Key Takeaways
- • Bessemer Venture Partners argues that a new class of LLM-native "Vertical AI" applications will create a market larger than legacy vertical SaaS, which it says has a combined public market capitalization of roughly $300 billion across the top 20 US vertical SaaS companies.
- • Bessemer reports that LLM-native companies founded from 2019 onward have reached about 80% of the average contract value of core vertical SaaS systems, are growing roughly 400% year-over-year, and maintain gross margins near 65%.
- • Bessemer predicts at least five Vertical AI companies will reach $100M+ ARR within two to three years and expects the first Vertical AI IPO within three years.
- • Bessemer projects Vertical AI's market capitalization will be at least 10x that of legacy vertical SaaS, citing that software spend is about 1% of US GDP while the Business and Professional Services industry accounts for 13%.
- • Early M&A signals include Thomson Reuters' 2023 acquisition of CaseText for $650M and DocuSign's acquisition of Lexion for $165M a year later.
Summary
In part one of its four-part Vertical AI series, Bessemer Venture Partners contends that LLM-native applications are opening markets that legacy vertical software could not serve. Bessemer, which says it has built one of the largest vertical SaaS portfolios in venture, notes that Mindbody, Shopify, and Procore were considered "sleepy" investments when it began backing vertical software in the early 2010s. The firm states that the category it helped establish has since produced top-20 US public vertical SaaS companies with a combined market capitalization of roughly $300 billion. It identifies 2023 as the point when a new generation of LLM-native applications began serving functions and industries that earlier vertical software had not meaningfully reached, including legal, healthcare, and finance.
Bessemer's portfolio data forms the core of its argument. LLM-native companies founded between 2019 and the present have reached about 80% of the average contract value of traditional core vertical SaaS systems, are growing roughly 400% year-over-year, and maintain gross margins near 65%. Bessemer forecasts at least five Vertical AI companies crossing $100M in ARR within two to three years and anticipates the first Vertical AI IPO within three years. The firm also cites exit activity, including Thomson Reuters' 2023 acquisition of CaseText for $650M and DocuSign's acquisition of Lexion for $165M, and notes that incumbents are both building and buying AI capabilities. In a survey of Bessemer investors overseeing its vertical SaaS portfolio, a majority reported companies across regions and sectors rapidly incorporating AI features.
Bessemer identifies three opportunity areas: expanding total addressable markets, unlocking functions and verticals that SaaS did not reach, and delivering value not previously affordable. Its examples include EvenUp, which automates demand letter generation for personal injury attorneys, Abridge and ClinicalKey AI in healthcare, and Axion Ray and JusticeText, which analyze large volumes of manufacturing and legal data. Bessemer cites US Bureau of Labor Statistics figures showing software spend at 1% of US GDP versus 13% for Business and Professional Services, and says Vertical AI's business model is largely complementary to legacy SaaS rather than displacing it.
Bessemer's portfolio data forms the core of its argument. LLM-native companies founded between 2019 and the present have reached about 80% of the average contract value of traditional core vertical SaaS systems, are growing roughly 400% year-over-year, and maintain gross margins near 65%. Bessemer forecasts at least five Vertical AI companies crossing $100M in ARR within two to three years and anticipates the first Vertical AI IPO within three years. The firm also cites exit activity, including Thomson Reuters' 2023 acquisition of CaseText for $650M and DocuSign's acquisition of Lexion for $165M, and notes that incumbents are both building and buying AI capabilities. In a survey of Bessemer investors overseeing its vertical SaaS portfolio, a majority reported companies across regions and sectors rapidly incorporating AI features.
Bessemer identifies three opportunity areas: expanding total addressable markets, unlocking functions and verticals that SaaS did not reach, and delivering value not previously affordable. Its examples include EvenUp, which automates demand letter generation for personal injury attorneys, Abridge and ClinicalKey AI in healthcare, and Axion Ray and JusticeText, which analyze large volumes of manufacturing and legal data. Bessemer cites US Bureau of Labor Statistics figures showing software spend at 1% of US GDP versus 13% for Business and Professional Services, and says Vertical AI's business model is largely complementary to legacy SaaS rather than displacing it.
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