Key Takeaways
- • Bessemer Venture Partners has distilled a decade of vertical software investing into ten lessons, updating its earlier vertical SaaS manifesto to cover new monetization models and the role of B2B payments.
- • The firm's core thesis is that the leading vertical software companies, including Shopify, Procore, Toast, ServiceTitan, Mindbody, and nCino, grew far larger than expected by trading market size for market share, in some cases reaching 50%+ penetration.
- • Bessemer argues that one or two vendors typically dominate each vertical and capture most of the value, so market leadership is the central objective for founders.
- • The first lesson identifies three paths to leadership: attacking underserved markets, addressing overlooked problems, and unseating sleepy incumbents through a platform shift.
- • The second lesson stresses a "layer cake" strategy of cross-selling new products into the core vertical; Veeva's Vault launch in 2012 illustrates the approach, with Veeva approaching $2 billion in revenue.
Summary
Bessemer Venture Partners has published an updated version of its vertical SaaS manifesto, titled "Ten lessons from a decade of vertical software investing." The update reflects new forms of monetization that augment the traditional software subscription model, deeper insights into pricing and packaging, and the growing importance of B2B payments, which the firm covers in a bonus lesson. Bessemer says it is more confident than ever in the proliferation of software across every industry.
The firm states that portfolio companies such as Shopify, Procore, Toast, ServiceTitan, Mindbody, nCino, and Disco grew to be much larger than Bessemer had expected. Vertical companies can trade market size for market share, in some cases reaching 50%+ penetration, and one or two vendors often capture most of the value in a given vertical. Bessemer therefore frames market leadership as the goal of every vertical software company, and it identifies three routes to that position. The first is attacking an underserved market, as Procore did in construction and ServiceTitan did in field services. The second is addressing an overlooked problem inside a mature market, as nCino did by digitizing commercial loan origination inside banks. The third is unseating sleepy incumbents, which the firm says is the hardest path. Toast displaced NCR and Oracle in restaurant point of sale by using Android hardware, cloud delivery, and integrated payments to offer a lower price point, reaching a business of more than $500 million in revenue.
The second lesson concerns a "layer cake" strategy of adding products to sell into the existing customer base. Bessemer cites Veeva, which expanded from pharma CRM into its Vault product line in 2012. CRM continues to grow at 10-15% annually, while Vault has driven most of the company's recent growth and helped sustain roughly 30% revenue growth over nearly a decade. Bessemer advises founders to begin planning their next product two to three years before the core product slows, and to limit themselves to one "next act" at a time.
The firm states that portfolio companies such as Shopify, Procore, Toast, ServiceTitan, Mindbody, nCino, and Disco grew to be much larger than Bessemer had expected. Vertical companies can trade market size for market share, in some cases reaching 50%+ penetration, and one or two vendors often capture most of the value in a given vertical. Bessemer therefore frames market leadership as the goal of every vertical software company, and it identifies three routes to that position. The first is attacking an underserved market, as Procore did in construction and ServiceTitan did in field services. The second is addressing an overlooked problem inside a mature market, as nCino did by digitizing commercial loan origination inside banks. The third is unseating sleepy incumbents, which the firm says is the hardest path. Toast displaced NCR and Oracle in restaurant point of sale by using Android hardware, cloud delivery, and integrated payments to offer a lower price point, reaching a business of more than $500 million in revenue.
The second lesson concerns a "layer cake" strategy of adding products to sell into the existing customer base. Bessemer cites Veeva, which expanded from pharma CRM into its Vault product line in 2012. CRM continues to grow at 10-15% annually, while Vault has driven most of the company's recent growth and helped sustain roughly 30% revenue growth over nearly a decade. Bessemer advises founders to begin planning their next product two to three years before the core product slows, and to limit themselves to one "next act" at a time.
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