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    Invest Like the Best with Patrick O'Shaughnessy

    Dave Yuan - A Primer on Vertical Market Software

    Tue Jul 04 2023
    Vertical Market SoftwareTeagas PlatformControl PointsVertical MarketsVertical Market SolutionsIntegration into BusinessesRetention and ExpansionValue ChainMulti-Product StrategiesBuilding Successful VMS BusinessesInvesting in VerticalsValuation ConsiderationsDave Yuan

    Description

    This episode covers various topics related to vertical market software (VMS) and its impact on businesses. It explores the Teagas platform, which provides qualitative insights through expert call transcripts. The importance of control points in vertical markets and factors to consider when evaluating them are discussed. The episode also delves into vertical market solutions, integration into businesses, and the value they provide. Retention, expansion, and the value chain in vertical SaaS are explored, along with strategies for building successful VMS businesses and investing in different verticals. Valuation considerations and insights from Dave Yuan are shared, as well as his system of record and gratitude towards his family and team.

    Insights

    Vertical market software (VMS)

    VMS businesses have unique business models and can provide significant value to clients in specific industries.

    Identifying control points

    It's important to identify the control point in an industry when assessing a new opportunity.

    Factors for evaluating vertical markets

    Market size, competitive intensity, and industry growth dynamics are crucial factors to consider when evaluating vertical markets.

    Integration into businesses

    Integrating into legacy software with surrounding disruptive functionality can be an effective strategy for vertical market solutions.

    Retention and expansion in vertical SaaS

    Gross retention and net retention are critical for VMS businesses, and cross-attaching multiple products can increase expansion and gross retention.

    Building multi-product SaaS companies

    Multi-product SaaS companies can offer additional features or services within the existing operating system to improve the merchant's experience and financial health.

    Investing in verticals

    There are still plenty of opportunities to build VMS businesses, especially in underserved markets. Investors should be thoughtful about investing in different verticals based on market attributes.

    Valuation considerations

    Valuation for VMS focuses on P&L, locations by ARPOO, and nuances of product market fit. Time horizon also matters in this space.

    Dave Yuan's system of record

    Dave has created his own system of record for understanding how businesses work and grow.

    Gratitude towards family and team

    Dave is grateful to his family and team for their support in building a successful business.

    Chapters

    1. Teagas Platform and Vertical Market Software (VMS)
    2. Identifying Control Points and Evaluating Vertical Markets
    3. Vertical Market Solutions and Integration into Businesses
    4. Demand, Growth, and Multi-Product Strategies in Vertical SaaS
    5. Retention, Expansion, and Value Chain in Vertical SaaS
    6. Expanding Product Offerings and Building Software for Merchants
    7. Building Successful VMS Businesses and Investing in Verticals
    8. Valuation Considerations and Insights from Dave Yuan
    9. Dave Yuan's System of Record and Gratitude
    Summary
    Transcript

    Teagas Platform and Vertical Market Software (VMS)

    00:00 - 06:47

    • Teagas is a modern research platform for investors that provides access to qualitative insights through expert call transcripts.
    • The Teagas platform has over 60,000 transcripts spanning 22,000 public and private companies.
    • The Founders podcast, hosted by David Senra, explores the lessons of different entrepreneurs.
    • Invest Like the Best is an open-ended exploration of markets, ideas, stories, and strategies for better investing.
    • Dave Yuan is the founder of Tiedmark Capital and has extensive experience in investing in vertical market software (VMS) businesses.
    • Vertical market software (VMS) businesses have unique business models and can span beyond a single part of the value chain.
    • Software companies in vertical markets can provide significant value to their clients, especially during challenging times like COVID-19.
    • Vertical market software (VMS) refers to software built for specific industries, ranging from small businesses to larger enterprises.
    • In SMB vertical SaaS, there is usually one system that is more important than others, known as the control point.

    Identifying Control Points and Evaluating Vertical Markets

    06:20 - 12:51

    • There is typically one system that serves as the control point for a business, storing important data and facilitating workflow.
    • The control point is the system that powers the business and provides opportunities for expansion.
    • When assessing a new opportunity, it's important to identify the control point in that industry.
    • Factors to consider when evaluating vertical markets include market size, competitive intensity, and industry growth dynamics.
    • Market size affects company formation and investment strategy.
    • Competitive intensity varies depending on the market structure.
    • Industry growth dynamics are crucial for identifying opportunities in stable industries with infrequent turnover.
    • Trust is an important attribute when extending through the value chain in vertical SaaS.
    • Building trust between different constituents can lead to significant outcomes in terms of market leadership and vendor success.

    Vertical Market Solutions and Integration into Businesses

    12:36 - 19:34

    • Vertical market solutions can create trust and cooperation among merchants.
    • Knowing the target buyers in vertical market solutions makes marketing easier.
    • Account-based marketing is important in vertical market solutions.
    • Traditional sales tactics may not work well for smaller markets in vertical market solutions.
    • Product-market fit is stronger in vertical market solutions, allowing for a more specific value proposition.
    • Some verticals have enough local density to create a flywheel effect in marketing.
    • Vertical SAS products exist because they provide industry-specific customization and value that horizontal tools cannot offer.
    • Small businesses prefer immediate time-to-value and specialized tools over broad RFPs.
    • Control points like workflow, data, and accounts are important in integrating into businesses.
    • Integrating into legacy software with surrounding disruptive functionality can be an effective strategy to displace it.

    Demand, Growth, and Multi-Product Strategies in Vertical SaaS

    19:08 - 26:13

    • SiteMinder is a channel manager that integrates with PMS and OTA systems, providing an integration layer into legacy systems.
    • VMS companies need to consider the role of demand in their business model, whether they act as a tool like Shopify or an aggregator like Amazon.
    • For small merchants, driving demand is crucial, but VMS companies may lack the DNA and density to compete with online marketplaces.
    • The best VMS entrepreneurs often have personal experience in merchant operations and understand the value of building credit history.
    • Vertical SaaS businesses require focus but also need to think about multi-product strategies early on.
    • Investors in the VMS space need to understand the different stages of growth and maturity in these markets and adjust their mindset accordingly.

    Retention, Expansion, and Value Chain in Vertical SaaS

    25:53 - 32:48

    • Gross retention is critical for VMS businesses and investors.
    • High logo retention (98-99%) is necessary for great businesses in this market.
    • Net retention factors in expansion from existing customers.
    • Limited TAM scenarios require net retention higher than 100%.
    • The control point framework correlates highly to gross retention.
    • Cross-attaching multiple products increases expansion and gross retention.
    • Vertical SaaS companies selling to SMBs have varying levels of grocery attention and net retention.
    • Best companies focus on individual customer retention rather than enterprise-wide.
    • Consumer-focused businesses can tolerate lower retention rates compared to enterprise markets.
    • Great vertical SaaS investors need a mix of enterprise software, consumer, and fintech DNA.
    • Multi-product mindset means offering additional features or services within the existing operating system.
    • Toast is an example of a company that offers an all-in-one solution for restaurants' point-of-sale systems and payments processing.
    • Adding more products or features improves the merchant's experience and financial health.

    Expanding Product Offerings and Building Software for Merchants

    32:30 - 38:53

    • Multi-product SaaS companies can charge different prices based on the size of their target market (TAM).
    • Payments and billing services are essential for merchants, providing financial health insights and opportunities for low-risk lending.
    • Employee-focused products like scheduling and payroll can be natural extensions of a multi-product mindset.
    • Supplier-related services such as procurement, payment flows, and group buying can also be valuable additions.
    • Moving towards consumer-focused offerings like CRM, loyalty programs, and consumer lending can create demand and increase conversion rates.
    • There is a scientific approach to building software for merchants, but creativity and imagination play a role as well.
    • A case study example is Fair Harbor, a booking platform for tour and activity providers that used pricing strategy, product strategy, and go-to-market tactics to succeed.
    • Fair Harbor charged transactional customers a percentage fee at the end of their booking to maximize revenue.
    • The company also provided software solutions to operators while making significant profits from high-ticket activities.
    • Fair Harbor utilized a compensation plan tied to increased monetization to incentivize salespeople.

    Building Successful VMS Businesses and Investing in Verticals

    38:26 - 45:31

    • A successful business strategy involved building a team to develop the product and sell it to customers, with a go-to-market model that incentivized sales reps.
    • Another example is a business in LA that targeted the commercial casting market by providing a tool for casting directors to easily manage resumes and auditions.
    • The key takeaway is to identify the scarce supply in an ecosystem and focus on serving it in a unique way.
    • There are still plenty of opportunities for entrepreneurs to build VMS businesses, especially in underserved markets or those lacking software solutions.
    • Investors should be thoughtful about investing in different verticals based on market attributes, rather than painting all companies with the same brush.
    • While some companies may be overvalued due to market hype, others will still be undervalued, particularly those with multi-product orientation and the ability to extend up and down the value chain.
    • Investing in SMBs and vertical SAS can be productive as these sectors have big problems that need solving and can benefit from automation.

    Valuation Considerations and Insights from Dave Yuan

    45:05 - 51:53

    • Investing in multi-product orientation and extending up and down the value chain is a productive area for SMBs.
    • Valuation considerations for VMS focus on P&L, locations by ARPOO, and nuances of product market fit.
    • Time horizon matters in this space due to slower turnover and longer build-out periods.
    • Companies to study include CCC, FOLU, OneStream, Mindbody's acquisition of ClassPass, and ZipRecruiter.

    Dave Yuan's System of Record and Gratitude

    51:23 - 53:27

    • Dave has created his own system of record for understanding the different aspects of how businesses work and grow.
    • Dave is generous in sharing his knowledge openly and freely.
    • The most impactful thing for Dave is his family and the team around him.
    • Building a successful business requires breaking barriers and pushing hard, which Dave is grateful to his family for supporting.
    • The first two years at Tidemark were intense, but Dave is grateful to the team for sticking with it and building the business during turbulent times.
    • Simple things are often the best.
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