The primary focus for all of our funds has moved forcefully toward health and happiness. But we will always invest where we see strong opportunity. One of the areas where that is definitely true this year is Vertical SaaS.
Vertical SaaS platforms are uniquely focused enterprise software systems that provide solutions tailored for a specific industry delivered as a service. The industries in question have either fallen behind the curl because of special characteristics (e.g., the remoteness of agriculture sites; the temporary nature of construction sites) or are undergoing change, whose intensity has been increased by the innately conservative nature of current practice and slowness to change (e.g., medical practice management).
In other words, these are the SaaS markets that (until just now) time forgot. Because they have fallen behind the curl, they can’t take full advantage of today’s new advanced technology. No cloud. No deep AI. No mobile-centric interactions with young team members or customers. No message-based interactions with key constituencies. As a result, leaders in these areas are approaching panic at the vulnerabilities being so fundamentally behind exposes. They feel compelled to catch up, and that is where we see a unique investment opportunity.
The characteristics of target markets for our Vertical SaaS focus include:
- Automation of outdated approaches – some still use pen/paper, faxes or outmoded software for essential activities
- Current systems ripe for massive cost-cutting
- New approaches essential for recruiting – mobile-centric everything needed
Based on these factors, our core areas for Vertical SaaS focus in 2019 are:
Patient-Centric Healthcare. This is the primary area of opportunity for Vertical SaaS in 2019, both because of its scale, and because this is where Vertical SaaS and health overlap. While medical tools are extremely advanced, medical practice as a business is vast, but stubbornly behind the times. It contributes to both health and happiness and is undergoing a revolution toward patient-centricity, driven not only by patients but by leading current players who are burdened by a failed payment system and are responding to pressure from many sources to reduce historically bloated costs.
Within Patient-Centric Healthcare we will focus on:
- Platforms providing insurance/cost transparency, Health Services Account (HAS) growth, new insurance alternatives with narrow networks and available funds
- Marketplaces optimizing for cost, transparency, and convenience over traditional outpatient/family physician relationships
- Direct to consumer healthcare products (e.g., home test kits, devices); ties to Life Sciences
- Platforms that displace or significantly improve Electronic Health Records (EHRs)/analytics for their target client base (e.g., Closed Loop for ACOs).
- New alternatives to EHRs promoting interoperability (long-term aim: giving consumers potential ownership of their health records)
- Femtech services delivery; fundamental fertility access, sexual wellness services; ties to FemTech
- New healthcare delivery methods (e.g., Biotanica), concierge care, we-work medicine approaches
- Healthcare communities
Remote Industries. These are areas of business that don’t take place in neat cubicles inside clean, fixed office locations. They are out in the boonies, have traditional methods that in many cases go back to the 19th Century, and have long been centered on expensive, hyper-specific hardware. Now, with the emergence of small sensors, drones, and stronger AI, these business areas are ripe for reform and are deeply ready for it. They crave the benefits of modern tech.
Our focus areas here are:
- Ag Tech, where we will center on software that increases acreage value, through analytics and machine learning
- Construction, where our focus will be on software that reduces labor costs and materials costs
- Oil and gas, where we will center on software that increases oil margins to reduce price volatility
Successful Vertical SaaS platforms that we invest in will deliver:
- Dramatically lower expenses than incumbent systems and thus, better margins
- Sales efficiencies toward a focused customer base
- Lower CAC on new initial customers
- Narrow product scope; they solve a particular problem, not many
- The winner can take all market potential
- Higher valuation comps than in traditional SaaS (7-9x forward ARR in vertical vs. 5-8 forward ARR in horizontal)
- Proprietary data moats; protectability that improves with scale as the result of network effects or distribution advantages
Regarding Vertical SaaS, you might say that we are helping these outlying business segments get healthier, which should produce happy outcomes, both for them in terms of operations and for us in returns.