the Vertical moment
or why software will finally eat the world
After months of thinking about little else other than vertical SaaS, I wanted to write about what I am exploring. And so, Verticalized has been born. I have deep conviction that vertical SaaS will be one of the most important sectors within tech in the next 15 years. At the same time, it is still not well understood. Understanding vertical SaaS requires comprehending the macro-factors that drove us to today, the specific verticals that will be served, and the design behind great vertical SaaS companies.
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Every newsletter should be clear around its thesis. After all, if at some point people begin to read your newsletter earnestly and even begin to allocate their own time, energy, and capital towards your opinions, you carry some responsibility for giving clear parameters that can render your opinions falsifiable.
So here is the thesis: Software is devouring the world and its endless hunger in the 2020s will take the form of vertical SaaS. Horizontal software products are overrated and will not generate returns above the general market. The alpha will be concentrated within startups that focus on a unique vertical.
To lay it out in a bit more detail:
Every industry has workflows not served by current horizontal technologies. This creates an appetite for vertical software that has been unmet. Fortunately, the 2010s birthed infrastructure startups that make building vertically focused products more cost-effective and faster. These vertically focused products collectively form vertical SaaS. The 2020s will thus be centered around the interaction between infrastructure companies, founders building vertical SaaS businesses, and the industries they serve.
If that thesis excites you, welcome to the club. I think we are in for a fascinating decade. If I’m right, vertical SaaS will mint founders who generate unique insights into the future of American small business, entrepreneurs will spring up to start small businesses utilizing these better software products, and software will generate total factor productivity above what we saw in the 2010s. It’s going to be a blast.
But first… the interlude. How did we get here?
Back in 2011, Marc Andreessen famously wrote that "software is eating the world.” While somewhat trivial to believe now, it was not in 2011. The economy was still climbing out of the 2008 crisis and Wall Street’s opinion on technology was that it was overvalued. Or in Andreessen’s words at the time, “today’s stock market actually hates technology.”1
Over the next decade, Andreessen was proven right and Wall Street’s hatred melted in to love. Tech began to eat traditional payments with the rise of Stripe, Shopify minted an e-commerce frenzy, and the FAANG bucket of stocks became the hottest date in all of America.
With this infatuation, startups of all kinds were able to be funded. And while there were some notable busts and frauds, the 2010s ended up looking more like a preparatory decade. You can group the 166 tech IPOs throughout the 2010s into three main buckets: consumer, infrastructure, and horizontal software. Check out this list from the Founder Collective2:
If you know much about these companies, you are looking at consumer products, infrastructure companies, and productivity (horizontal) software3. The 2010s were mostly about the digital consumer, cloud-based infrastructure, and better productivity tooling.
So yes, Andreesen was right: software began to eat the world. But mostly, it ate the consumer and general business architecture. It didn’t bother much with digitizing industries as a whole. There’s good reasons for that!
Software products require an immense degree of complexity to get off the ground. Navigating server infrastructure, implementing enterprise level features, and ensuring developer productivity all meant resources had to be allocated to humongous bets to offset the the immense time that went into creating software companies. Establishing all this infrastructure took months if not years of labor. But throughout the 2010s, founders posed a new question: what if we could simply make building software products take less time?
And thus, infrastructure startups were born. Some of the names are familiar like Twilio and Stripe. Others are less familiar or still emerging. The point is that rather than build out the infrastructure yourself for SMS messaging or payments, you could rely upon APIs to do so. Complexity was abstracted away and the task of building got easier.
Software ate the process of building software. And this, is the unlock that will result in a new wave of vertical SaaS startups. The infrastructure underlying startups is now understood. Money continues to pile in. For the first time, founders can concentrate on unique sectors with unique workflows, and build comprehensive products in a time-effective manner at lower costs.
The first wave of torch bearers have entered: companies like Toast and Procore have IPO’d and continue to grow within their sectors. Dozens more will follow.
In 2011, it was contrarian to predict that software was eating the world. Now, it is far more important to predict how. The consummation of Andreessen’s thesis will happen over the next 15 years. Vertical SaaS is eating the world.
Before getting into deep dives of companies in the space, the next few weeks will focus on the vertical SaaS vs. horizontal SaaS distinction. What makes a vertical SaaS solution truly unique? From there, expect deep dives into specific companies, predictions around what industries will be disrupted, and far more.
Veeva is a notable exception and foreshadows the vertical SaaS wave.