Vertical Software Is Growing Up: The 10 Things You Need To Know

Greg Gibb, chairman and CEO of Lufax, runs the highest-valued vertical-specific unicorn out of China.

Salesforce. Oracle. SAP. IBM. If you’ve read anything about business to business technology in the last 10 years, you know these names, no doubt! But have you heard of “Vertical SaaS” and the many up-and-coming Davids trying to take down these Goliaths? Now, more so than ever, we are seeing vertical-specific software solutions, which are built to serve a specialized “vertical” or industry as opposed to being a solution across industries, trying to disrupt their older, less-specialized peers.

To date, we’ve already seen some huge successes in vertical software. Veeva Systems – a provider of cloud-based CRM and content management solutions for the life sciences industry – went from zero to $2.4 billion in under 6 years raising less than $10 million. Dealertrak – a provider of on-demand software for the automotive industry – was acquired for $4 billion by Cox Automotive after a solid run in the public markets. Vertical software continues to show signs of performance and growth as it matures.

Yet still, questions remain. Are we on the verge of CRM software specifically for the cannabis industry? How about new project-management tools for the project-heavy construction industry? The time is now for technology laggards or new industries altogether to obtain software that is purpose-built for them.

As business software goes more vertical over time, we at Bowery Capital annually profile and highlight over 500 companies focused on verticals like Manufacturing, Healthcare, Oil & Gas, and Cannabis. Through this research, we release a report on our findings called Opportunities In Vertical Software. Below are highlights some of the most interesting themes, findings, and predictions from our most recent edition of the report.

Tracking the opportunities in vertical software.

1. Vertical software is now raising capital like horizontal software. One example that stuck out in our report was Meicai, a platform which connects vegetable farmers with restaurants across China. The company raised an estimated $600 million to 800 million in October 2018 from Tiger Global Management and Hillhouse Capital and is now valued at an estimated $7 billion. In January 2018, the company raised $450 million and was valued at an estimated $2.8 billion. We are seeing the same trend of “endless capital” starting to play out for vertical, at-scale companies.
2. Looking for a pot of gold? Cannabis is your industry. The cannabis industry as a vertical has grown up almost overnight. Investors continue to pour money into the space, with the number of cannabis funding deals growing from 11 in 2013 to over 300 in 2018. Overall funding into the vertical has grown from $15 million in 2013 to $2.2 billion in 2018, a compound annual growth rate of 171%. Similar to other verticals, we are seeing the emergence of cannabis-specific investors such as Poseidon Asset Management, The Arcview Group, and Canopy Boulder that provide specialization and expertise in the space. We expect ecosystem to continue to explode in the coming years.
3. The Healthcare vertical continues to see monster exits. As a sign of continued growth, the healthcare vertical produced roughly $10 billion of outcomes since the publishing of our last report. Most notably in 2018, athenahealth sold for $5.7 billion to Veritas Capital and Evergreen Coast Capital and Roche bought Flatiron Health for $1.9 billion. Despite its maturation, Healthcare continues to be a software vertical showing strong signs of company formation, growth, and exit volume.
4. Construction technology begins it’s bundling phase. If you can’t beat them, you might as well buy them. In the construction space, we are seeing an era of consolidation occurring. Autodesk recently announced its $875 million purchase of construction workflow management software, PlanGrid. Other notable transactions include Oracle’s $1.2 billion purchase of Aconex and Trimble’s $1.2 billion purchase of Viewpoint. The trends highlight how legacy firms continue to purchase innovation in a $13 trillion global construction industry plagued by fragmentation, inefficiencies, and low productivity gains.
5. The Financial Services vertical houses the biggest vertical unicorn. With a fresh valuation of $38 billion and $1.3 billion in funding, Lufax (lu.com) tops the list of vertical specific unicorns. The Shanghai based financial asset exchange is focused on P2P lending solutions for banks and insurance companies and clocks in somewhere in the top 20 of all unicorns in existence today.
6. There is now a diverse list of vertical software unicorns. The list of vertical unicorns used to be small, however today is quite large. Since our last report, we count over 10 vertical unicorns in industries like Healthcare, Restaurants, Transportation, Construction, and Insurance. Outcome Health continues to re-invent the care experience and is the highest valued on our list at $5 billion, Toast ($1.4 billion / Restaurants), Convoy ($1.0 billion / Transportation), Procore Technologies ($1 billion / Construction), and Essence Group Holdings ($1 billion / Insurance) are a few other innovators we highlight. 
7. These unicorns are supported by a pipeline of emerging vertical software. In addition to the vertical software unicorns we mention, companies like Plex Systems in the Manufacturing vertical, Welltok in the Wellness vertical, and Hudl in the Sports vertical are now valued in the hundreds of millions of dollars and growing quickly. We count over 20 companies that are moving to become unicorns in the coming years. As more and more industries adopt digital transformation and innovation we expect this trend to increase. 
8. No funding slowdown in sight for vertical software players. In 2018, for the first time since the dot com era, venture capital dollars invested soared to over $100 billion ($131 billion to be exact). The average seed-investment through 2018 was $2 million which was four times the $550,000 average in 2013. By leveraging these dynamics, vertical software continues to expand into more industries such as agriculture (Farmers Business Network’s $110 million Series D) and legal (Atrium LTS’ $65 million Series-B) where capital constraints were previously a barrier to entry. 
9. IPO activity is down with vertical players unlike their horizontal counterparts. Over the past two years we count 18 business software IPOs, however zero have been vertical in scope. The last IPO that we count in the vertical software world was Mindbody and Instructure in 2015. However, we count more than 10 vertical software unicorns and believe more will pursue IPOs to provide compelling exits for their earlier investors. 
10. Despite explosive growth, gender diversity is still lacking. Despite a private market which now features over 300 unicorns, recent data shows that only 16 of these unicorns have a female CEO. Vertical software is no exception. Notable female founders and CEO’s of large vertical software companies include Judy Faulkner (Epic Systems) and Tracy Young (PlanGrid acquired by Autodesk). We hope to see better representation across companies and industries in the years to come.

The vertical software movement continues its march to victory with the industry seeing record levels of new company formation, funding, and unicorns. While M&A and IPO events have lagged in recent years, we expect some tailwinds in the coming years as the new batch of vertical unicorns figures out the liquidity question. For entrepreneurs interested in disrupting old line industries, the tailwinds remain and now is a great time to build a vertical software winner.