vertical SaaS company needs to either be the general ledger by which the back office is managed, or it needs to own the front office record of transactions/customer interactions. 

A great example of this is Toast, now a large publicly traded company. Toast’s initial product was yet another point of sale system in a red sea of competitors. Yet Toast’s maniacal focus on restaurants and superlative go to market execution helped them to win. And as it turns out, point of sale is a key control point for restaurants, which has enabled Toast to layer on numerous downstream products and business lines that make Toast the platform it is today.

For more on this topic you can check out our essay Control Points 2.0, in which we revisit and expand on the concept of a control point. 

To help understand the operational muscle that is required to scale locations, we are hosting quarterly deep dive sessions led by top functional leaders in Tidemark’s Vertical SaaS Boot Camp. These meetups bring together non-competitive peer operators to compare tactics and strategies in a community of trust. Lightly edited transcripts of these sessions will be published on this site.

Once you own the control point and have won location market share, you have an opportunity to expand your offerings to your clients, thereby increasing ARPU, your total addressable market (TAM), and stickiness. 

Expand Offerings

Once a Vertical SaaS Vendor (VSV) owns a control point, it can Expand Offerings to the same merchant customers. By cross-selling additional products, the VSV can expand average revenue per user, net revenue retention rate, and customer lifetime value. If done correctly, these expansions will also make the VSV's customer (we’ll refer to them as the "merchant") more effective and strengthen the VSV’s control point through account ownership, data, or workflow. Over the coming weeks, we will publish essays that walk through the strategic and tactical considerations of each of the common expansion opportunities.

Many think the opportunity stops with expansion. But what we are seeing at the frontier is VSVs making leaps beyond merely selling more products to the same customer; they are expanding to sell to other stakeholders forward and backward through the value chain.

Extend Through the Value Chain

With market leadership at a key control point, a VSV may have the opportunity to Extend Through the Value Chain and sell to other key stakeholders such as consumers, suppliers, employees. This is the frontier. I’ve been fortunate to work with a couple of the pioneers. CCC started serving auto insurers before extending to auto body repair shops, then parts providers, and now many stakeholders in the insurance economy. Avetta started with large industrial clients before extending to industrial suppliers and now the individual workers.  

While extension is not yet common, success unlocks new customer sets and TAM, and allows a VSV to become ingrained in the fabric of the industry itself. We will publish essays over the coming weeks to establish some patterns and an advocacy case for the extensions below.

Case Studies:


Share your thoughts

We love the idea of bringing together a community to explore the boundaries of Vertical SaaS and are excited by what we can learn from each other. If you have thoughts or comments or want to get involved, reach out to us at knowledge@tidemarkcap.com. If you would like to keep updated as we publish these essays, sign up here. Glad to have you on board.

Dave

Founder and General Partner, Tidemark


This is the introductory essay from Tidemark’s Vertical SaaS Knowledge Project. Click over to the VSKP to view the project and sign up to be notified as new essays are added.

Huge thanks to 

  • Grace Yuan, Sabrina George & Evan Armstrong for many hours of drafting and reviewing to bring the VSKP to life
  • Contributing editors Nick Deleonardis, Tim Barash, John Burke, and Matt Baumgartner
  • Contributing authors: Andrew Brown, Toni Oloko, Daniel Hanover, Bob Solomon, Tim Barash, Chris Comparato, Arshad Matin, Indy Chakrabarti, Githesh Ramamurthy, Marc Fredman, Jonathan Vassil, Alison Elworthy

Exciting news! Version 2 of the VSKP coming soon! Sign up for the launch: lnkd.in/gqg9iUi8

Ali Gara

founder at MagicPort | building solutions to connect and empower the maritime community 🌊🛳️

1y

David Yuan thank you so much for sharing this. Among my top findings in SAAS education.

James Carbary

Owned Media Agency for B2B Brands | Founder of Sweet Fish (3x Inc. 5000)

1y

Dan Sanchez Ray Lau Benji Block - y’all need to see this

Michael Kanazawa

Founder/CEO ► Board Director ► Consulting Firm Partner: Innovation, XaaS, Digital Transformation

1y

David Yuan - The article captures almost all of the same patterns I've seen over many years. Over 10 years ago we were working with the native creators of SaaS and thinking about how it was different than operating like a traditional ISV. That early ripple has continued to grow into transformations of software companies, then hardware tech companies and now across all industry sectors - finance, ag, equipment, healthcare, etc. The strategic stair step model is a good starting point for anyone looking to scale a SaaS business.

Mark Schoen

CEO | SaaS & Payments

2y

I love this document, Dave. Clearest roadmap that any of us could hope for.

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