Vertical Software: Think Small to Win Big

In 2013, booking a doctor’s appointment in France was a nightmare. Then Doctolib arrived, transforming healthcare scheduling with a solution built for the industry’s unique needs. Doctolib isn’t alone. From Toast, which revolutionized restaurant operations, to Procore, simplifying construction management, vertical software proves that solving industry-specific challenges can create global leaders. From several years now, Thomas and I have been passionate about these models and have invested in companies like Planity ✂️, Obat 👷, and Worldia 🌏 . Welcome to the era of Vertical Software — tailored tools transforming industries one market at a time. Why is vSaaS thriving, and what’s next? Let’s dive in. 1. Definition of Vertical Software Definition Let’s start by aligning on the definition of Vertical Software. Vertical software (or vSaaS) is designed specifically for a particular industry or market segment. Unlike horizontal software (e.g., Workday or SAP SuccessFactors, used across industries for HR management), vertical software focuses on specialized functionalities tailored to specific sectors, such as healthcare, construction, or hospitality. Source: https://creandum.com/stories/ai-in-b2b-saas/ Industry Examples Global Leaders: Toast (NYSE:TOST) : a restaurant point-of-sale and management system that improves operations, increases sales, and enhances guest experiences. Founded in 2011, Toast generated $4.7 billion in the past 12 months ($1.6 billion ARR with 120k locations) and continues to grow at 29%. Veeva (NYSE:VEEV) : a leading software provider for life sciences, streamlining drug development and commercialization. Founded in 2007, Veeva reached $2.6 billion in revenue LTM, with a growth rate of 15%. Procore (NYSE:PCOR) : A construction management software that simplifies collaboration, communication, and documentation. Founded in 2022, Procore generated $1.1 billion in revenue in the past 12 months, with 17,000 customers and 24% growth. In France as well, Leaders in Vertical Software are emerging: Doctolib (healthcare) : the company stands out as one of the most prominent examples of vertical SaaS in France. Founded in 2013, the company has raised over €800m to date and is projected to generate €350–400 million in revenue, as shared by its CEO, Stanislas Niox-Château, in a recent podcast. Interestingly, despite its significant presence, Doctolib holds only a 30% market share among caregivers in France (and 50% among doctors), highlighting room for further growth. Planity (Beauty) : the leading platform for booking hair and beauty appointments online (€100 million+ raised, 40k+ customers). Zenchef (Restauration) : a comprehensive restaurant management software solution that helps restaurants manage reservations, optimize operations, and enhance customer relationships (€60m raised, 19k+ customers). Obat (Construction) : a SaaS platform for construction professionals, simplifying quotes, invoices, and project management (€18 million raised, 15k customers). Why is Vertical SaaS thriving today? Vertical SaaS is experiencing significant growth due to several key drivers: Accelerated Digital Transformation : the COVID-19 pandemic forced traditionally offline industries to embrace digital tools, creating a surge in demand for specialized solutions. Lower Competition: unlike horizontal markets saturated by giants, vertical niches often lack dominant players, offering a clear path to leadership. Diverse Revenue Streams : Vertical SaaS providers are integrating payment solutions, marketplaces, and even financial products, transforming their business models and creating additional value for customers. 2. Benefits & Challenges of Vertical Software Benefits : Deep Market Expertise : focusing on a single vertical allows vendors to develop a profound understanding of the industry’s unique workflows, regulations, and challenges. This expertise enables the creation of tailored solutions that address specific pain points better than generic software. As a result, customers see immediate value in adopting these solutions, which cater to their nuanced needs. Easier GTM Strategy : vertical software vendors benefit from targeting a well-defined audience, making their marketing and sales efforts more efficient. With fewer industries to cover, they can refine their messaging, establish stronger relationships with industry players, and lower customer acquisition costs. Additionally, verticals often have tight-knit communities, enabling word-of-mouth referrals to amplify growth. Higher Market Penetration: Vertical SaaS often achieves a dominant position within its niche due to its tailored nature. Once a vendor establishes itself as the go-to solution (in particular due to network effects), competitors find it challenging to unseat them. This dominance often leads to penetration rates exceeding 50% (see Doctolib or Planity in France for example), creating defensibility and a reliable and stable customer base. Opportunity for Adjacent Revenue Streams : once critical size has been reached, vendors can capture new revenue streams beyond traditional subscription fees developing new products (see below). Lower Competitive Pressure: horizontal SaaS markets are saturated with established players, making differentiation difficult. Vertical SaaS operates in less crowded spaces, particularly in industries that have been slow to adopt technology, such as construction, agriculture, or manufacturing. This creates opportunities to carve out substantial market share without intense competition. Challenges: Smaller initial TAM compared to horizontal softwares: targeting a single industry or niche market limits the initial TAM compared to horizontal software that spans multiple sectors. While this can lead to high penetration in the short term, scaling the business often requires expanding into adjacent verticals or new geographies, which introduces complexity. Dependence on a Single Market : relying on a single vertical increases vulnerability to market-specific risks, such as regulatory changes or economic downturns. For example, during the COVID-19 pandemic, SaaS providers focused on hospitality faced significant challenges as restaurants and hotels temporarily shut down. Limited Exit Opportunities: Vertical SaaS vendors may find it harder to exit compared to horizontal players due to the smaller pool of acquirers. Buyers are typically limited to large SaaS companies seeking to enter a specific vertical or private equity firms looking to consolidate niche markets, which can cap the valuation potential. 3. Trends and Future of Vertical SaaS Trends in vSaaS: Multi-Product Developments : eventually, companies reach a growth ceiling where expansion slows, customer acquisition costs rise, and sales cycles lengthen. To overcome this, it is often necessary to develop new products to increase market size and average baskets. Tidemark talks about this very well in his VSKP Framework . Currently, we can see more and more vSaaS moving towards: Embedded Financial Products in order to augment the Software-Based Model : today with banking as a service solution like Stripe or Swan, every software provider can offer payment processing solutions or fintech products to their customers. They can thus take a fee payement or a commission of the interchange revenue and of deposits. According to a 2024 survey of 250 vSaaS conducted by Tidemark (admittedly**,** there is a US bias), 30% of vSaaS have a payment product. Monetization of the End Customer : with consumer marketplaces where a commission can be taken for example. Source : https://www.tidemarkcap.com/post/2024-vertical-smb-saas-benchmark-report AI & Automation: in order to accelerate product development and improve operational margins especially for back office tasks. As highlighted in the aforementioned survey, 31% of respondents have an AI product on the market, with a further 39% planning to launch within the next few months. Data leverage : vSaaS solutions collect valuable industry data that can be monetized or used to enhance product offerings. Future of vSaaS: Growing Adoption of New-Gen vSaaS (cloud-based) : having been a model neglected by new vendors for a long time, legacy products have taken on a significant market share. But this is changing with the arrival of a number of specialized players (e.g.: the construction market where there is lots of legacy on-premise softwares which are gradually displaced). Market Consolidation : driven by strategic acquisitions, horizontal software providers expand into vertical segments to better serve specific industries (e.g., Cegid acquiring Bobby in the construction sector). Simultaneously, larger Vertical and Multi-Vertical SaaS vendors, such as Septeo and Visma (both backed by Hg Capital), are consolidating their positions through targeted growth and integration efforts. Increased Investor Interest : over the last decade in Europe, most investors were chasing horizontal software because opportunities were high & yet untapped. But things have been changing and will rapidly change over the next few years. AI-enabled Services: with the development of AI agents, vSaaS can now perform time-consuming human tasks previously too complex for software (especially on sales, marketing, customer service, operations, and finance). In this way, vSaaS can capture a larger share of their customers’ budgets. In the construction sector, for example, a vSaaS could offer a voice agent to answer incoming calls in order to qualify prospects, or an AI agent to create a quote automatically from a voice note, thus replacing a secretary. Source: https://a16z.com/vertical-saas-now-with-ai-inside/ 4. A focus on the French Vertical SaaS for SMBs Mapping: Methodology: Must be a Vertical Software (industry-specific or at most a few industries), subscription-based or not (some players take a commission on the gross merchandise value or a payment fee instead) Targeting independents or small businesses (< 20 FTE) or Points of Sales French-founded and privately owned 5. Conclusion Vertical software is transforming segment markets into global opportunities. By addressing specific industry needs, vSaaS companies are becoming indispensable within their sectors. For entrepreneurs, success lies in mastering industry nuances. For investors, vertical SaaS offers a rare mix of focus, scalability, and market dominance potential. Which vertical will be the next to revolutionize its industry? Share your thoughts or let’s discuss in the comments! Laissez un commentaire. Abonnez-vous maintenant