Perspectives: The Future of Vertical SaaS Comes from Consumer Trends

In tech, the mere mention of “Vertical SaaS” evokes a sense of stability, predictability, and a proven track record. On the other hand, “Consumer” conjures up images of risk, excitement and the thrill of the unknown. Investors don’t often think of Consumer and Vertical SaaS as two areas with much overlap. Yet, we’d like to propose a framework that links exciting new consumer trends to identifying the next big vertical SaaS startup. A core part of the Vertical SaaS market is bringing services businesses workflows and payments online and into the cloud. The first wave focused on the biggest industries – Procore for construction, ServiceTitan for home services, Toast for restaurants. Services businesses recognized the inherent desire for service businesses to have a vertical SaaS business tailored to their unique needs. The specificity offered by these platforms allows them to streamline their workflows, effectively market their services, and seamlessly accept digital payments. Savvy founders have built on that many more incredible companies tailored to different services verticals.

In the rapidly evolving landscape of the SaaS industry, the once-untapped verticals that seemed ripe for disruption are crowded. As such, founders and investors must look elsewhere for inspiration. We’d argue that the best way to find a Vertical SaaS opportunity is to find a consumer opportunity. 

But how do we identify those? Many shifts in consumer trends start with a technology change. For example, my mother’s first job was as an Encyclopedia saleswoman. She actually made big bucks doing this! But as the internet emerged (specifically, Wikipedia) that entire industry went down the drain. Travel agents similarly got disrupted by platform innovations such as Expedia and Booking.com (though now they are making a resurgence through companies like Fora). You also saw music stores, video stores, cyber cafes, and more suffer as the result of shifts in technology. However, other consumer trends happen via a shift in values. Gen Z loves to thrift, for one example. Mental healthcare is another: what was once stigmatized has become a ballooning industry due to changing mores around therapy and mental illness. A third example might be increasing value placed on wealth management and finance tracking as a value, or perhaps in response to anxiety over inflation and job insecurity. No matter the underlying driver, these changing attitudes give way to the rise and fall of different SMB segments. 

Tying this all together, we believe that by carefully examining consumer habits, we can better identify the next wave of Vertical SaaS innovation. 

We see a clear unfurling from consumer trend → service industry to service it → vertical SaaS to support the service industry.

What’s more, the new services industries created today are by younger, digitally native business owners who expect to conduct business online. You can see this born out with some of today’s more exciting vertical SaaS companies.

• Consumers are increasingly buying EVs, leading to a demand in ADAS calibrations (EVs have a lot of ADAS features!), where Revv is building a vertical SaaS solution to fuel (no pun intended) ADAS calibration growth. 
• Botox, liposuction, cheek lifts, dermaplaning, glycolic peels and what the hell is CoolSculpting? American women have developed a clear preference for unique skin and beauty solutions and as a result, there has been a precipitous rise in aestheticians. Companies like Moxie, Persimmon, Peachy, and Prospyr Medical are building the software to power this industry. 
• Baby boomers are aging out of the workforce and requiring an increasing number of disability services, Companies like Mon Ami, Birdie, and August Health have built the Vertical SaaS backbone to support aging and disability agencies. 

And then many of these effects will be second order. For example, the consumer embrace of weight loss drugs like Ozempic and Mounjaro has in turn led to an increased demand for nutritionist support to sit alongside these pharmaceutical interventions. Companies like Berry Street and Nourish in turn enable those nutritionists to run their businesses and generate demand. (Check our healthcare deep dive: The new “lean” how weight loss drugs will affect Healthtech startups.)

This all gets even more exciting when you consider that Vertical SaaS founders can benefit from the growth of a consumer trend in two interrelated ways. 

The first is the growth in the number of new businesses in that industry. One of the enduring pain points for any software company is that you often have to rip and replace legacy systems. And after a decade of cloud-based innovation, some of these legacy systems aren’t half bad. But when there’s a new supply of companies in an industry, sales cycles are much faster and the total cost to acquire customers can be significantly lower. 

The second benefit is the growth in volume for existing (and new) logos. This can be a benefit because as volume increases, “haphazard” workflows reliant on Microsoft Office, Salesforce and pen and paper might no longer cut it. But more fundamentally, vertical software companies often have a significant portion of revenue coming from payments. So in addition to SaaS ARR, if the customers are growing in revenue, the Vertical SaaS offering will enjoy increased transactional revenues themselves in tandem. This “double whammy” means that software offerings that serve explosive industries can grow explosively themselves. 

In conclusion, Vertical SaaS is grouped in the B2B bucket of businesses, which makes sense. But the TAM for any Vertical SaaS is most generally a byproduct of the services business they are building for.

We at Northzone believe that to uncover the next great Vertical SaaS businesses, you have to work backwards from the prevailing consumer trends that will lead to either new service businesses or a surge in existing ones.

If you are building in Vertical SaaS, we would love to talk. You can find us at nickb[@]northzone.com or molly[@]northzone.com