Vertical SaaS 2.0: Leveraging AI to Automate, Innovate, and Dominate Industries

*This article is adapted from * SaasBoomi

From our experience in vertical SaaS investments, we believe vertical software companies have the ability to disrupt the market with solutions built around automating workflows of a particular industry. Once seen as niche startups; large outcomes created in the last 15 years have changed the ways people think about Vertical SaaS.

With the advancement of AI and the advent of LLMs, we believe the opportunity has only gotten bigger as it allows founders to target newer industries/workflows that couldn’t be tapped earlier. For example, one of our recent investments, Spyne.ai, is helping auto dealers in the US improve sales by offering them an AI-enabled retail software stack (from merchandising to marketing). Similarly, one of our existing portfolio companies, Attentive, is targeting project bidding and measurement workflows in the US landscaping and construction industry using LLMs and image AI.

2 cents (literally!) about what makes a great Vertical SaaS company

Start small; expand big

Given that vertical SaaS companies target specific industries; skepticism about the potential to build “big business” comes along with it. I think it’s okay to start with a “seemingly” small TAM. However, it is critical to identify ways to expand it either functionally (similar workflows in other industries) or target additional workflows in the same industry. For example, Spyne started with building merchandising solutions for auto dealers in the US; but now it has expanded into inventory management and marketing solutions for the dealers.

Similarly, Attentive.ai started by offering bidding solutions for the landscaping industry in the US but later expanded into the construction industry with a similar offering — which has a much larger TAM and is as manual as landscaping.

Innovate than replace

Software changes face every decade or so. A new entrant might believe that there is a natural right to win and replace incumbents with a better/user-friendly product. Easier said than done! In our experience, we have seen that organizations are hesitant to replace systems, especially those that target core workflows, even with a less clunky product. Most of the time, either the incumbent catches up or investments in system change and re-training people are very high. 

We believe it’s easier to target untouched workflows or customer segments in an existing category. e.g., Spyne helps mid-market dealers with merchandising solutions that earlier were only available to large dealers. This was possible because of the natural advantage India has in terms of a cost-efficient labor force across functions such as sales and customer service, product, and tech.

We can’t miss AI, can we?

The earlier crop of Vertical SaaS companies can be credited with bringing an entire set of industries online (ServiceTitan for service workers, Procore for construction, Toast for hospitality, etc.). 

However, there were large pools of industry/workflows that couldn’t justify upfront investment in software and setting up systems and processes. Vertical AI is changing all of that! Here is my take on how AI will transform the way Vertical SaaS will be written:

Shifting from labor to software

The earlier crop of Vertical SaaS companies expanded from bringing industries online to embedding financial services in their offerings. I think we will see a new layer of services that will either eliminate labor or make them highly AI-augmented. The obvious ones are customer service (chat to chat/voice to voice “humanoids”!), sales (understands pipeline, writes personalized emails, etc.,) and back office!

For example, one of our recent investments is disrupting physical security space with AI-based remote safeguarding solutions reducing the need to staff security guards at the site. I believe we will continue to see such examples of companies going after niches that traditionally have been labor-intensive.

Increase defensibility

As an investor, I must talk about moats! I believe AI can help Vertical SaaS platforms become stickier. Well, not by taking off-the-shelf models with little customization but by embedding them deep into workflows. For example, while a horizontal model can also structure appointments for dentists or plumbers, it can’t figure out how to match issues in a plumbing system to the best technicians on the roster and automatically assign the next work order, unless it has been trained on such information by working with similar companies.

Hence if a company can embed AI in such workflows; it can earn its right to be “core” which will make it difficult to replace at least for some time —  allowing them to build a great distribution engine!

Customization at scale

It’s every software company’s dream to productize its offering and at the same time offer customization. Well, Gen AI is turning this dream into reality. We will increasingly see examples of companies customizing software by writing plain English paragraphs, cutting implementation cycles even further! This allows companies to target varied customer segments such as small/mid-market along with enterprise.

So, does all the above mean doomsday for the human workforce?

To conclude, it’s only fair to talk about the billion-dollar question –

“Will AI replace humans?” – No, of course not! 

There is no exhaustive answer to this question. But my hypothesis is that in workflows that are core and where costs of errors are high — chances are organizations will want humans in the loop with the role of AI being to improve productivity/accuracy. This can either come in the form of AI-enabled human vendors where output is the responsibility of an external vendor but with humans in the loop, or companies would want their internal teams to be augmented by AI tools. On the other hand, workflows that are ancillary/supporting, chances are it will be completely disrupted by connected AI agents.

We’ve seen an avalanche of software companies leveraging AI to tackle various problem statements in niche markets.

On the other hand, every organization’s Board is asking its management how they can leverage AI in day-to-day operations. I believe there has never been a clearer “why now” moment for Vertical SaaS. 

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