When people think of Software-as-a-Service (SaaS), they often think of horizontal giants like Salesforce or Microsoft, which serve a wide range of businesses. However, there’s a quieter, often more profitable, corner of the market known as Vertical SaaS. These companies develop highly specialized software tailored to a single industry, such as construction, restaurants, or life sciences. This focus creates deep competitive moats and can lead to fantastic long-term investments.
What is Vertical SaaS?
Vertical SaaS companies focus on solving the unique problems of one specific industry. For example, Procore (PCOR) provides project management software specifically for the construction industry. Toast (TOST) provides a comprehensive platform of software and hardware solutions for restaurants. Veeva Systems (VEEV) creates cloud software for the pharmaceutical and life sciences industry. By going deep instead of wide, they become experts in their field.
The Power of a Deep Moat
This industry focus is a powerful competitive advantage. A vertical SaaS provider understands the specific workflows, regulations, and jargon of its customers in a way that a horizontal player never could. This deep domain expertise gets built into the software, making it incredibly valuable and “sticky.” A construction firm is highly unlikely to switch from a specialized platform like Procore to a generic project management tool.
Multiple Avenues for Growth
Vertical SaaS companies have a clear growth path. First, they can win more customers within their specific industry. Second, they can expand their product offerings to solve more problems for their existing customers. For example, a company that starts with a billing solution for dental offices might later expand to include scheduling software and inventory management. This increases the revenue they get from each customer.
The All-in-One Platform Play
The ultimate goal for many vertical SaaS companies is to become the all-in-one operating system for their industry. Toast is a great example. A restaurant can use Toast for its point-of-sale system, online ordering, employee payroll, and capital loans. By bundling everything, they make their platform indispensable and capture a larger share of their customers’ spending.
What to Look for in a Vertical SaaS Investment
When analyzing a vertical SaaS company, look for a leader in a large and complex industry. The more fragmented and underserved the industry, the bigger the opportunity. Check for high customer retention rates, which prove the product is sticky. And, as with all SaaS companies today, look for a clear path to profitability and a management team that understands the specific needs of their industry.
Conclusion
While horizontal SaaS giants get the headlines, Vertical SaaS offers a compelling investment thesis. These companies build deep moats by becoming indispensable partners to the industries they serve. For investors willing to look beyond the big names, Vertical SaaS can be a source of high-quality, long-term compounders that the market often overlooks.
