BVP: Ten lessons from a decade of vertical software investing - summary and comments

Very deep article with very thoughtful content, I highly suggest reading it in its entirety,  posting below a summary and our own take on some of the insights. Our comments are in ITALICS.

The entire article is available at: https://www.bvp.com/atlas/ten-lessons-from-a-decade-of-vertical-software-investing

Summary and Vertical Sugar commentary

Lesson 1: The goal of every vertical software company should be to find a path to market leadership

"Yes, we agree 100%"

• Attack an underserved market
• Address an overlooked problem
• Unseat sleepy incumbents

Lesson 2: The best vertical software companies build a layer cake of new products that drive continuous growth

There is one thing that separates the good from the truly great in vertical software—a “layer cake” strategy of building additional products to sell into their core vertical market.

"Again, yes this is the secret sauce. Embedded SaaS will make this faster and better than ever"

Lesson 3: Some of the best layer cake opportunities are integrated services like payment processing. They are easy to cross-sell and feel “free” to your customers

"Absolutely, See our article Fintech will cause Vertical SaaS to explode"

Lesson 4: For consumer-facing software, there is a unique opportunity to monetize the end customer

"Think B2B2C (e.g, If your vertical is Schools you can sell to parents, if your vertical is non-profits monetize donors, etc.). Yes, but not trivial to do unless there is a clear and strong need. We suggest not forcing this one unless there is a natural fit. Building for consumers, servicing them, and keeping them happy are not trivial skills and they are typically different from what's needed to keep your Vertical Businesses happy which should be your main goal."

Lesson 5: Data remains one of the most under-exploited opportunities in vertical software

"Yes, maybe, but we think there are likely bigger and easier fish to fry for most Vertical SaaS businesses before going there. If you need to sell the data to a new type of customer (e.g., hedge funds) it's much harder than if your own customers can be the buyers (e.g., if you sell aggregates or benchmarking)"

Lesson 6: Pricing and packaging is the biggest missed opportunity in vertical software

"Again, spot-on, pricing is a combination of art and science therefore you need to iterate and develop an internal capability that evolves the pricing and packaging continuously, non-trivial but well worth the effort"

Lesson 7: Many verticals require a move up-market to sustain growth

"Do the math for your industry, pricing * number of potential customers. It has to be big enough to sustain growth. If the goal is massive growth this is sometimes the answer, but we think there are three additional options:

1) Aim for profitability, focus on pricing and costs to become profitable sooner, and grow profits

2) aim to become the sole software provider for your clients, bring everything they need to run the business in one place, integrate tightly, and price accordingly high. This extends beyond software into insurance, property management, etc.

3) Go up or down the operational chain going up means seeing if you can impact their costs (e.g., pool purchasing and procurement for several customers allowing reduced costs, generate access to outsourcing/services optimized for their business, could be lawyers who specialize in this type of business for example). Going down the operational chain could be by attracting customers for their business (and charging for it) as an example."

Lesson 8: Vertical software lends itself well to M&A but should be used cautiously

"We agree with the "use cautiously" clause. Many times M&A integrations fail and are value destructive. Generally, avoid doing one-off acquisitions. If this is becomes a core strategy then develop the muscle for it and plan to do many of them (preferably all with similar goals). Eventually, the playbook and muscle will increase the likelihood of success"

Lesson 9: Once market leadership is established, enduring vertical software companies focus on deepening their competitive moats

"Yes, yes, not much more to add here, read their full approach"

Lesson 10: Smart vertical software CEOs (re)position their business for multiple exit paths

"Yes, agreed, a huge topic overall, once you start getting large enough Investment Banker can really help showcase positioning options to consider"

Read the full article, with a lot more content and without our commentary here.