"It's Not Enough That We Win"
or why you must be ready for war
Last week was all about the end goal of vertical SaaS. In summary, the reason any vSaaS product will win a market is because it will drive second-order insights that are not available to a hodge podge of SaaS tools. After all, the central value of any vSaaS product is that ultimately you can rely upon it for multiple facets of your business. These are the things that ultimately drive massive enterprise value.
But no product begins at the end. The early days looks meager when compared with the ultimate vision you may have for an industry. And as vSaaS gets more competitive and legacy software companies begin to realize they are under siege, there are important questions to answer around how to strategically enter a market and then ultimately conquer. What follows is not a technical guide to go-to-market, but some frameworks for thinking through the problem.
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Theoretically, the various stages of a startup are quite well understood at this point. Broadly as a founder, you must figure out your product, figure out how that product fits into the market, and then scale. At this point, you can find thousands of articles detailing the playbook around how to navigate the various stages.
The reason the playbook is broadly understood is obvious: we have 20+ years of software businesses to learn from. There are now software giants and we can chart company lifecycles accordingly. The good news of course is that there are very few uncharted business problems for founders. However, the challenge for the vertical SaaS founder also arises from this same set of facts. The very playbooks you are implementing have been mastered by the businesses that most likely have massive market share over critical workflows in your vertical.
And while you can avoid them for a while or at the very least pacify them, at some point you will face them head on. Even in the verticals with the least amount of software, there will be skirmishes. But in order to generate the second-order insights necessary to drive massive enterprise value, this ultimately must be the road you engage in. Horizontal SaaS companies or legacy point solutions will have no interest in letting you force them out of your vertical and take over their workflows. To do so, will ultimately require conquest.
So your problem in a nutshell: how do you beat these horizontal giants at their own game?
For vertically-based companies, you must be committed to two things:
Building an incredible product
Committing fully to the art of war.
Today is about war.
The great Frank Slootman of Snowflake doesn’t believe in peace time. In Slootman’s account of the world, companies cannot afford to delude themselves into thinking it is all a game. In Amp It Up, he writes:
It's no exaggeration to say that business is war. Either you already have a turf, and you have to defend it against all comers, or else you have to invade somebody else's turf and take it… I love a win‐win deal as much as anyone else, but it's much more common that business is close to a zero‐sum game.
Often, this truth gets obscured. And in bull markets, where capital is unlimited, software budgets continue to climb, and cost structures don’t matter, it’s easy to believe that business is a lot more pleasant. But unfortunately, the great companies were forged in far harder market conditions and have an edge to them.
Down markets are not the time to beat around the bush and the simple truth is that the minute you start to threaten your competitors, you are asking for war. Again Slootman writes:
“[T]he game doesn't really start until the other guys, whose profits you are trying to seize, start fighting back with everything they have. They are not our friendly competitors. At a minimum, noses will get bloodied. At worst, in a few months or years, some firms in our industry will still be in business and others won't.”
The vertical SaaS founder faces a unique war. Within any given vertical there are a finite amount of companies. In order to stay in business and grow into a profitable enterprise, vSaaS companies must win a large portion of their vertical. Veeva, a legendary vertical company who has been at the game longer than anyone, has only just crossed 1000 customers in 2022. The exact number you must win will vary by vertical, but you must win a large territory simply to stay in business. Depending upon your entry point, you may not encounter skirmishes at the border. After all, software hasn’t penetrated every company. In the process, you will continue to take on more and more workflows. And as you go upmarket to larger enterprises in your vertical, it then becomes inevitable, that you will take on more and more horizontal enemies. And you simply can not afford to lose. You will not survive as a company if you cannot conquer. The good news is that as you win more and more of the vertical, this may become easier. If you really have proven out enough value, taken over more workflows, and developed a vision for serving your vertical, you will continue to compound these wins and become a true industry partner and leader.
But getting there is a tough road that any would-be conqueror must face. It takes immense strategy.
Know Thy Enemy
Two horizontal companies with iconoclast founders will demonstrate both the competition as well as the mentality that it will take.
Oracle and Ellison
Larry Ellison is the original software emperor. In 2022, there’s not a workflow that his company, Oracle doesn’t have a product for. Working in a legacy vertical? Better get used to running into Oracle in some capacity.1 And Larry Ellison is a full believer that business is war.
One of his favorite quotes?
"It's not enough that we win; everyone else must lose."
That’s the mentality Ellison and Oracle have embodied in taking on competitor after competitor.
He famously hired PI’s to go through Microsoft’s trash to find evidence of antitrust violations. He at times told his sales force that after he took out a competitor, he would “buy [their] building, which we’re going to bulldoze. After that, we’ll salt the earth. Then we’ll go after their families.”
Distasteful? Yes. Revealing? Also yes. The reason Oracle became a great company was partly because they had decent products but mostly because they were adamant that they would conquer. And as a result, any vertical company will have to compete with them.
In 2022, the primary way vSaaS companies may run into Oracle is around NetSuite, an ERP system. NetSuite has become an incredible business line for Oracle and competes heavily for the small business market. Depending on your specific industry, you may also run into other products from Oracle. The point is this: from day 1, Oracle decided that they were out for blood. Oracle firmly believes that their product is the best for customers and will most likely have the advantage in the total number of workflows they can provide any single business.
Your advantage is that in the end, your product will be better for your specific customers. Don’t pretend you are in a friendly contest, take Oracle seriously as a foe and ensure every single one of your potential customers knows what you will do in order to ensure they have the best software ever. Make Oracle’s biggest customers your allies, by spreading a message of liberation from their legacy software.
You are not up against a friendly competitor or a player that is on its last legs. You must not pretend otherwise.
Salesforce and Benioff
Marc Benioff emerged from Ellison’s inner ring party and from Oracle with a plan to take Ellison and legacy software out. And in the early days of Salesforce, Benioff went after his competitors with the same savage quality. Benioff was bringing companies to the cloud and in the process to Salesforce. And he didn’t really think twice about being abrasive about it.
One of his earliest stunts was to throw a protest outside of a conference hosted by Siebel, a legacy competitor, calling for “the end of software.” Seibel was gigantic and Benioff had just started, but he took them on and instantly drove attention to Salesforce. Benioff didn’t stop there, and was devoted to seeing Seibel go extinct. He kept the pressure on, kept building better software, and kept the heat on from a marketing perspective.
When Siebel later got acquired by Oracle in 2005, Benioff blasted out an internal memo to his team:
“Oracle put Siebel investors out of their misery today. We have been doing that for Siebel customers for years…
Oracle’s strategy is simple, instead of innovating, buy as much installed software as possible, call it all Oracle Fusion, and make sure it all uses Oracle’s database.
Now, the same thing that happened to Peoplesoft will happen to Siebel, it will die. Customers will look for new solutions and new providers. Employees will look for new employers.”2
When Benioff knows his solution is better, he will always risk confrontation with a competitor. Why? It always will work to his advantage. Better products win head to heads. To this day Benioff will never miss a shot or a moment to call attention to an opponent’s weakness.
And he can’t. In 2022, Benioff is no longer the upstart. Benioff is always at risk of disruption. It takes immense discipline to maintain an empire worth billions.
For vertical SaaS companies, with ambitions of conquering your market, you must know the great warlords and learn from their lessons. The best companies have always been willing to risk conflict when the conditions suited them. When their product was clearly better, or they had a moment to crush a competitor, they would. When you compete with them, they deserve the honor of being taken out the same way they took their own competitors out. Don’t only learn from their playbooks, but from their mentality.
At the same time, to risk confrontation requires planning. How and when you make yourself known to foes is important.
So now the question: how should you enter a vertical and when should you switch into war mode?
There are a couple of different ways that vertical SaaS companies have chosen to enter markets. In the coming decades, there will be plenty more. The thing that ties all of these strategies together is that great vSaaS companies give themselves time to fly under the radar in order to build great products. Once they have a great product with industry traction, then they are more willing to take on conflict and win the vertical.
The first strategic path looks a lot like the path of a pioneer.
The largest advantage any vertical startup has is the ability to tackle workflows that existing enterprises can’t do well. Right now, there are plenty of workflows that are deemed unimportant for large companies. In other cases, there are workflows that don’t map well to existing horizontal products and that require gnarly implementations.3 Legacy vertical specific solutions may also be structured in such a way that they can’t offer specific functionality to different market segments.
Lastly, it also may be a matter of will. Legacy industries may be unconvinced of the power of the cloud and thus remain untapped.4
In either case, a vertical company acts as a pioneering effort. Since you are claiming workflows that have very little value to existing enterprises, you don’t necessarily set off alarm bells. Of course, these workflows aren’t ultimately where you will stay, but they function as a beachhead for your future invasion.
In choosing a pioneering workflow, it is not ultimately important if this is a massive revenue driver. But it is critical that this workflow or combination of initial workflows unlocks access to data that you can use to identify highly lucrative workflows for the future.
For instance, Toast’s first product was largely a pioneering effort. It functioned primarily as a rewards and tab product for customers that sat on top of other restaurant software. It wasn’t pitched as a replacement but instead as a service they could offer their customers. This product wasn’t incredibly lucrative, but it did allow Toast to understand deeply where the pains in the current restaurant software stack were. And by going after a workflow (customer rewards and tabs) that was non-threatening but data rich, this fueled their ultimate solution.
Another potential strategy for the vFounder is to tackle a new segment in partnership with a horizontal player who is having trouble taking their solution into a specific vertical. This was Veeva’s approach to the life sciences.
While at Salesforce, Peter Gassner discovered that the life sciences had specific needs out of their CRM that were not directly achieved without an industry specific solution. Companies in the space are highly regulated in their interactions with potential customers and the existing solutions didn’t cut it. Rather than try to reinvent a CRM wholesale, Veeva made a deal with Salesforce and built the Veeva Commercial Cloud on top of Salesforce’s solution.5
The result? Significantly reduced development costs, aligning with a potential competitor early on, and earning the ability to focus heavily on the customer.
Rather than take on Benioff head on, Gassner was able to convert Salesforce into an ally. Now it was Salesforce + Veeva competing against the Seibels of the world in the life sciences. The only thing hSaaS companies hate more than losing to you is losing to the other cloud giants. If you can partner with one and go on a joint conquest, you may find that you can conquer more effectively.6
In turn, Veeva has been able to expand into many additional workflows that they wholly own which have now outpaced the revenue they generate from Commercial Cloud. By willingly giving up revenue share to accrue an immense advantage, they now can go after their vision of becoming the industry cloud for all workflows.
The specifics may look a bit different, but in many ways the message is unchanged. If there is a significant workflow that needs vertical specific featuring, there is a massive opportunity to partner as a way to enter the vertical far faster.7
Lastly, depending on the size of your vertical, you can initially offset the the strength of the competition by targeting areas and clientele that go somewhat unnoticed.
Once Toast fully went into restaurant software and complete with payment processing, they intentionally avoided entering the Bay Area. Steve Papa and the team didn’t want the attention from both existing competitors as well as upstarts.
“We intentionally chose not to put reps in Silicon Valley,” Papa said. As long as potential competitors didn’t see the product in action, they could continue “arrogantly dismissing it,” he said.8
The great thing about your industry is that it will be made up of large swaths of the country that don’t have much to do with Silicon Valley day to day. You can use this to your advantage. Go after these significant geographies, escape detection, and drive adoption and product development before your foes notice what you have built.
Mere Survival is Insufficient
Regardless of how you initially enter a vertical, there will come a time to conquer. You must join the ranks of the warlords. Hopefully, you have accumulated an advantage with a strategic entrance. But at the end of the day, there will come a time where you must fight.
As the vertical SaaS revolution heats up, so too will the vitriol. hSaaS companies will begin to wonder where these rebels have sprouted from and seek to put the uprisings down. Luckily, there are a couple of things in your favor. First, they will be fighting a multi-front war. If every important vertical begins developing software for their specific workflows, the giants will simply have to cut losses. They cannot fight on all fronts simultaneously. Rather, these horizontal giants will have to somewhat buy into the vertical revolution. Giants will be forced to try and pick winners and back vertical solutions that use some of their infrastructure. Others will acquire solutions in an attempt to mitigate losses in the vertical. At the end of the day, vertical businesses will win huge market share and force hSaaS to play on their terms.
If in the meantime it gets heated, take a lesson from the playbooks of Benioff and Ellison. Brand any horizontal player’s moves into your vertical as anti-competitive. Whenever a giant buys an existing solution, simply call out that they are against innovation and are seeking to prevent disruption to their market share. The tactics they used to build their empires can be used against them. And if you really are innovative and have the better product, this will work. After all, industry players want to feel valued. They want an ally who is designing for them. They know they are a just a number to Oracle, can you convince them that you are truly their industry partner?
There’s another element you must be prepared for. For Slootman is right, you will be playing both offense and defense. And defense will most likely be defending your new territory against vertical upstarts.
The easiest way to defend? Become a platform upon which your potential rivals wish to operate in order to gain customers.
By doing so, you will seek the ultimate good of your chosen vertical, allow startups to flourish, and truly become an industry partner.
You too can echo Benioff’s words (although you may not be referring to Microsoft):
“They hate everybody and we love everybody”
And that is how the conqueror becomes a benevolent emperor. May the same be true for myriad vertical innovators.
While this was mostly strategy, next week is about tactics. Really it’s just an excuse to write about why I think product-led growth is of limited value for vSaaS startups.
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At some point, I will write about taking on Oracle’s industry specific products.
Full memo can be found here. Both Benioff and Ellison love accusing companies of forsaking innovation. They both have a soft spot for doing this to Microsoft to this day.
One of the really interesting things about Oracle and Ellison is that they succeeded in part by convincing companies that they should redo their business logic when it didn’t map directly to Oracle’s systems. This was probably a good thing for some workflows and a bad thing for others. One area to explore for your vertical: what workflows got left behind or trapped in spreadsheets? What point solutions filled the gap?
Post-Covid, everyone gets the importance of software, even these previously unpenetrated industries. It may be a race between you and hSaaS to scoop these stragglers up.
Veeva’s deal involves 15% of subscription revenue from Commercial Cloud going to Salesforce.
In many ways, infrastructure companies mirror this strategy. They act as partners to take critical workflows into new verticals and benefit from their customers winning the market. More to be written on this down the road.
We are in the midst of an intense data race. One potential strategy is to partner more directly with Snowflake or a competitor that is having trouble entering a specific vertical.