Vertical SaaS is having a moment. Post the entry of Gen AI, the investors who bankrolled horizontal SaaS for the last two decades are shifting their attention to the lucrative VSaaS market. The numbers speak. In 2024, the horizontal SaaS were trading at a revenue multiple of 7.3X, while VSaaS had valuations of 12.3X.
To put this into perspective, that is almost a 60% higher valuation compared to their Horizontal peers. Why do investors favor VSaaS? Is it the faster payback periods, or lower CAC? Well these are factors that put VSaaS on a high pedestal, but there is a pronounced impact through Gen AI that fundamentally alters the SaaS dynamics.
How Gen AI Alters HSaaS Dynamics
Horizontal SaaS companies built competitive moats primarily through three layers: systems of record (database), systems of engagement (workflows), and systems of intelligence (insights). Experts predict that these once defensible moats face the risk of commoditization by Gen AI.
Recently Zoominfo faced a series of notable analyst downgrades citing Gen AI and intensifying competition. The billion dollar company had built its market by monetizing access to verified contact data. But now LLM models are increasingly used to scrape, synthesize, and generate data at scale. What was once a hard-to-replicate moat —B2B contact and company data is now getting commoditized by Gen AI.
Not All HSaaS Face the Gen AI Threat
It should be noted that not all companies face the commoditization threat from Gen AI. Incumbents that have built competitive moats across all the three layers continue to dominate their markets. For example, HubSpot’s stickiness extends beyond being the single source of truth for customer data.
Its all-in-one marketing hub is central to most of its customers’ marketing campaigns. Added to these is its intelligence layer, which layers in reporting, recommendations, and AI-driven insights, contributing to a robust, hard-to-replicate moat.
Building Systems of Agents – The New Moat
Companies with moats in only one layer are pivoting to building systems of agents, delivering outcomes. Zoominfo’s new offering, AI Copilot, promises to get you the next buyer faster. These AI agents are not just systems of reason, they represent a convergence of the three layers. For instance, Salesforce Agentforce pulls customer data, reasons with Einstein AI, and engages with customers, autonomously resolving the case or advancing a sale. Thus the systems of agents are designed to accelerate customer outcomes. The HSaaS incumbents now realize their moats are as much in the results it aims to get for its customers.
Transitioning to VSaaS – The New Pivot
Some notable horizontal SaaS leaders, Zoho for instance, are pivoting to vertical niches. The recently announced Zia Agents are set to be introduced in autodealership and BFSI verticals. Atlassian, best known for its team collaboration suite of software, has already pivoted to industry-specific use cases targeting healthcare, manufacturing, and BFSI niches. Long before Gen AI, Salesforce, the horizontal CRM leader, sensing the rise of Vertical CRMs, acquired Vlocity (now rebranded as Salesforce Industries). Today it offers vertical solutions across nearly every industry.
Factoring in the above two trends, one can safely presume that more HSaaS businesses are likely to storm the verticals with their own industry-specific systems of agents.
It is clear that the VSaaS landscape is set to be disrupted, about to witness a three-pronged competition from the Horizontal SaaS Leaders, Vertical SaaS incumbents, and Vertical AI startups.
The question is if you are a Vertical SaaS incumbent or Vertical AI startup- What would power you to penetrate the market and create a highly sustainable moat?
The answer is in leveraging Tech accelerators that will supply the building blocks to help you create, expand, and sustain your moat.
Leverage the Prebuilt. Invest in the Moat.
The 2X2 Domain Tech Framework gives you a mental model as to where to focus your scarce resources. Ideally you should be invested in the Deep tech * Deep domain zone where your proprietary data, domain-specific intelligence and outcomes converge. You may be aggressively building your MVP, or integrating your product in client environments, or onboarding customers. Wherever you are in your journey, the key is to focus your investments to build the moat zone, leveraging the prebuilt domain and tech accelerators.
Let’s get to the specifics of these Domain and tech accelerators.
On-demand Tech Resources
Startups in stealth mode, still building their MVPs, often choose to stay lean rather than hiring a full-time team. The real challenge is building the MVP quickly and efficiently without getting weighed down by staffing overheads.
A two-person team recently approached Trigent to build an Insights agent that will autonomously catch and correct errors before they cause damage to the machines. They required the following resources:
- Front-end engineers to build visualization dashboards
- Backend engineers to wrap it as a cloud service called through API,
- Integration specialists to extract the data from legacy machines and make it usable in the python environment.
We supplied the above resources on an on-demand basis. The fractional access to resources gave the founders the freedom to focus on their MVP, which they carved out in just 5 weeks
Prebuilt Connectors
A library of connectors is a haven for Manufacturing VSaaS looking to demonstrate their product value within the clients’ proprietary tech ecosystem. An emerging startup was building an Agentic AI Platform for error-proof manufacturing. However, to integrate the platform with 100+ OT and IT systems required a host of prebuilt connectors (OPC UA for PLCs, Katana Cloud Inventory, Oracle Netsuite). Trigent’s integration specialists utilized their library of prebuilt connectors, to quickly integrate the pilot version across the client’s high-value customers.
Reusable Software Accelerators
Once the early stage growth startups win the backing of the first few customers, their priority quickly shifts from pilots to production-ready software. Hard coded rules need to be reworked, role based access needs to be implemented, the tech architecture should be evaluated for reliability, performance and scale. At this stage, it is crucial to keep the in-house development team lean and focused on enriching the core product differentiators. Foundational capabilities like message queues, two-factor authentication, push notification engines, SSO flows, need not be built from scratch. Leverage reusable code libraries that are packaged as plug and play modules, which would serve to transform your pilots into enterprise-ready solutions.
Customer Success As a Service
Scaleups often face a two-fold challenge. On the one hand, their core product team should continue to build deep domain differentiators. On the other hand, the business is tasked with accelerating customer onboarding. But here is the catch: the enterprise clients, more often than not, require custom implementations. They want localized language packs, branded UX elements, or tailored reporting dashboards. Employing the core team to create product forks or trouble shoot custom features will stall your product builds.
This is where customer success as a service does the job. While you let your product team do what they know best, your customer success partners provide product localization as needed by the client, UX customization to match the client’s brand guidelines and Operational Support Services as per the client’s service delivery norms, that ensure speed, flexibility and scalability without distracting your startup from its product roadmap.
IT Managed Services
As startups acquire more customers, optimizing not just cloud operations but the entire IT backbone assumes a higher priority. Again your developers should remain focused on innovation.
Automated CI/CD deployments, Managed DevOps, adoption of enterprise-grade security, minimizing tech debt, Managed Cloud infrastructure, Cloud Optimization, monitoring and observability, compliance, disaster recovery, and L1/L2 Helpdesk Services can be fulfilled by trusted managed service partners, who ensure that your product is continuously optimized for performance, security, and scalability.
Final Word: Accelerate the Moat
“The next titans of software will be Vertical AI companies in specialized industries,” declares the world’s largest venture capital firm, NEA. It is high time for VSaaS businesses to accelerate their efforts in creating outcome-focused industry-specific solutions. The keyword is accelerate —accelerating through trusted partners.
The winning formula is clear: invest your scarce resources in creating sustainable outcomes, and lean on tech accelerators to handle everything else.
