Vertical SaaS vs Horizontal SaaS - Which is More Profitable?

every B2B SAS company falls into one of two buckets they're either horizontal SAS or vertical SAS and massive businesses have been built in both categories but over the course of my 170 or so Investments I've picked up on some key differences that make one a better fit for bootstrapped and mostly bootstrapped Founders in this video I'm going to look at the upsides and the downsides of the two business models explore which type sells for more and if you stick around till the end I'm going to introduce you to a third type of SAS you've probably never heard of so grab your coffee or an Irish Stout and let's dive in I'm Rob Walling I've started six companies five of them bootstrapped I've written four books on entrepreneurship and I've invested in more than 170 startups let's start by defining horizontal SAS horizontal means your tool or service is applicable across various sectors so examples of that include a lot of the communication platforms that we use productivity tools project management examples are things like slack base camp Zoom or E signature platform Sewell schedule software savy Cal and podcast hosting software kastos all of these serve a function that are essential in a wide range of businesses and they don't focus on a specific niche market or industry vertical SAS of course focuses on a specific niche market or industry examples could include SAS built to manage a dental practice or a CRM built specifically for realtors an application to track legal cases or project management for building contractors like Builder Prime they're a tiny company vertical SAS focuses on depth rather than breadth so they solve complex industry specific challenges and vertical SAS more often than horizontal tends to be more integral to the running of a business so they tend to not be nice to haves but things that you really need so when comparing the two I have to speak in some generalities but in general horizontal SAS will have larger Tams this is total addressable markets this just means the market size that you can serve with horizontal is usually bigger and this is intuitive right because if you're going to build a CRM for any business versus a CRM just for realtors then the odds are that the total addressable Market of just Realtors is smaller than every business in the world now in general horizontal SAS can have higher churn rates not always but it's a slight lean but I'd say all other things being equal when you have that vertical SAS that a business relies on you're going to have lower turn than horizontal SAS horizontal tends to be a little more generic right general purpose Maybe undifferentiated and often times there are a lot more options that people can switch to so therefore there's less churn versus if you're competing in the dental space or for hair salons there might only be two or three software products that cater to them and lastly horizontal SAS tends to involve constant Innovation and fierce competition because the markets are so large there's a lot more funding involved there's a lot of venture capital entering those spaces thus they tend to be more competitive so with vertical SAS the total addressable markets tend to be a little smaller but you know what they can still be massive right you can still have a 50 100 $300 million total addressable Market even within a tiny little space and as a bootstrap then mostly bootstrap founder you have to ask yourself how much revenue do I need to build a successful company it's probably not hundreds of millions of dollars speaking based on my experience looking across 170 Investments our vertical SAS companies tend to have lower turn overall and again it comes back to that maybe lack of competition there's more differentiation and these vertical SAS pieces tend to be more in drained in the business thus harder to switch away from and as you know when you have lower turn and high switching costs it's easier to achieve one of the cheat codes of SAS net negative churn I've defined net negative churn in several previous YouTube videos but the two- sentence explanation is it's when you add zero customers in a month but your Revenue grows imagine that negative churn because of expansion Revenue because of people paying you more each month if your pricing is well architected and welld designed you get expansion Revenue that can lead to your turn being negative it it blows your mind if you've never heard of it before but it is a SAS cheat code and the best SAS businesses in the world have it I want to pause for a minute to chat about monday.com who are very kindly sponsoring this video when folks ask me about starting their first SAS I typically recommend they build an app or an extension on top of an existing product like monday.com which already has 186,000 customers across more than 200 Industries 90% of their largest paying accounts have at least one app installed which is why I think there's a lot of opportunity to build a SAS on top of the platform if you aren't familiar monday.com is a versatile platform that enables business owners and teams of all sorts to streamline their work using their Work Management sales CRM and Dev products they have an app marketplace where developers like you can build and charge good money for apps that extend the functionality of the platform to learn more about the types of customers you might find in the marketplace their team has put together an ebook that lays out their core user groups the job titles they often have their pain points and use cases for the platform this is a treasure Trove of customer research laid out for you and you can get it for free to get your copy head over to the link below to fill out the form and sign up for a developer account thanks to monday.com for sponsoring this video let's get back to it okay so as I was saying earlier many investors dare I say most investors tend to focus on horizontal SAS because they want these huge total addressable markets or Tams but when they do this they often demand faster growth and they have the winner all mentality because they need c toillion or billion dollar outcomes now at my fund Tiny Seed we've tended to focus more on vertical sass we still invest in horizontal but vertical has tended to be a better fit for what we're looking to do in the companies we're trying to fund plus we also focus on a third type of SAS that I'm going to talk about in just a couple minutes so you're probably asking yourself which is better so if you want to go public or you want to go after Venture Capital you probably want to go towards horizontal software it's better due to the massive Tams and the just the ability to grow very quickly but if you want to grow to say 2 to 20 million in annual recurring Revenue maybe it's 2 to 30 whatever your number is sell for 10 million to $100 million I think vertical SAS in general not in every case is easier to grow and it's easier to sell there are more acquires who want to buy something with net negative churn it's like I said in my very first book start small stay small you don't have to be the best marketer in the world you just have to be better than your competition and when you're in a vertical Niche your competition tends to be less sophisticated and have less funding than in the big horizontal markets so it can be easier to compete in a second I'm going to talk about a third type of SAS you've never heard of but it's another type that I think is a really good opportunity for bootstrappers and one where I've invested a lot of money before I do that I have a book out it's called the SAS Playbook the SAS Playbook includes all my up-to-date thinking on how to build an incredible mostly bootstrapped SAS company you can get the book at SAS playbook.com or on Amazon and if you've already bought the book I'd really appreciate a five-star review wherever you can the book has sold more than 21,000 copies to date which is actually quite a lot for a self-published book and it still selling about 800 copies a month I'd really appreciate it if you could either buy a copy I think you'll get a ton of value from the book If you haven't read it yet and now for the third type of SAS have you heard of orthogonal SAS I would guess not because I made that term up last week but orthogonal SAS is the term I use anr hates the term by the way my co-founder but orthogonal sass is the term I use when you build for horr horizontal Market but you focus on a single title or a role within an organization so examples include horizontal tools that focus on individual titles like semrush and SEO testing that focuses on the role of a marketer in a company a and find email they focus on salese sdrs bdrs and AES then there are HR tools that can be used at any company but they focus on the HR department like jazz and code submit or even developer tools like GitHub and Status Gator any company in any industry can use these tools but you know exactly who your ideal customer is or at least your buyer and user within any organization it's a nice advantage to know who your buyer is and I'm seeing a lot of success with folks building orthogonal SAS in the microcom Tiny Seed in the broader bootstrap Community if you could start fresh and pick one of these three types of sass to build which would you choose let me know in the comments and if you're in that early exploratory phase of starting a business you might be wondering where to find great business ideas whether they're vertical horizontal or even orthogonal in this next video I lay out the seven ways to find profitable business ideas thanks for watching please give this video a like if you found it helpful and if you aren't subscribed yet I hope you will I'll see you next time

Channel: MicroConf

Views: 9,033

Keywords: MicroConf, Saas, vertical saas, saas company, saas company startup, saas company marketing, b2b saas, b2b sales, b2b saas company, bootstrapped, bootstrapped business, bootstrapped startups, bootstrapped founder, startup business ideas, startup company, saas ideas, saas development process, saas business development, saas product development, saas platform development, saas developer, bootstrapped saas, b2b business model, b2b business ideas, horizontal saas

Id: FlJaIqI0N10

Length: 8min 45sec (525 seconds)

Published: Sun Mar 31 2024