Investment Theme: Vertical software is an attractive investment universe and the market is in a renaissance with new companies that produce real value, especially in regulated or offline markets.

Theme Drivers:

• The Markets Are Large And Unpenetrated — Markets like real estate, financial services, agriculture, and health are large and often use pen-and-paper with data. Companies often use homegrown tools that have limited capabilities, and customers feel significant pain in using these applications.
• These Companies Build Sustainable Data Moats With Pricing Power — These applications create data moats that allow users to process information more quickly or make better informed decisions by combining data across silos in powerful ways. They allow for new behaviors and time and cost saving.
• Companies Can Build A Lasting Customer Base — Vertical software companies have shown how customers can remain loyal to their software. This allows companies to focus on new opportunities and compounding growth. Some examples include Epic Systems, Buildium, and PointClickCare.
• Investors Realize The Opportunity And Exits Validate It — Investor appetite has grown to support these companies and there have been several large transactions in vertical software (Autodesk/PlanGrid, Oracle/Aconex, Trimble/Viewpoint) and successful IPOs (APPF, VEEV)

Considerations:

• TAM vs. SAM — Investors have to consider the total addressable market (TAM) vs. the serviceable addressable market (SAM) in vertical markets. The number of willing customers within a vertical may be significantly smaller than anticipated. One way to test this is to see if the product is a “feature” that users want (i.e. tenant screening) or something core to what they do (i.e. rent rolls and payment management).
• Customer Upsell — Consider the ability to add value in more than one way to customers. Some markets become saturated because a core feature has been solved with vertical software and there are no logical additional features to add. These companies move to other verticals, which is harder.
• Growth vs. Profit — Sometimes these companies can reach saturation points within their market and start to focus on profitability. Growth-minded investors must consider the runway of opportunity within a specific vertical.
• Price — Because investors have realized the value of these platforms, newer vertical software is often valued at a premium to other software and to other growth companies.

Examples:

Vertical Software 1.0

Proven business models that produce consistent profit, unlike many of their software peers

• Veeva Systems (VEEV) — customer relationship software for pharmaceutical industry
• AppFolio (APPF) — property management software focused on large property owners

Vertical Software 2.0

Newer vertical SaaS players varies across industries like financial services, agriculture, construction, retail, and shipping

• Avalara (AVLR) — sales tax compliance platform for 30k mid-market retailers
• Blend Labs — mortgage application and workflow aggregator for banks
• Farmer’s Business Network — marketplace for farmers to gain insights from each other
• Procore — project management platform for construction
• Lufax — peer-to-peer asset exchange platform for Chinese banks
• Atrium LTS — legal platform that helps startups incorporate and manage legal processes
• Convoy — on-demand service to connect trucking companies with freight shippers

Vertical Software 3.0

~20 emerging players in vertical software that have discovered product/market fit

• Plex Systems — enterprise resource planning for manufacturers
• Hudl — sports analytics platform for coaches and players
• Welltok — consumer health platform designed to help engage consumers in their health