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Picking Your Market: Vertical TAM & Concentration

AUTHORS:

Bob Solomon

Former SVP/ GM of Supplier Network and Financial Services, Ariba

Dave Yuan

Founder and General Partner, Tidemark

Small business, big decision

Let’s say you have read the VSKP and are convinced—you want to build a vertical SaaS company. The next logical question is what market you should pick. 

The ideal SMB vertical should be:

  • Gigantic: While Vertical SaaS companies can achieve high market share, ideally you start with a big market.  This is not only defined by number of locations, but also what ARPU you can achieve initially and over time (through expand & extend). 
  • Highly fragmented market: It is challenging to build a business in a market where SMBs are fighting over the leftovers of large enterprises.
  • Highly fragmented value chain: You want to be selling to fragmented buyers and buying from fragmented sellers. Fragmentation up and down the value chain is important for two reasons. One, it makes a marketplace possible and two, it often means a better profit pool from payments. Many small payments are generally much more profitable than fewer large payments. 


To kickstart this analysis for you, I set out to study which industries are big and dominated by SMBs.  (We will save fragmentation up and down the value chain for another day.)  The government's business census (released in 2020, from 2017) provided the requisite data.


In the chart below, I mapped industries at the 4-digit NAICS level.  There is a perpetual argument around which level of classification is best, but we went with the 4-digit for today’s exercise. Here's how to read the chart:

  • Each circle represents one 4-digit NAICS code.
  • A circle's size is proportional to the sales of the industry.
  • The x-axis represents the # of companies in each 4-digit NAICS industry.
  • On the y-axis you see the market share of all but the top 50 companies.  So for industries up near 90% on the y-axis, the top 50 companies represent only 10% of the market (highly fragmented). Conversely, in industries near 10% on the y-axis, the top 50 companies represent nearly 90% of the revenue.


Again, we could spend hours discussing how many companies with what market share represent concentrated industries at various different NAICS levels.  I'll leave that to the antitrust experts!

In the upper right of the diagram, you see fragmented verticals with many SMBs.  This is Vertical SMB SaaS Heaven.   For example, the restaurant industry is off the chart way to the right (500,000+ restaurants). It really is heaven for vertical SMB SaaS—just ask Toast, Olo, DoorDash, and UberEats.

In the upper left are the fragmented industries that have fewer companies.  These verticals are SMB or mid-market opportunities.

On the lower left of the chart is the land of the giants.  In these verticals, you are an enterprise solution, or your company will fail.

Vertical SMB SaaS Heaven

Let's take a closer look at the highly fragmented, large SMB markets.  In the chart below, the axes are the same, but I'm:

  • only including those industries where the top 50 companies have less than 20% market share.
  • expanding the x-axis to include restaurants.
  • adding color-coding to denote related verticals.  (So now we have four variables in two dimensions.  I think we are at the max!)


 

In this chart, you can see restaurants (and bars) in blue.  The red circles the various types of healthcare practitioners who operate outside of large hospital networks. Green circles represent the trades related to the entire life cycle of a building: from construction to maintenance.  In purple are auto dealers.

Implications

None of this may immediately surprise you.  After all, we all know that there are no small airlines!  Still, I found it interesting to see the actual numbers.  I knew, for instance, both florists and personal care services (barbers, nail salons, etc) are fragmented industries, but the latter are 10x the size of the former.

One could imagine an ambitious, young analyst (I am neither) comparing the size of vertical SMB SaaS businesses created in each vertical relative to the market opportunities presented here.  This analysis would help you determine where there is potential growth left in an existing market or how big the opportunity is for a new player in a new vertical.  


If you’d like the complete data set for your fundraising deck or just to check our work, fill out this request form.   If you are interested in learning more about the pattern of growing a Vertical SaaS business, you can check out our Win, Expand, Extend model here.

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 below.

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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Picking Your Market
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