A Look Under the Hood of Vertical Software Models
As we all know, technology has infiltrated almost every part of our lives, changing the way we communicate, work, shop, and more. However, despite mass adoption from modern consumers, there are still industries that remain stuck offline. Here at Interplay, we’re focused on investing in vertical software companies building specifically for these industries that are ripe for technological disruption. To uncover more about the vertical software model, we asked a couple experts to join us for a conversation on the podcast: Interplay portfolio company founders Chetan Narain and Todd Saunders.
Chetan (“Che”) is the Co-Founder and CTO of Pepper, an e-commerce and digital services solution for the trillion dollar food distribution market. Che originally became interested in the food supply chain as an early member of Uber Eats, where he worked closely with restaurants and witnessed firsthand how difficult it was to get food from distributors to retailers.
Todd is the Founder and CEO of Broadlume, a full-stack vertical software company for the flooring industry. Todd worked at Google before launching an adtech company that eventually pivoted into flooring software after working with a customer in flooring and seeing the immense potential for a vertical software solution.
Che and Todd operate in radically different industries, but there are still parallels that can be drawn between their strategies for, and outlook on, building successful vertical software companies. If your podcast queue is backed up, here are a few important takeaways from the discussion:
- Software is the wedge to eventually take a larger portion of industry GDP. Investors often criticize vertical software companies for having small addressable markets that limit venture-scale returns. However, the initial software TAM should not be viewed as an immovable constraint. Once a vertical software company acquires meaningful distribution and becomes the trusted software provider for a specific industry, there are ample opportunities to expand the product offering and take a larger portion of industry earnings. For example, Broadlume’s initial TAM for flooring software is ~$800M, but zooming out, there is $76B of flooring goods and services bought and sold every year with numerous opportunities for monetization. Expansion into the broader market often starts with payments, taking a percentage of transactions, but can also move into selling physical products or facilitating advertising. Overall, owning the distribution in an industry unlocks many unique opportunities to expand the addressable market.
- Industry-specific data is crucial to building an effective vertical software company. Websites, CRMs, and ERP systems can all be built specifically for one industry; however, there is rarely enough differentiation for these applications to 10X value versus the generic solution. What really drives value for a vertical software company is the industry-specific data that they acquire and use as a foundation for building on. For Broadlume, this is in the form of inventory data. They’ve built close relationships with thousands of manufacturers, giving them access to all their data, which they use to build products for flooring businesses. There is no aggregate API that flooring businesses can tap into to get this data, which is critical for enabling e-commerce. This can only come from a flooring-specific software provider with the necessary industry relationships.
- AI is already having an impact, internally and externally. Both Pepper and Broadlume are embracing AI to streamline internal operations such as data mapping for integrations with ERP systems. This is unsurprising for tech-forward software companies equipped with adept engineering teams. What’s been more unexpected is the appetite for AI from existing customers in the industry. Although most flooring companies or food distributors don’t have the technological expertise to build and deploy their own AI tools, they’re already identifying opportunities where AI might drive efficiency for their businesses. For example, displacing outdated ordering systems in food distribution or enabling a wider variety of blue collar workers to service the flooring industry. Che and Todd have witnessed conversations around AI innovation at industry conferences and other community forums. Customers’ willingness to adopt AI technology opens up new, promising opportunities for vertical software companies like Pepper and Broadlume.
- Vertical software companies should always prioritize retention. When building for a vertical, there is almost always a smaller pool of potential customers than there is when building for a horizontal. Because of this, high retention is vital to the success of a vertical software company. There isn’t an endless supply of customers to acquire - the pool is finite. Vertical software companies need to prioritize NPS and constantly be focused on improving customer experience and offering new innovation.
We’d like to give a special thanks to Che and Todd for participating in the discussion and sharing their insights into vertical software. If you’re building a vertical software startup, we’d love to chat! Get in our process by visiting this link. We look forward to hearing from you.