“Software is eating the world” was a phrase coined by Marc Andreessen. Byron Deeter at a recent conference astutely said, “Cloud is eating Software.”
The robust valuations of subscription software companies compared to legacy software business reinforce this. To keep things exciting in SaaS, there are “flavors” in SaaS – Horizontal SaaS or Vertical SaaS.
The team at Allied Advisers have worked across both flavors, we see interesting differences. While Horizontal SaaS companies generally have larger TAM, Vertical SaaS companies can be more capital efficient and have better operational metrics making them better suited for middle-market funds. They include analysis across a select group of companies in each category, comparing operational metrics across the two flavors of SaaS. While there are category leaders in Horizontal SaaS, there are also many opportunities to build targeted Vertical SaaS companies which can become leaders in their own vertical sectors.
Here are the high-level findings of the Allied Adviser’s most recent report:
- Vertical SaaS has been gaining increasing traction across industries, with companies offering customized solutions built on in-depth sector expertise.
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Vertical SaaS is seeing growing number of companies with somewhat smaller but more focused TAM (as compared with horizontal SaaS) and more capital efficient business models.
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In Vertical SaaS, we saw sector exposure get amplified during Covid-19; sectors like FinTech, healthcare and education benefited while sectors like travel, hospitality etc. were impacted.
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We see strong middle-market investor interest due to high growth prospects supported by capital-efficient business models. Middle-market investors are also drawn to the “nicheness” of players in space and less competition
To review the full report, click here.