The Vertical SaaS Knowledge Project — Introduction

Dave Yuan’s opening chapter of The Vertical SaaS Knowledge Project, and the frame the rest of it hangs on.

It opens by dating itself deliberately: “When I first started investing in Vertical & SMB SaaS 10 years ago, to be a vertical software entrepreneur was to be underestimated.” Too small a market, too hard a sales motion, customers who couldn’t produce enough revenue. The chapter is an argument that every one of those objections was wrong for the same reason — vertical companies are inherently multi-product, can take a genuinely high share of their category, and get Network Effects their horizontal peers don’t.

The three-step framework, which is the durable takeaway:

1. Win the Category — own the control point and scale locations. General ledger in the back office, or a Systems of Record in the front. Toast’s first product was another point-of-sale in a red sea; maniacal restaurant focus and go-to-market execution won anyway, and POS turned out to be the control point.
2. Expand Offerings — cross-sell into payments, payroll, financial services, insurance. Raises ARPU, TAM and stickiness at once, and done right makes the merchant more effective, which strengthens the control point rather than just taxing it.
3. Extend Through the Value Chain — sell to the customer’s customers, suppliers and employees. “This is the frontier.”

The line that reframes the opportunity: “the opportunity to expand is way beyond payments.”

Notes

• 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.”
• The opportunity to expand is way beyond payments. 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.
• 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.
• In contrast to their horizontal peers, Vertical SaaS companies are ==inherently multi-product==, can achieve a high market share percentage, and enjoy Network Effects.
• Three-Step Framework
  • Win The Category
    • Winning the Category requires owning the control point and scaling locations.
      • In other words? General ledger in the back office or Systems of Record in the front office.
    • Toast’s initial product was yet another point of sale system in a red sea of competitors. Yet Toast’s maniacal focus on restaurants and superlative go to market execution helped them to win. And as it turns out, point of sale is a key control point for restaurants, which has enabled Toast to layer on numerous downstream products and business lines that make Toast the platform it is today.
    • Once you own the control point and have won location market share, you have an opportunity to expand your offerings to your clients, thereby increasing ARPU, your total addressable market (TAM), and stickiness.
  • Expand Offerings
    • By cross-selling additional products, the 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.
    • Additional products
      • Multi-Product Opportunity‍
      • Payments‍
      • Payroll
      • Financial services
      • Insurance
  • Extend 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 other key stakeholders such as consumers, suppliers, employees. This is the frontier.
    • Ways to extend
      • Patterns of Extension
      • Consumer Demand
      • Supplier Networks
      • Employee Networks
      • Industry Transformation