Vertical SaaS requires a different go-to-market than horizontal SaaS companies. Vertical software companies, a recent important trend in SaaS startups, pursue customers only in a particular industry. They trade a more narrow customer base and consequent reduction in market size for a competitive advantage in that market segment.
The most salient example, Veeva, sells software to the largest life sciences companies, which are subject to a unique regulatory regime in their sales processes. A spectacularly efficient business, Veeva raised only $4.5M in venture investment before going public six years after founding. Today, Veeva’s market cap exceeds $3.3B. Similar large market cap examples exist in real estate (CoStar - $5.8B), insurance (Guidewire - $3.7B), logistics (Fleetmatics - $1.8B) among other categories.
Because vertical SaaS companies limit their potential market size by focusing on just one type of customer, they must employ a differentiated strategy to win disproportionate share of smaller market. These are the strategies I’ve observed:
All vertical software companies develop uniquely focused products. A smaller target customer base may reward vertical SaaS companies with superior sales and marketing efficiencies. Fleetmatics, which sells primarily to small operators of trucking fleets and recorded about $6.5k average revenue per customer at its IPO, leverages its best-in-class product advantage to sign customers to three year or longer contracts, establishing very favorable LTV/CAC ratios. At IPO and generating about $177M, Fleetmatics recorded an estimated sales efficiency of 1.2, 50% greater than the public SaaS median.
Some vertical SaaS businesses employ network effects to engender winner-take-most dynamics. For example, CoStar, which sells data on commercial real estate transactions, employs data network effects. By aggregating the most data, CoStar became the industry standard. In 2012, CoStar acquired its key competitor Loopnet to consolidate these data network effects further. Consequently, CoStar trades at a 9.1x forward multiple, in the top 10% of SaaS companies. Not bad for a business founded in 1987.
Broadened product portfolios enable vertical SaaS companies to upsell existing customers more software, and cross-sell software into other teams within the existing customer base. Veeva sells content management to marketing, CRM to sales, and a unified data platform to analytics teams of their customers. At IPO in 2013, Veeva’s average revenue per customer reached about $750k. As of the company’s last annual report, customers now pay Veeva $1.13M, a 51% increase in 2 years.
Choosing to start a vertical SaaS company is a strategic bet with an important trade to consider: a focused customer base which brings better sales efficiencies, narrower product scope, and potential winner-take-all-dynamics in exchange for a smaller theoretical market size. Understanding these dynamics are critical for crafting a vertical SaaS company’s go-to-market, and also for fundraising.