Vertical Future Series I - Rise of the “Forgotten” Industries
The Why Question: This past winter, a few friends and I spent the new year in New Mexico. We found ourselves stumbling upon a Pistachio Farm & Vineyard called “Heart of the Desert.” Ran and managed by George & Marianne, the Eagle Ranch farm started as just 400 two-year-old pistachio trees in 1974. Today, Eagle Ranch is the home of New Mexico’s first and largest producing pistachio groves. As we chitchatted with Marianne to inquire “how the business is going.” - I couldn’t help but notice that many of the business operations (accounting, order mgmt., inventory counting, and clearance) still heavily rely on pen & paper and old clunky machines that print out sheets to be checked by office managers.
That dawn I started to ponder: while we are certainly proud of pushing the human race and society forward with frontier technologies like AI, Blockchain, Space Tech, and more, there are still giant industries that have stayed relatively siloed over the past decades and insulated from the level of technology adoption that we as tech investors almost take as granted. I have been following the vertical solutions space for the past 3+ years through talking to founders in Vertical SaaS, B2B Marketplaces, Fintech, and more. This series is an invitation to talk, debate, and share to drive the “Rise of the Forgotten Industries” and Future of Vertical Solutions.
The Now Question: Vertical Solutions, most commonly exhibited in the format of Vertical SaaS or Vertical B2B marketplaces, have long existed and led to many generational companies such as Veeva, Faire, Service Titan, Procore, Toast, and many more. However, to invest and build a large company in this industry, founders and investors still face the common questions/challenges:
TAM: TAM concern, IMO, is ultimately a pricing and monetization concern. Many of these vertical industries move billions, if not trillions, of yearly volume. Therefore, the question is NOT whether there’s money in the flow but how to build a layer of value extraction and provision following the pattern of industry concentration and market share distribution. The Food Supply Chain industry drives $218B in grocery wholesale annually; Chemical is a $153B market in the U.S. alone; Trucking & Fuel powers 30B global fleet transactions; and the Moving & Logistics industry commands $150B of the U.S. movers expenditures. How to build a long-term sustainable and unit economically efficient LTV (Lifetime Value) case is the question that startups strive to address.
Hurdle for Behavior Change: The elephant in the room is “well, pen-and-paper works.” The effect of Inertia on human beings is strong and hard to overcome. As the daughter of the Food Supply Chain Manager in Pastry, I know all too well that it’s normal and easy for these business owners to go the default way of pen-and-paper, EVEN IF it means more human labor and time required. It’s not that the business owners don’t know that they are operating at a suboptimal level or that tech integration could be further deployed - but many of them think the current workflow process “works.” Moreover, the initial time and effort required to onboard & learn an entirely new technology could imply 3-5 days of “down days” in the business or even longer. And to many SMB owners, who are the manager, the accountant, the customer service, the cook, all-in-one, that could mean an unprofitable month and, therefore, an unnecessary crunch on the bill.
So, what has changed and led us to believe that from now on the stage will be set for vertical solutions to thrive? Here are some technical and demographic level shifts that have happened and could potentially drive acceleration in adoption:
Maturing Fintech Infrastructure: I initially got interested in the Vertical Solution space precisely because of Fintech. After covering the giants of Visa, Mastercard, etc, as a public analyst for many years and speaking with 100+ fintech companies over the past 3+ years at Lightspeed - there's an apparent emergence of a foundational fintech layer: these are
Industry-specific embedded or infra-level solutions for Vertical SaaS and B2B Marketplaces
Payment Infra that powers B2B money movement
Embedded Lending solutions that unlock new revenue streams,
AR/AP reconciliation platform that facilitates fund flow,
Embedded Payroll that ensures flexibility in customized money-in and money-out
All these solutions and many more that are emerging help answer the LTV question long-term. [We will have more around this in the next two pieces]
Fragmentation of Data: To be an easily integrated workflow and ease into the "behavior change," vertical solution players have to inevitably understand and work with end customers' existing processes - Accounting (Sage, QuickBooks, Xero), Inventory (Microsoft Dynamics, NetSuite), Sales (Salesforce, Hubspot), Logistics, Fleet Management, etc - these systems used to operate in independence and relative silos. With the prevalence and shift towards API- first data extraction & integration (for example, Intuit launched QuickBooks Online API in 2013), Vertical Solution players can utilize the strength and build a modularized product stack because of the bundling of data.
Process Automation & Behavior Change: A cruel but honest truth is that COVID took away many players within industries with a physical presence. While it's saddening to see macro events and cycles impacting businesses, it also gives rise to a new generation of business owners who may be starting from a new blank canvas. Without a long-existed incumbent workflow and process, these businesses may consider a more tech-forward framework and set-up and therefore open the window of opportunity for vertical-based software or marketplaces to become the de facto tech stack for driving business transactions. Vertical industries most often see repetitive processes in the daily operations that are still filled with nuanced details, making them prime targets for specialized process automation.
In the next piece, we plan to dive into the How Question and provide a few hypotheses from the lessons of leaders in the industry