<aside> 👉 Hi there,

With Clément and Loup, we (Eurazeo) are currently digging into vertical SaaS for local businesses to understand their key success factors as well as to try to identify great verticals and startups to invest into in Europe. We are planning to publish a mapping with European vertical SaaS for SMBs as well as several articles on this trend.

We will share our initial ideas on the space in this document. You can comment the Notion's page to provide us with feedbacks. You can also reach me out at [email protected] if you want to have a chat on the topic.

Talk to you soon and thanks for your help! 🙏 Alex

</aside>

• 📖 Table of Contents

Why is it Relevant to Build a Verticalized SaaS for Local Businesses?

Key thesis: I believe that for local businesses, verticalized SaaS are strictly superior to horizontal ones because verticalized players can become the global OS of the industry they target - which is something that horizontal SaaS will never achieve.

I like vertical SaaS for the following reasons:

• Superior products: vertical SaaS will customize every feature to the industry they serve (e.g. Doctolib's booking platform allowing patients to share data related to their health) and will build specific features that only make sense for the vertical targeted (e.g. Amenitiz including a property management system in its SaaS for hotels).
• Higher market penetration potential: it's hard to impossible to reach market dominance as an horizontal SaaS. You will always have CRM (Salesforce, Hubspot, Pipedrive) or communication tools (Slack, Teams, Discord) competing. On the contrary, well-executed vertical SaaS are becoming industry standard and can reach market share above 50%. Some vertical SaaS will become SaaS-enabled-marketplaces to incorporate network effects in their model in order to reach market dominance (e.g. Mindbody's successful booking platform for consumers is a strong value proposition to sign new beauty professionals).
• More efficient acquisition machine: as you are serving a unique vertical, your sales team has a deeper knowledge of the pain points that your product is solving. You can have a super relevant sales pitch to potential customers that will increase conversion rates. After a certain threshold, vertical SaaS also see the market tipping in their direction with more customers coming organically or customers becoming easier to convince because of your growing reputation. Moreover, you can implement acquisition strategies uniquely suited for your industry (e.g. going to a trade faire for your vertical, partnering with influencers in this vertical etc.).
• Strong TAM expansion potential: historically, most investors were passing on vertical SaaS because the addressable market was too small. Nowadays, this statement is wrong for most verticals. Vertical SaaS have clear playbook to massively increase their addressable market by (i) becoming the one stop shop software for their industry, (ii) building marketplaces (consumer facing, developer facing or supplier facing) and (iii) tying financial services to their offering (e.g. Mews processing payments when end consumers book a room in one of its hotels).
• The OS of a given industry: vertical SaaS have the potential to become the one stop shop solution for professionals in a given vertical to manage all the aspects of their business. When you become the backbone of your customers, your solution can drive high engagement rate and low churn rate. I believe that it's a great position to be into when you are the last software that your customers will unplug before closing down their business.

TAM Expansion Potential = How to Expand your ACV as Vertical SaaS?

Historically, many investors did not want to invest into vertical SaaS for local businesses because they believe that most vertical markets were too small to generate multi-billion dollar outcomes. Most of the time, this view is wrong: vertical SaaS are uniquely positioned to expand their addressable market by adding layers that will increase the revenues they can generate per customer.

To increase the revenue generated per customer as a vertical SaaS you can:

• Add product features to become the one stop shop solution when it comes to software for your customers
• Embed financial services
• Embed a marketplace for suppliers and/or end-consumers

Part I - Become the one stop shop software solution

Most vertical SaaS start with a simple value proposition solving a large pain point in the vertical they operate (e.g. managing bookings, complying with a new regulation, etc.). But vertical SaaS have the potential to become invaluable to their customers by developing a suite of products needed to run all the aspects of their businesses (e.g. CRM, estimates, inventory, team management, analytics, etc.). Ideally, you want to become the record system of your customers - the unique place where they store all the data related to the business. Most successful vertical SaaS end up being the last software that customers will unplug when they close the business. As a result, these vertical SaaS for local businesses are able to reach much stronger gross retention rate (90-95%) compared with horizontal SaaS targeting small business (50-70% retention rates).

Even if your SaaS is business critical and is the one-stop shop solution to run a small business, you can't go beyond a pricing threshold that depends on the targeted industry but that is generally between $200 and $250 per month. Small businesses behave like consumers. It's hard to charge a consumer an individual subscription above $10-15 per month because it's the price that will get you access to amazing services like Netflix and Spotify. It's the same for small businesses. As a result, to increase the revenues generated per customers, you need to find revenue sources that will not be a directly visible or appear as an additional cost to them - examples of such sources are fees on financial services or a take rate on a marketplace.

Part II - Embed financial services

I covered in a past issue the idea of fintech enabled businesses which are companies adding one or several fintech layers on top of their core value proposition to increase their lock-in effects on their customer base and to generate incremental revenues per customers. Vertical SaaS are perfectly positioned to transition into fintech enabled businesses. They can offer superior financial products because they understand their industry inside-out and they have much more granular customer data than traditional banks.

For a16z, the combination of software and financial service is the next successful iteration of the software business model after bottom-up SaaS. It allows software to penetrate new vertical historically underserved by tech and to generate additional revenue per customer.