In the past decade, the market for vertical SaaS has nearly tripled to support numerous $1B+ public companies and a new wave of cloud players that's kept Bessemer busy. This is a handbook for future founders looking to build enduring, successful companies, straight from the best practices of our vertical software portfolio with 25+ investments.
A FOUNDER’S GUIDE TO SUCCESS
BRIAN FEINSTEIN, BEN MATHEWS & RAHIM NOORANI
public companies and a new wave of
cloud players that’s kept our
In the past decade, the
market for vertical software businesses
has nearly tripled to support numerous
investments across education, real
estate, construction, healthcare
To date, Bessemer has built one
of the largest vertical software
portfolios in the
venture business with
This presentation is
intended to share our
for the vertical
opportunity and to
walk future founders
through the keys to
building a successful,
WHY BUILD VERTICAL SOFTWARE?
The prize is big and getting bigger1
We believe the
opportunity to build
vertical software is
greater now than it’s
ever been before. Here
are the three drivers
that make this a unique
time for vertical
Winner take most dynamics2
Attractive exit opportunities3
WHY BUILD VERTICAL SOFTWARE? THE PRIZE IS BIG & GETTING BIGGER
PRIZE IS BIG AND
GETTING BIGGER1 |
Companies in all industries are being led by a new
generation of leaders that grew up with software.
These execs view software as a source of competitive
advantage and are making software "table stakes" in
Vertical software companies have emerged as some of the most valuable IPOs in recent years. Companies like Athenahealth and Guidewire have eclipsed
household names like Zendesk and Hubspot, commanding valuations above $5B. The aggregate vertical software market has tripled in market cap in the past 6
years, growing from ~$50B to $150B1. We expect this growth to continue thanks to a few factors:
CLOUD & MOBILE
Cloud and mobile have made software more useful
than ever before. Software can now be used in the
field through smartphones, in a collaborative
environment on the web, in concert with other API-
based services, and in a way that doesn’t require a
dedicated IT support staff. This has dramatically
increased the customers that can be served by
industry software and the value that software can
~$150B Market Cap
~$30B in cumulative revenue
~$50B Market Cap
~$13B in cumulative revenue
Source: Morgan Stanley
WHY BUILD VERTICAL SOFTWARE? WINNER TAKE MOST DYNAMICS
MOST DYNAMICS2 |
EASIER TO PULL AWAY FROM THE PACK
Vertical leaders enjoy less competition. They sell into markets with buyers
who have homogenous needs. These buyers are often risk averse want to
buy from the market leader. Fewer competitors and reference buying drive
winner-take-most dynamics, making it easier for a vertical leader to pull
away from the pack.
Vertical markets are often smaller than horizontal markets. But vertical leaders enjoy winner-take-most dynamics that allow for capturing massive market share.
Veeva, for example, has successfully grabbed 60% of the life sciences CRM market, compared to 20% for Salesforce in the general CRM market.
GREATER CAPITAL EFFICIENCY
These forces also conspire to make vertical software companies much more
capital efficient. In our analysis of public companies, we've found that vertical
software businesses need about 45% less cash to get to IPO than their
horizontal peers. Veeva is the prime example, having raised only $7M prior to
Time to Market Share
in 19 years
60% in pharma
CRM in 8 years
Average capital required before IPO
WHY BUILD VERTICAL SOFTWARE? ATTRACTIVE EXIT OPPORTUNITIES
Public markets are no longer penalizing vertical software. It seems that the
historic concerns about market size have been offset by a growing
awareness of the winner-take-most dynamics we discussed in the prior
slide. High growth vertical companies are now trading at similar multiples
as their horizontal peers:
Conventional wisdom used to say that vertical software companies were hard to exit at attractive valuations because of market size concerns.
Over the past few years, this has changed dramatically thanks to a few trends:
Private equity has shown a big appetite for vertical software.
The success of Vista, Thoma Bravo, Silver Lake and other software-focused
PE firms has generated a massive inflow of LP capital into technology PE over
the past few years. These buyers love vertical software businesses because
they exhibit many of the features they're looking for in acquisition targets
(like high defensibility, limited competition, strong customer retention, and
potential for high profit margins).
Recent vertical PE-led and strategic M&A multiples have been robust:13.7%
While interest remains unpredictable on the strategic side, we’ve seen
some large strategic acquisitions in recent years such as Cox’s $4B
acquisition of Dealertrack, Verizon’s $2.4B acquisition of Fleetmatics,
Salesforce’s $2.8B acquisition of Demandware, and numerous vertical
acquisitions from Oracle (Moat, Textura, Opower, Logfire, etc.)
Acquired Company Acquirer Acquisition Value
Ministry Brands Insight Partners
HOW TO BUILD A SUCCESSFUL VERTICAL SOFTWARE BUSINESS?
Choose your market wisely1We’ve been fortunate to
work with many
software companies in
our history. Here are some
lessons we’ve gleaned
from their success.
Build multiple acts3
HOW TO BUILD SUCCESSFULLY? CHOOSE YOUR MARKET WISELY
The spoils in vertical software go to the leader. We recommend choosing a market where you have domain expertise, a large market opportunity,
and a path to market leadership.
Many founders behind the best vertical
software businesses spent years in an
industry before deciding to build
software to change that industry. While
not a requirement, we believe that
domain expertise is one of the unfair
competitive advantages that give
vertical software founders a leg up.
With many teams coming from industry
backgrounds, we often see companies
breaking the “Silicon Valley” mold and
starting businesses outside traditional
tech hubs in the US, as evidenced by
the $1B+ vertical software companies
outside of Silicon Valley shown here.
Lake Bluffs, IL
Lake Success, NY
San Luis Obispo, CA
Salt Lake City, UT
1 |CHOOSE YOUR
New York, NY
MARKET WISELY1 |
A BIG ENOUGH MARKET
If your goal is to build a company worth $1B+, we
believe you need to see a clear path to $200M+ of
ARR. One of the most common reasons we struggle
to invest in a thriving vertical software investment
is because the total addressable market (TAM) is
The best way to think about TAM is a bottoms up
analysis where you multiply a realistic annual
average contract value (ACV) by the number of
customers in your target market.
The RealPage market sizing analysis shown here is
a good example. RealPage charges customers on a
per unit basis ($54 per year per unit on average).
The company estimates there to be 46M units in
the market, representing a TAM of $11B in ARR.
If you’re looking to attract venture capital in today’s
market, build a credible case for a $100M+ ARR
business with 20% market share. If you can’t, self-
funding can be an attractive way to maximize value
by alleviating the pressure to play for the billion
Source: RealPage Q1 2017 investor presentation
HOW TO BUILD SUCCESSFULLY? CHOOSE YOUR MARKET WISELY (continued)
MARKET WISELY1 |
A PATH TO MARKET LEADERSHIP
Winner-take-all dynamics are only helpful after you’ve achieved market leadership. These dynamics can make it particularly difficult to win market share where
there are incumbents. The key is to find a path to market leadership. Here are some strategies we've seen from recent success stories:
HOW TO BUILD SUCCESSFULLY? CHOOSE YOUR MARKET WISELY (continued)
Re-platforming to the cloud. In markets still dominated by legacy, on-premise players, there remains several opportunities to re-platform to
the cloud. Demandware made a killing going after e-commerce incumbents like IBM, SAP, and Oracle, delivering a cloud experience that
these incumbents could not match. After a successful IPO in 2016, it was acquired last year by Salesforce for $2.8B.
Mobile-first software for non-desk workers. By taking advantage of mobility, you can attack markets that have never had access to
software. As an example, Procore used mobile devices to deliver software to construction workers in the field, attacking a $1T+ industry
that had historically been underserved by technology.
Focusing on SMBs. Cloud delivery and web-driven high-velocity sales have made software less expensive to sell and far cheaper to
implement. As a result, companies like Shopify can price their products to target a new class of SMB customers who historically couldn’t
afford software. These SMB markets can be deceptively large. Shopify has grown to $400M of ARR by catering to this customer base.
Delivering Integrated Payments. It used to be that software companies sold software and payments companies delivered payment
processing. Now, vertical software companies can deliver a better experience for their customers and capture more revenue by processing
payments for their customers. In 2016, payment processing made up ~40% of MINDBODY’s total revenue.
Vertical AI. While tech giants like Google, Facebook and Amazon lead the competitive race to build platform-level and general AI, industry-
specific data sets and tasks are outside their crosshairs. New vertical software companies can use AI to build defensible data moats that
enables them to grow faster and do more than incumbent competitors. Startups like Merlon Intelligence are using NLP, machine learning
and other new methods to build risk management and compliance solutions for financial services companies.
CUSTOMER LED PRODUCT DEVELOPMENT
Everything starts with product and engineering. Without a best-in-class product,
you can never build an industry-defining software business. The most successful
product and engineering organizations in our portfolio share a few qualities:
The software world has gotten so competitive that growth companies need to execute flawlessly across all dimensions. We’ve seen a few
functional areas separate the best from the pack:
HOW TO BUILD SUCCESSFULLY? EXECUTE FLAWESSLY
(1) Obsessive focus on hiring and retaining the best talent
Not only is a top performer 10x-100x more valuable than a mediocre hire, the
mediocre hires often function as a drag on output and morale. This is particularly
acute in the product and engineering functions.
(2) Highly agile squad model with decentralized decision making
Rather than building a monolithic organization where product decisions are made
top down, we’ve found that our top performing teams rely on a cross-functional
squad model where individual squads are empowered to make product decisions.
This usually involves a product manager, a designer / UX specialist, and a team of
5-10 engineers. Spotify has excellent resources on this topic.
(3) Customer-driven product management
Many companies pay lip service to customer-led development, but for the
best, it is core to their culture. Here are some tactics we see from our best
• Focus on understanding customer needs. Rather than just asking for
feature requests, these teams instead focus on understanding customers’
root problems and finding solutions to those problems.
• Full squad engagement with customers. The entire squad engages with
customers, not just the product manager. This provides much deeper
insights into customer needs and humanizes the customer’s problems for
the engineering team.
• Rich, clickable prototypes. Watching users interact drives enormous
product insights and it ends up being a lot cheaper to make changes at
the UX stage than after you push code.
• Continuous feedback from customers every step of the way. The best
teams view product development as an iterative process, with ongoing
discovery calls, demos, on-site visits, conversations with sales reps,
feedback from customer support, etc.
Source - BVP proprietary data, Jeff Epstein & John Golub “Marketing, Sales and Service Best Practices for Cloud-based Businesses” - a 2013 survey of 100 U.S.-based, enterprise-focused SaaS businesses with an average ACV of $26k
SCALABLE SALES & MARKETING
After you’ve built a great product, the biggest challenge you will face is scaling a
sales and marketing engine. There’s been a lot of written around the key B2B
marketing disciplines, all of which are important to master, including:
• Ops/analytics (measuring what works, brand sentiment, A/B tests, etc.)
• Content marketing / webinars (driving leads and brand affinity through
• Paid marketing (SEM, display, direct mail, affiliate, etc.)
• Field marketing (local events, trade shows, world-class user conferences)
• Communications (telling your story for both customers and hires)
• Outbound calling (generating leads through an army of BDRs)
On the sales front, sales strategy is really a function of average contract value.
Software companies selling to SMBs with a lower average contract value will
rely more heavily on marketing to drive inbound leads to feed a high-velocity
inside sales team (although we’ve seen some companies like MINDBODY make
outbound work even at a low ACV).
Those selling to the enterprise with a higher ACV will rely more heavily on
BDRs and an account-based marketing engine to feed leads to a hybrid
inside/field sales force. See the chart on the left for helpful benchmarks we
gathered from an internal poll of BVP’s enterprise sales teams.
HOW TO BUILD SUCCESSFULLY? EXECUTE FLAWESSLY (continued)
# of meetings
3 SDRs per
Most by geo’s
$ARR or new
Most often by
net new ARR
1 CSM per
$2M ARR or
2 CSMs per
HOW DO YOU
METRICS & IMPLEMENTATION
As you scale your business, you need to instrument and benchmark your
performance to make sure each function is on track. After surveying our
portfolio of vertical software businesses as well as public comps, we’ve
outlined what we believe to be ‘good’, ‘better’ and ‘best’ industry standards
across growth, retention, CAC payback and gross margin:
Note that we’ve seen many cloud companies calculate CAC payback
incorrectly. Bessemer’s method is:
There is always a trade-off between growth and cash burn. We’ve found that
an Efficiency Score (defined as % year-over-year ARR growth - % FCF
margin) is a good way to think through those trade-offs. As seen in the chart
below, best-in-class software companies follow an Efficiency Score
progression of 70 - 50 – 30 from expansion to post-IPO.
Source - Internal BVP benchmarking from 10+ years of anonymized data.
HOW TO BUILD SUCCESSFULLY? EXECUTE FLAWESSLY (continued)
GOOD BETTER BEST
<1x 1x >1x
1 Year Forward
(New ARR/Mo. Burn)
[ Total Sales & Marketing Costs Last Qtr ]
[ New CMRR Added Last Qtr ] * [ % Gross Margin ]
($100M+ ARR)This framework applies to vertical SaaS companies who are >$3mm ARR (annual recurring revenue) and who sell an average
ACV (annual contract value) of greater than $10k
Vertical software founders capitalize on their market leadership to pursue “multiple acts” after they get to meaningful scale with their core
product. We’ve seen a few examples worth highlighting:
HOW TO BUILD SUCCESSFULLY? PURSUE MULTIPLE ACTS
Cross-selling new products. Cross selling is the idea of selling new software into your existing customer base. A company that we
has done well in this regard is Veeva. Veeva has been able to successfully cross-sell new products such as their content product,
Vault, which now generates more revenue than its core CRM product.
Payments. Integrated payments is a new area of value creation in vertical software. In the past 5 years, companies like Vantiv have
launched enabling technologies that make it easier for software companies to drive payments. For example, Ministry Brands has
quietly built a $1B+ company selling a combination of software and payment processing for the church market.
Marketplaces. OpenTable started off as a reservation management solution which built an impressive footprint in the restaurant
industry. Once it had enough access to supply, it was able to flip a switch and become a consumer-facing reservation marketplace
which ultimately became more valuable than its core software business. Mindbody is following a similar path in health & beauty.
Mergers & acquisitions. Acquiring companies can help drive cross-selling opportunities, unlock cost synergies, and diversify the
revenue of the overall company. Companies such as Jack Henry, Constellation Software, Tyler Technologies, RealPage, and Fiserv
have been able to sustain growth and market dominance over time via the acquisition of small companies.
International Expansion. Going international is difficult, but it can be a scalable way to continue revenue and user growth.
Demandware has been able to grow a large percentage of revenue through their joint venture in Japan and their expansion into
Europe, Australia, and China.
We’ve laid out a broad market map below which shows the relative industry size with both vertical incumbents (typically on-prem solutions) and newer cloud
competitors. With the tailwinds we’ve outlined in this report, we believe any one of these verticals is ripe for innovation.
OPPORTUNITIES FOR THE NEXT VERTICAL SOFTWARE WINNERS
Real Estate Government Commerce Manufacturing Finance Health Telecom & Media Construction &
Hospitality Education Transportation
Source: Morgan Stanley, JPMorgan
Bessemer has a long history of investing in vertical software founders across a variety of
verticals. We look forward to future growth in the space and invite future founders to reach
out and share their vision.
25+ investments across different verticals, with
founders and teams all around the world
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For more information, contact the authors: Brian Feinstein – firstname.lastname@example.org and Ben Mathews – email@example.com