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 become enamored with Vertical SaaS. But the framework and language remain clumsy. One sniff of a post-Covid pullback and investors went running to the hills. 

At Tidemark, we know the opportunity in Vertical SaaS is just starting to unfold.  The opportunity to expand is way beyond selling more seats—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 restaurants (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, ServiceTitan in HVAC and industrial trades, Klook in tours and activities, and 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.  As they extend forward and back through the value chain, Vertical SaaS companies can bring multiple stakeholders onto the software and transform industries. 

I am calling this the Vertical SaaS Knowledge Project (a.k.a. the VSKP). While I will continue to give the stump speech on why Vertical SaaS is great, the VSKP is focused on giving Vertical SaaS leaders a guide on how to grow, covering practical topics with pragmatic depth.  The writing will contain novel strategic frameworks, some practical examples, and case studies demonstrating successful deployment of these strategies.

To organize this, I'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.

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, but the company's maniacal focus on restaurants and superlative go-to-market execution helped them to win. As it turns out, point of sale is a key control point for restaurants, enabling Toast to layer on numerous downstream products and business lines that make it the platform it is today.

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

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Once you own the control point and have won location market share, you have an opportunity to expand your offerings to your clients.

By cross-selling additional products, a Vertical SaaS vendor (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. Some of the common expansion opportunities are as follows: 

• Born Multi-Product
• Sequencing Multi-Product
• Payments‍
• Payroll
• Insurance
  

Many think the opportunity stops with expansion, but I am seeing VSVs at the frontier make leaps beyond merely selling more products to the same customer. They are extending to sell to other stakeholders forward and backward 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 key stakeholders such as consumers, suppliers, employees. This is the frontier, the big leagues, the very cutting edge of software business models. 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 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.

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• Patterns of Extension
• Supplier Extensions
• Employee Extensions
• Consumer Extensions
• Marketplace Take Rates
• Industry Transformation

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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.

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If you would like to keep updated as we publish these essays, sign up below.

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Glad to have you on board,

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Dave

Founder and General Partner, Tidemark

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_{The information presented in this post is for illustrative purposes only and is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by Tidemark or any of the securities of any company discussed. Companies discussed in these posts may include current Tidemark portfolio companies and/or prior investments made by Tidemark employees while at other investment firms.  These companies identified above are not necessarily representative of all Tidemark investments, and no assumption should be made that the investments identified were or will be profitable.   The information in this post is not presented with a view to providing investment advice with respect to any security, or making any claim as to the past, current or future performance thereof.  ‍}