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Building the G.O.A.T: Industry Platforms

AUTHORS:

Dave Yuan

Founder and Partner, Tidemark

You’re not here just to play the game; you’re here to win! C’s: 1957, 1959- 1966, 1968, 1969, 1974, 1976, 1981, 1984, 1986, 2008 | Pats: 2001, 2003, 2004, 2014, 2016, 2018 | Sox: 1903, 1912, 1915, 1916, 1918, 2004, 2007, 2013, 2018 | Bruins: 1928-29, 1938-39, 1940-41, 1969-70, 1971-72, 2010-11

This is the capstone, the point of arrival for the Vertical SaaS Knowledge Project. This essay describes what a VSV can be in the highest state. Admittedly, it’s aspirational, and more theory than facts and figures. But hey, you didn’t come to play the game; you came to win it all. 

Suspend disbelief and take the plunge. If, at the end of this essay, you are a believer, come talk to us. We’d love to go on the journey with you to build the GOAT (Greatest of All Time) Vertical SaaS platform together.

The Point of Arrival: Multi-Stakeholder Platforms

In previous essays, we’ve argued that a VSV’s progression should be Win the Control Point→Expand Offerings→Extend through Value Chain. The goal should be to win the control point of a single company by becoming the steward of the most important data or process of a business. Next, expand offerings such as payments, payroll, and insurance to increase LTV. From there, you extend through the value chain to other stakeholders: suppliers, employees, and consumers to increase TAM. 

Truly incredible software businesses coordinate productivity between multiple stakeholders, including your customer, your customer’s customer, employees, and suppliers. A multi-stakeholder workflow is valuable for all of the typical fiscal reasons (multi-product, increasing TAM), but more important is the strategic value it offers. Engaging with multi-party stakeholders cements you as the crucial component of an industry. If a VSV has progressed to this point, they have a shot at becoming the control point for the entire industry. In doing so, you will not only reap economic rewards—you will also massively reduce risk, take out coordination costs, and wholly transform the consumer experience for the entire industry. Everyone’s lives become easier, and you glean significantly more profit. 

When you have reached this point—when you serve multiple stakeholders simultaneously—you have become an industry platform, the GOAT, the highest level of the VSV pantheon. 

Types of Multi-Stakeholder Platforms

There are a variety of ways that a company can become a multi-stakeholder platform. I’ve stacked these options in order from easiest to most difficult to execute:

Workflows

When you have multiple stakeholders on your software, the most natural extension is to coordinate work between these parties. Sequencing and orchestrating these multi-stakeholder activities is an easy win, since manual workflows across multiple parties default to being slow, ineffective, and expensive. These negative outcomes manifest in the following:

  • Compounding delays that cascade to slow down everyone involved: “I missed your email,” “I forgot to send the check,” etc.
  • Complex conditionality and decision making are a pain to manage. Think of something as simple as an if/then statement. If an invoice is > $1,000, then send it to Jill. If it’s less than $1,000, send it to Joe, etc. All of that workflow being manual, or custom-coded, is an awful experience.
  • Bad handoffs are abundant, with parties not knowing when it is their turn in the process.
  • Manual paperwork is prone to being rife with human input errors, time waste, and overall hassle.

What you want is something akin to what we in the finance world would call “straight-through processing.” This is where the sequence of steps is set out ahead of time, handoffs are digital and instantaneous, and everything just works. 

A great example of this is car insurance software provider CCC. CCC has all the stakeholders—the estimator, the towing company, the insurance provider, the autobody shop, the parts supplier, and the consumer—mingling on its software, so it can automate the entire process of assessing a car accident and repair. You can go from car totaled to the car repaired as quickly as possible, all managed on your iPhone. It’s as close to delightful as a car accident can be!

Single Source of Truth

If you’ve ever traded files, you’ll know about the dreaded Presentation_Final_Version_V7. Drafts are flying back and forth, edits are happening all over the place, and the data is a mess. If you apply this to the scale of an industry, you can see how powerful it is to be the single source of truth for coordinating industry activity. I’ve seen 9 ways to act as a central source of truth: 

1) Product Record: A software provider can coordinate a piece of data about a customer to facilitate multiple use cases. Let’s take the dental technology company Dandy as an example. They will scan a patient's teeth to create an accurate 3D visualization of their teeth. That visualization acts as a transactable record, as the dentist can use this visualization to order a new mold, guard, etc. A third-party dental lab can then use that visualization as a buildable record to help fabricate the dental mold. Finally, the scan can be used to show the progress of the patient, opening up cross-sell opportunities for other treatments. In this case, the master record becomes a sellable record. This same progression of transactable→buildable→sellable applies to more than teeth! The framework is broadly usable across Vertical SaaS.

2) Financial Data: Financial performance needs to be understood not only at a single level but at multiple layers of a value chain. This occurs when there is either distributed ownership or distributed operations. Consider a real estate asset—there is a painful amount of people involved. There’s an asset-level operator who will get economics or ownership in the performance of that asset. Surrounding them will be the people who financed the property. These financiers range from equity providers to debt providers like banks. Sometimes, you’ll have an additional complication where equity providers are an investor consortium, all of who will demand performance data. It is financial chaos.

What is needed is a single source of truth on the asset financials. That single source can be viewed with various lenses on economics based on which of the stakeholders is pulling the data. And all of this has to happen on a single software package! Again, chaos—but for the operators who can execute this play, it allows for a special version of data gravity. 

Appfolio is the best real-world example. I chatted with Jason Randall, CEO of Appfolio, about how they got everyone on board:

Jason: We built out a system of engagement early on, so our property managers could easily engage with owners. Then we started to look at other opportunities there. A couple of years ago, we launched a new product, AppFolio Investment Management, for real estate investment managers. That product is for investors who are raising money and distributing funds out to a pool of investors all based in real estate. The product talks to AppFolio Property Manager, but you buy this independently to do your CRM, your distributions, and everything else. It’s a great example of us ticking up the ladder to find a new constituent to sell to.

Dave:
Is it a workflow that links these different entities? Or is it different panes of glass on the same financials…or both?

Jason: It’s mostly a data share. You’re operating the units over here and over there, and you’re facilitating the tracking and moving of the money based on the fund that you raised. There is key data being exchanged there, but they’re two separate workflows. The important part is, yes, we have overlap, and we have customers who are using both, but we’re also able to sell to non-AppFolio customers who are just raising money and then outsourcing the running of the units. It lets us move into a bigger pool.

3) Central Design: This source of truth occurs when everybody's using the same master plan to coordinate interdependent work. When implemented properly, a central design eliminates the need for version control. Changes, down to the minute details, all flow through this document. Imagine a tool like Figma that works across company boundaries and isn’t exclusively for digital goods. (We wrote a more detailed guide on this use case in Design to Build). Companies like Xometry are placing CAD designs at the center of manufacturing customer products, while companies like  Procore are fulfilling similar roles in construction.

4) Bill of Materials/ Components: The bill of materials (BoM) will already incorporate component information, performance data, and maintenance routines, and have all those facts centralized. Even more powerfully, all of this data will be within the design context and universally accessible. By using the BoM as the single source of truth, you can more easily get all stakeholders to agree—it’s a rare document format that both the design and finance departments can understand. If it’s a common payer, across multiple constituents, the BoM becomes even more powerful.

Returning to one of my favorite examples, CCC, shows how powerful this document can be. They use the BoM to describe how components are to be repaired, what replacement parts are acceptable, how much those parts should cost, and how to verify the quality of the repair and the roadworthiness of the fixed vehicle. Utilizing the BoM as the source of truth is sometimes frustrating for founders—they want to radically change an industry! Viva la software revolution! However, leaning into the BoM is a smart play. There is a reason every business since 1950 has been using these forms. They work.

5) Joint or Group Quotes: By coordinating the bid of multiple parties interested in a project, you can act as the source of truth through the bidding process. Procore is a great example of this capability. They help owners (consumers), general contractors (core merchant customers), and specialist general contractors (suppliers) communicate and contract all on the same software platform. For larger bids, multiple contractors can band together, or a general contractor can coordinate their activity. This use case is particularly powerful in industries that compete on their ability to efficiently manage requests-for-quote processes like defense contracting, government services, or public works. 

6) Product authenticity and information: Regulatory or industry reporting needs to be sourced from multiple parties through a supply chain. Once again, software fixes this. For medical or defense goods, there are stringent requirements for how goods are handled, and who handles them. In practice, this looks like Tracelink. They perform this service for 1300+ companies in 50 countries—ensuring that everyone in the supply chain is following US law around pharmaceutical handling. Telling executives, “We will make sure the U.S. government doesn’t throw you in jail,” is a very good pitch. 

7) Multi-party compliance: More and more goods and services are provided collaboratively by multiple parties. This typically is a partnership between a customer-facing company and its supply chain. To attest to local and national regulations, or to manage liability and risk, a company needs to be able to have a collective view across its supply chain. Even for non-mandatory compliance use cases (aka environmental and social good guidelines), the emphasis is shifting from corporate to entire supply chain emissions.

8) Liability: In many industries, liability is structured as a waterfall—meaning that one company’s liability and insurance coverage is supported by the coverage of its suppliers. For instance, if the windows of a house collapse, a general contractor may be liable, but can access the insurance coverage of the window installer. For everyone in the value chain, it is key to know the insurance coverage, and qualifications to be covered, of your supplier. For more on this strategy, check out our Avetta case study.

9) Embedded Financial Services: Finally, you can consider software-enabled financial services across these multiple stakeholders. Being the payment layer allows you to function as a system of record for all the transactions in an industry. Because you have everyone on the same platform, you will naturally have opportunities to pool risk. In doing so, you can either provide insurance products directly or facilitate third-party insurance or lending products. I have yet to see this practice fully implemented by a VSV, but it is just a matter of time.

[In Bill We] Trust

If all this stuff sounds similar to web3/ ledgers/ smart contracts, that’s because, conceptually, it is! The big difference is that these businesses actually work. In comparison with companies in the digital monkey-flipping business, VSVs pursuing this strategy have many years of consistent profits and cash flows. 

These vendors have built trust with stakeholders who are on the opposite sides of zero-sum transactions by being fair, transparent, and long-term oriented. This stands in stark contrast to the stereotypical crypto playbook of automated trust via whitepaper, computational greatness, or auction/ game theory. 

I’m not trying to be a curmudgeon on crypto! But I feel the need to highlight the incredible industry commitment, the multi-year (sometimes multi-decade) marathon of innovation and stewardship, that is required to be an industry platform. Perhaps industry platforms can be accelerated by the introduction of a token and community ownership, but as of right now, that’s currently a sideshow to the main event. There isn’t a way to speed-run trust—it has to be earned, and VSVs have those multi-year brands and working relationships to make this happen. 

To bring this to life, Githesh, CEO of CCC, describes decades of building trust in our interview

“You have multiple participants in a transaction, so sometimes the incentives are misaligned, or there are inherent conflicts because each side is trying to optimize something slightly different…We have to be understood as the neutral, objective third-party arbiter of information…Even if you didn’t use our software, all the information was published in book form to provide transparency for everyone.

….integrity wasn't free. It bounded what we would even consider, but it’s the basis of our reputation. We’ve seen the power of that integrity, especially as we branched into adjacent areas. We have gone from working with insurers to repair facilities, repair facilities to parts providers, and parts providers to OEMs. We've made these transitions to adjacent verticals and adjacent industries; they all check back with others, and because of the longevity (people usually stay in this industry for a very long time), we've been enormous beneficiaries of word-of-mouth. As people move from company to company or industry to industry, that integrity is paid off massively.”

Industry Transformation

Once you build this trust, you have the potential to transform the industry you serve with whatever system-of-record strategy you choose to pursue.

You’ll encourage efficiency via straight-through processing and providing a single source of truth across all stakeholders. This increase in efficiency will enable you to take massive amounts of costs out of the system (and hopefully capture some of that value). By pooling risk, you have an opportunity to provide insurance products to manage down the risk for industry stakeholders. And because you took time, cost, and friction out of the system, you can change the experience for consumers. 

This is the point of arrival for a vertical SaaS company. If you have reached this point, congratulations, you’ve won! The market is now yours to lose, and profits await. What we’re describing is not just a vertical SaaS phenomenon. We’re seeing software platforms emerge everywhere we look. We were so excited by this trend that earlier this year, we launched a podcast called The Platform Journey with Avanish Sahai (exec at Salesforce, Servicenow, and Google, and on the board of Hubspot). You’ll see us launch other series where we are seeing this transition to “industry platforms” happening. Our first essay will be out soon on Supplier Networks. Subscribe below to get it in your inbox! 

CASE STUDIES RELATED TO THIS CHAPTER:

Avetta: A Case Study in Supplier Networks

CCC: Extending to the Supplier

CCC: Extending to a Two-Sided Marketplace

Xero: Building your Platform the Right Way

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Industry Transformation
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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.

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