The Verticalized February Roundup
The Verticalized February Roundup
productivity, fundraises, and some open questions
There’s a lot of great content, news, and more that doesn’t quite fit into core Verticalized content. As part of a dual strategy to maintain the quality of main Verticalized content and highlight interesting tidbits that don’t quite fit into main content, I’m going to be trying out a monthly roundup.
Expect a short piece of commentary, some interesting fundraises, and a collection of the best stuff I am reading (both vSaaS and non-vSaaS related).
And where better to start than to revisit why vSaaS matters?
Stagnation, Productivity, and Vertical SaaS
A couple years ago, Austin Vernon wrote a post hypothesizing why software hasn’t shown up in productivity. It’s the one of the best rationales I’ve read for why software hasn’t pulled us out of the Great Stagnation. To distill the piece, Vernon thinks software is in a bit of a Catch-22. Current software can’t be general purpose enough to impact productivity across multiple sectors. And historically, fixed costs have been too high to impact very specific firm processes that would increase productivity.
[Software] is magic technology that almost anyone can use to message Grandma or learn incredible amounts of information. A closer look shows that the [general purpose technology] aspects are shallow. For software to increase TFP, it has to mimic human tasks in great detail.
AI might enable a new era of highly productive software. GPT-3 is of course trying to be… general purpose technology. But there’s another strategy that will harmonize well with whatever advances in AI we get in the coming decades. And that would be modern vertical software; digitizing very specific processes and the data necessary for software to impact sector productivity.
Vernon was decidedly skeptical of software’s ability to ever impact very specific processes primarily due to fixed costs and the need to scale into large markets to justify the cost. I think this is less true by the day. Fixed costs have come down. Development cycles are understood. And vertical markets can support large software businesses (so long as both investors and founders understand the relative market size and right size the investment). Now the core challenge is to get this software in the door.
In other words, we have a movement towards vertical software encoding the very processes that have previously mounted a challenge for increased productivity.
Management and Productivity
Vernon makes the case that software is primarily a management technology.1 And when you encode very specific processes, you simplify the administration and legibility of firm processes leading to better returns on management.
This is important because good management is usually the biggest bottleneck in SMB/SME businesses. Owners and managers often don’t have the real time data necessary to make decisions about how to optimize the business. By increasing the management throughput, productivity in the business goes up.
There’s two important things going on here:
Vertical software enables businesses to scale as more processes can be simultaneously managed with decreased friction.
Put more simply: vertical software enables businesses not only to do more with less. It allows businesses to scale with less. This will only get compounded over the next decade.
Firm management is de-risked in transactions.
The single biggest risk in a business acquisition or transfer is often firm-level knowledge about how to run the company. When companies die, often knowledge about the industry itself dies as well.2
It’s a key reason acquisitions often prioritize keeping management teams in place. But to zoom in on SMBs and SMEs, it’s far harder to guarantee firm-level knowledge will also transfer with the acquisition. And when your knowledge graph is internalized in the mind of aging-out managers and operators, you end up with unpredictable side effects.3 And while not all firm knowledge is contained at the workflow level, luckily a large portion of it is. Workflow fidelity through vertical SaaS thus derisks a large portion of management knowledge necessary to keep the business in a steady state.4
Vertical SaaS has the potential not only to increase productivity. It has the potential to enable vast swaths of industries to transition businesses into the next generation.
Selected Fundraises:
Luminary came out of stealth to fix wealth management (9.5m seed)
Bessemer takes a reported majority-stake in Litify.
Some comments on why this is interesting:
Litify is built on Salesforce. As I’ve written in the past, Salesforce is verticalizing. No idea on the financials or the valuation, but there’s a strong argument to be made that Salesforce will scoop up a vertical legal platform in the future. This investment has built in exit-potential independent of going public.
Bessemer generally & Brian Feinstein in particular (now chairman at Litify) are on another level at propelling vSaaS companies to their full potential. Combine that with lessons learned from their Clio investment and commonalities with nCino’s architecture (and Insight’s majority control at IPO) and this just makes all sort of sense.
Some reflections from Boris at Version One here.
What I’m reading:
Kevin Hsu on Increasing the GDP of the Private Markets
Anna Khan on Vertical SaaS Lessons
Alexandre Dewez on nCino
Open Questions and Ideas:
Are vertical franchises a superior model to generate venture returns than vSaaS in the SMB segment?
Yoni’s been really thought-provoking on this:
How real is the Silver Tsunami? What would prevent the successful transfer of SMB/SMEs from the Boomer generation to acquirers?
What does the future hold for vSaaS roll-ups?
Next Month on Verticalized:
March is going to be a bit of an extended look on trends in building industry clouds and specific companies taking on Veeva’s mantle into the new software era.
One really interesting prospect for AI that would augment software primarily as a management technology: if AI understands the workflows and data of a vertical and is empowered to act upon those in knowledge work contexts, it might have a far better chance at extending beyond management and into actual knowledge work activity in complex verticals.
Chris Power at Hadrian often talks about how a retiring machinist base in the US meant that when Ukraine ran out of javelins, nobody knew how to make them.
Not to mention you scare away acquirers and depreciate the value of owner's equity.
There’s two sorts of knowledge transfer: management knowledge and skill-based knowledge. I don’t mean to imply that skill-based knowledge is de-risked, but management knowledge certainly is.