BIP Ventures’ Paraj Mathur: The Next Wave of Vertical Software Adoption Will Be driven by ‘Subterranean’ Industries

ABSTRACT

KEY POINTS FROM PARAJ MATHUR’S POV: 

Why is the second wave of vertical software adoption such an important category moving forward? 

• As technology use has proliferated in all facets of our lives, SMBs in traditionally manual industries are increasingly in the market for verticalized solutions that overcome the limitations of horizontal software offerings. “As everyone has become comfortable with technology in both their personal and professional lives, people are realizing that there is a lot of manual work that has the potential to be automated. This has been the rudimentary starting point for the foray into tech for a lot of smaller businesses that collectively represent a large portion of our GDP,” says Mathur. “Customers in primarily offline industries are now starting to stitch together horizontal solutions to augment their workflows.” 
• The first wave of vertical software adoption in mainstream industries – including Toast for restaurant management and Service Titan for field services – has highlighted the opportunity for solutions that target the next layer of previously ‘hidden’ industries. “Over the last decade, several successful companies have already proven components of this thesis in the mainstream industries that comprised Wave 1.0 of adoption,” adds Mathur. Examples include Toast for restaurant management, Procore for construction, SQUIRE for salons and barbershops, and ServiceTitan for consumer home services and commercial contractors. This initial wave demonstrated how vertical software companies can establish systems of record in specialized industries, enabling them to continue scaling revenue with auxiliary offerings. The success of this model, and its impact for customers, has paved the way for a second wave adoption within overlooked industries or industry subsegments that are eager to adopt hyper-specialized software to bring their core workflows online.

What kinds of business models, use cases, or specific industries might be attached to this category?

• After wedging into untapped markets by solving a critical workflow, companies can establish durable customer relationships and scale platform offerings through a ‘layer cake’ strategy. “The core offering is usually software that solves a critical workflow, data, connectivity problem with a SaaS fee,” says Mathur. “Afterwards, there is usually a natural secondary path to payments with gateway or processor based monetization. Further growth is then driven via a tertiary "Layer Cake" strategy of offering value added services, such as insurance, directly through the platform. A common entry point we’ve seen has been to simply open up a white label marketplace to let services vendors sell on the platform, thus enabling high margin lead-generation fees.”
• Wave 2.0 of vertical software adoption will be driven by companies that solve critical workflows in ‘hidden’ or subterranean industries. “The companies that will define this next wave of adoption are identifying large markets that are just underneath the radar of existing tech vendors,” says Mathur. “In event management for example, everyone recognizes the size of the live events industry, but nobody thinks of event management businesses as a sub-segment of the market that is actually very large.” Eventeny, a BIP Ventures portfolio company, targeted this subterranean market with a GTM wedge that focused on solving vendor management and payments as the unaddressed, critical workflow amongst event management businesses. “While event managers certainly leverage CRMs for attendee marketing, the industry requires far less personalization than marketing for B2B software or consumer goods. What’s far more important for these businesses is managing relationships with the vendors that are critical to the success of their events. This was the critical workflow that Eventeny sought to bring online and own, thus differentiating them from horizontal CRMs like Salesforce and Hubspot. After owning this workflow, Eventeny has been able to layer-on and upsell with vendor payment solutions, as well as merchandise marketplace solutions and attendee marketing on the consumer side.” 
  • Numerous untapped industries can support substantial outcomes, particularly service-based business including parking management, waste management, fire safety, and building inspections. There are many business segments — each generating substantial revenue — that are just beginning to stitch together horizontal software solutions or that are still operating through manual and disparate processes. These industries involve complex workflows where vertical software solutions can bring about remarkable efficiency gains and operational improvements. “Parking management, for example, is a large market that still relies on extensive, labor-heavy operating models. There are many workflow opportunities to bring the industry online, from reservations and ticketing to real-time rate optimization,” says Mathur. “I’m always excited to connect with founders who are innovating in these unexplored industries by establishing the system of record that will open the door for building comprehensive and heavily entrenched platforms.”

• Labor marketplaces will evolve from point solutions into a new generation of verticalized workforce management software that holistically address industry-specific workflows. “Labor has historically been thought of as an input. The first generation of labor marketplaces were largely comparable to job boards. The second generation of companies sought to solve labor inputs as a service; this generation essentially comprised labor marketplaces. The third generation of solutions will solve industry-specific labor workflows in parallel to providing a tailored labor marketplace,” says Mathur. “Every industry has a unique labor profile that affects how you acquire, pay, retain, manage, and upskill labor. This whole process is a large and critical workflow, especially in periods when unemployment is very low.” For example: ShiftMed, a BIP Ventures portfolio company that began as a labor marketplace for nurses, has now evolved into a full solution for labor in the healthcare space. “What we have learned from ShiftMed is that there is an opportunity to efficiently flip the model from being a labor problem to a workflow problem – of which acquiring labor is one component – that must be solved with verticalized software. We are seeing this trend across the board, in particular with companies focusing on construction and other blue-collar industries where turnover is high and costly to manage.” 
  • In industries with high turnover velocity, verticalized solutions must support customer workflows that bifurcate to optimize either for retention or turnover efficiency. "What we have also learned from ShiftMed is that the importance and impact of solving labor workflow increases in parallel with the velocity of labor turnover in an industry.” In similar industries with high turnover, emerging solutions must be able to support customer workflows that are fine-tuned for one of two models: 
    • A retention-optimized model that aims to reduce turnover relative to industry averages. “Outperforming other market competitors through improved compensation and benefits offerings is certainly one way to win, but it's the more expensive way to win,” says Mathur. Nonetheless, businesses in the position to pull this lever will leverage verticalized software that enables them to do so. 
    • A cost-optimized model that streamlines the full process, from onboarding and offboarding. Other businesses competing for the same talent pool will leverage the same software to minimize costs across onboarding and offboarding, while also leveraging referrals to continuously and efficiently fill vacancies.

What are some potential roadblocks?

• Customer acquisition can be tricky (and expensive): “Customers within many of these target markets are not habitual software buyers,” says Mathur. “Companies building in these segments need to experiment and find sales channels and processes specific to the target industry.” 
• Founders should be wary of beginning multi-product expansion prematurely. “New companies need to focus on solving the core workflow problem first, ensuring both a differentiated wedge into the market and product stickiness. From there, expanding into other products is far more effective for establishing long-term retention and defensibility” adds Mathur. “Ancillary offerings, while a meaningful source of revenue, are ultimately commodity offerings. The core software is the glue that drives product stickiness.” 

IN THE INVESTOR’S OWN WORDS

"The fundamental driver of this next wave of vertical software adoption is that people across every industry have grown far more comfortable with technology. Smartphones, apps, and broader digitization have broadly shown us how software can improve or replace workflows in our own personal lives. 

As a result of this, small and medium size businesses in traditionally offline industries are beginning to leverage horizontal software to digitize their workflows. There is tremendous potential now for vertical software companies to target these ‘unexplored’ markets. 

The critical shift that has taken place is this: customers in these industries don’t necessarily need to be sold on the opportunity of using software. What they need to be sold on is the applicability of verticalized software that specifically solves their core workflows better than horizontal solutions."

MORE Q&A 

Q: What do other market participants or observers often misunderstand about this category?

A: "Sometimes people think of vertical software primarily as payments businesses, or that these payment solutions should be the tip-of-the-spear offering. This oversimplifies why these businesses succeed. 

While a meaningful portion of revenue comes from payments, the software itself needs to solve one — and eventually most — of the biggest process-related problems specific to that vertical. That makes the solution sticky and compelling, thus enabling the possibility to upsell with payments solutions.

In the absence of a core software solution, payments tend to be a commodity offering with severe downward price pressure that is vulnerable to competition from horizontal players and much less sticky."

STARTUPS MENTIONED IN THIS BRIEF

• Eventeny*, ShiftMed*

Editor's note: BIP Ventures portfolio companies denoted by (*).

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