Why verticalization and specialization will always win the day.
When we were young, our parents encouraged us to try everything – we played instruments, sang, acted, danced, played little league, Pop Warner, soccer, basketball, the list goes on. These experiences were invaluable for personal development, learning what activities we were good at, and which we weren’t, which we liked and which we despised. Some of us were good at multiple things and became multi-sport athletes in high school, or perhaps followed in the footsteps of Troy Bolton and starred in the school’s musical as well. In very rare instances – we see folks like Kyler Murray rise to the top of two fields (pun intended) in being drafted by both the MLB and NFL. While having multiple passions is both impressive and admirable, it becomes increasingly difficult as time goes on and the competition becomes fiercer. Why is that? For every “playground hero” who can hit a softball, shoot a basketball, sing AND act – there are those who choose to specialize. The athlete who can’t be peeled away from her basketball, who plays online chess into the wee hours of the night or who doesn’t travel anywhere without his canvas. This breed of specialist is deeply impassioned by a single activity, industry or craft. Not only do they find great joy when pursuing their passion, they are often fueled by a desire to be the very best at what they do. The playground heroes might have a great deal of innate talent, but over time find it impossible to compete with the skills acquired and refined over years and years of specialization. In the book Outliers by Malcom Gladwell – the author repeatedly mentions the “10,000-Hour Rule,” stating that the secret to achieving world class expertise in any domain is practice – a prescribed 10,000 hours of practice in fact. When studying industry leaders; whether it be in the arts, in academics, or athletics – one undeniable characteristic that the best of the best share is a deep appreciation for the power of focus.
The same principle holds true in business software. Scaling a growth stage software company is super hard because it’s almost always a hyper-competitive race. A solid tech stack, strong management team and access to capital simply does not cut it these days. While the 2000s and 2010s were marked by the rise of multiple horizontally-focused business software giants such as Salesforce, Workday and ServiceNow, the next decade of winners are rising to dominance in an entirely different fashion – through verticalization and specialization. Recent examples in the public markets include Veeva (Life Sciences), RealPage (Real Estate), and Teladoc (healthcare). Behind these folks is a long roster of public and private software companies also taking a verticalized approach. Even companies who appear horizonal in nature, we would argue are leveraging “plays” from the vertical SaaS playbook to their advantage. Demandforce, a provider of reputation management and appointment scheduling software, is a good example of a seemingly horizontal platform that scaled rapidly through a single vertical. While their website lists Auto, Chiropractic, Dental, Dermatology, Medical, Spa & Salon, Veterinary and Vision – Demandforce’s secret (shhhh!), is that under the covers, they are mainly serving (and dominating) the dentistry industry. While they have expanded more in recent years, the team at Demandforce was able to build a market leading software business on a capital efficient basis through the power of focus. Let’s break this down. Successful vertical SaaS businesses are able to create significant leverage by having an extremely well-defined Ideal Customer Profile (“ICP”). Once these high performers have nailed down their ICP, they can more easily optimize their i) product direction, ii) organizational model and iii) go-to-market strategy accordingly.
1. Product Direction: imagine you are tasked with developing a software platform for a school to manage attendance. How would you approach this? Perhaps by speaking with schools, learning what pain points and frustrations exist today, and exploring the daily workflows associated with attendance by both teachers and administration. Once built, you deliver the product and secure your first happy client. I’m sure you’d then want to offer that product to other schools so they can benefit from your hard work and feel the same joy as school #1. While “attendance” is a process that exists across many verticals (summer camps, opera houses, conferences, etc.), the more widely you offer your product – the more “stuff” you have to build to satisfy different types of customers as the summer camps will have different priorities and requirements than your original school customers.
Before you know it, you are spending significantly more time and resource on product development and are left with a marginally weaker product for all of your customers, versus your original killer product for school #1 and school #2. Further, should you expand horizontally – you better believe there are several EdTech companies on your heels developing more focused software solutions for schools #1 and #2.
2. Organizational Development: back to our playground hero example. Imagine you recently closed a new round of funding and are planning to hire your first customer success representative. Vertically-focused software providers are afforded the opportunity to more deeply educate/onboard their employees within a single vertical, as well as craft “playbooks” that outline common customer pain points, solutions, resources and talk tracks. While possible to do so across multiple verticals, the time and resource expenditure involved is far greater and has a diminishing rate of return depending on penetration rate. Furthermore, for employees in vertical software, every conversation becomes relevant to every other conversation. Learnings from school #1, can be applied to school #2 and so on. This self-reinforcing cycle helps provide clarity on the role and builds confidence across each and every employee as they will soon be able to walk and talk like industry experts and provide REAL value to customers. In some of the most successful vertical software companies – it’s often true the employees know more about their customer/prospect’s business than they know themselves!
3. Go-To-Market Strategy: similarly, as you enhance focus, strategy becomes a lot simpler. Pricing strategy can be crafted based on the buying tendencies of the ICP. Positioning can be crafted directly with this end-customer profile in mind and supported by all the industry knowledge and domain expertise gleaned through living in a single vertical for years. The outreach medium, sales pitch, demo, etc. – are all informed by knowledge gained through selling to essentially the same customer over and over and over again. Soon, you are left with a product that is rooted with years and years of learnings and a team of industry experts selling, serving and providing immense value to an industry vertical. Like the student who can’t be peeled away from her canvas – this type of organization has a singular focused mission and can’t be stopped!
It’s amazing how much simpler life becomes when you can wake up every day knowing what market you play in, who you are selling to and what you are building towards. In less competitive times, playground heroes could get by on their technology talent, but in today’s environment, specialization and verticalization have become table stakes ingredients for building an enduring software company and market leader. Find your focus.