An Annual Review and Zombies in Trucking
Industry Dispatches #3
Hey friends,
It’s been approximately a year since the launch of Verticalized. Whether you have been here since the start or have joined recently, I want to express my gratitude.
Frankly, the goal at first was to simply have an outlet to write about a segment of the technology industry that I believe has outsized importance and little analysis. Sure, you could find the occasional ghostwritten Twitter thread on a vertical SaaS company, but you couldn’t find much content other than what Tidemark has consistently put out. I guess many of you also buy that, as this newsletter is now read by a large swath of the ecosystem and is growing faster than ever.
I don’t want to overstate the size of this newsletter - there’s still plenty to be done and room to grow. But I am quite pleased that with no real distribution effort, the newsletter has grown organically.
That’s in part because the space itself is growing, as founders and investors realize that vertical AI applications will accrue the most value and vertical software continues to be a prized asset amongst traditional capital allocators.
It’s also where all the fun is! Vertical technology forces teams to be product strategy savants. The market sizes breed capital efficiency. And PMF demands real world impact.
It might be useful to sketch out why I think vertical SaaS has become trendy.
The SMB Silver Tsunami
A large swath of investment dollars are now chasing the suppose 6 trillion worth of SMB assets in the United States. The playbook that is developing is deceptively simple: buy a business, implement the best vertical SaaS, and profit.1 Repeat.
This is more dream than reality right now. But it has increased the amount of attention on the asset class.
R&D Allocation
Enterprises are realizing the value of having trusted industry software partners and are realizing the benefits of ROI from hyper-tailored workflows.
Many of these industries are experiencing PE consolidation which in turn acts as a tailwind for vertical tech.
Niche Expertise is Proliferating
I am planning on writing about this one more - but we are now living in a world of technology-native hyper-niche specialists. As expertise goes into deeper niches, it’s allying with vertical-specific technology to do so.
All in all this adds up to a world where vertical tech is becoming a bigger deal and a virtuous cycle is forming around the space.
For Verticalized, this means I am doubling down on investing and writing about the space. But expect some more endeavors shortly around podcasting and some new bets to aid the ecosystem.
Fundraises
GlossGenius has another 28 million in the bank as they continue to empower salon owners with software.
There’s a lot I love about GlossGenius. Their product and GTM strategy are predicated on a unique insight: salons are rapidly converging on either large brands or solo practitioners.
The past decade with social media and content marketing has enabled many in the industry to go solo. They can rent a booth, market themselves, and own their clients fully. GlossGenius has heavily focused on this new and growing long-tail of the industry and in the process won a lot of loyalty.
Terminal came out of stealth with $17m in funds to tackle one of the last frontiers in logistics: the yard. 8VC’s piece here on the problem is worth the time.
What I’m Reading
Why We’re Excited about Insurance Premium Finance
“We believe there is opportunity to broaden access to premium finance for small businesses of all shapes and sizes. We’re most excited about the models attacking it with a focus on back office management, payments orchestration, and data automation combined with premium financing offerings.”
R&D leverage in software: Multi-product greatness to drive terminal FCF
“As Rippling launches in the UK, the gravity of their bundled product suite combining HRIS and payroll will result in Rippling being the vendor that buyers consolidate ‘to’, not ‘from’. Product suites are greater than the sum of their parts, hence producing pricing mechanics to reap maximum upside from the bundle.”
Proptech Cool This Hot Summer as M&A Activity, Funding Ebb
“The incumbents’ “natural aversion” to trying new technologies “implies that VCs have to finance the double whammy of an expensive adoption curve and poor economics, such as discounted early users, and dilution via stock or warrants to early users,” said Gupta. In turn, that scenario “makes $50 to $100 million exits de rigueur, limiting the amount of VC capital that can be raised, deployed or returned.”
In the current market, “incumbents will step up their M&A game on the back of lower multiple, long-drawn sales cycles and the advent of bundled software,” he added. ‘What Microsoft did successfully with the browser and Windows may be replicated across CRE. Hence, platform companies will continue to emerge, thrive and grow.’”
Industry Bites: Yellow Trucking and Zombies
One of the largest and oldest trucking companies is on death’s door.
And they should have died years ago. Freightwaves has the best analysis on this I’ve seen. But instead of dying, Yellow was kept alive due to hundreds of millions in debt financing.
The post-mortem essentially boils down to a freight rollup with no operational leverage due to a unionized workforce. In a deregulated freight industry, this should have been a more immediate death sentence. It wasn’t. Instead the company was propped up by hundreds of millions of dollars in loans and bailouts including a $700 million dollar loan by the US Treasury during Covid.2
The company was in need of more capital to continue operations, couldn’t cover their existing debt load while bleeding cash, and then encountered a threatened labor strike by the Teamsters.
It was over. Immediately their shippers fled. There is no recovery in sight, and the company is rumored to file for bankruptcy protections by Monday.
As we enter an era with non-zero percent interest rates, the walking dead are finally dying. Zombies consist of any company addled with debt that is unable to make their payments from revenues.
Their death is a really good thing for industry innovation. Zombie companies distort markets. They depress margins inside of the industry, crowd out more efficient and agile companies from seizing market share, and reduce new business formation.
In Yellow’s case, they cornered about 10% of the less-than-truckload market with $5.1B in revenues. As that gets reallocated to industry participants who run leaner and profitable operations, overall productivity will go up.
Any company that can’t flip the switch to profitability, can’t muster innovation, and is bleeding out to debt must die.3
Zero-percent interest rates distorted market activity. As we come out of it, there’s a lot of technology bears whom believe that technology itself was fueled by ZIRP. It’s a compelling narrative that seizes on the fears inside the industry as the industry itself passes the torch to a new generation of founders and investors. But the bull case is quite simple: while yes, technology has its own (equity-fueled) zombies, the winners whom emerge will have massive prospects to reshape industries as each industry itself is cleansed of low-productivity incumbents and prioritizes efficiency.
And use BPO and outsourced services to grow and re-allocate time into other business purchases.
The US Treasury took 30% ownership in the company.
Sure, there are companies that might encounter zombie phases, which is why zombies are typically defined as having a long period of zombification - often 10 years.