Embedded Finance: Vertical Software Founders’ Opportunity to Create Multifaceted Value

Embedded Finance: Vertical Software Founders’ Opportunity to Create Multifaceted Value

By: Jake Colognesi, Michael Browne & Bradley Tatz

Over the past twelve months, the Sageview team has met more than two thousand founders. In many cases, these individuals are leaders of fast-growing, vertically-focused software companies that provide innovative solutions tailored to the unique needs of specific industry groups. The software development world continues to trend towards increased specialization with each passing year; as investors, we are excited about the opportunities this trend presents.

As users demand more from software vendors, the pressure to provide more feature-rich, robust platforms grows. Soliciting and reacting to feedback from customers about product features and enhancements they’re most interested in is the most traditional, common approach to crafting a product roadmap. However, one enhancement that’s not always demanded by customers – and too often ignored by software vendors – is the opportunity to embed financial products into their platforms.

What is embedded finance in the context of vertical software?

Embedded finance refers to the integration of financial services directly into vertical software applications. In our discussions with founders, however, embedded finance is too often interpreted as synonymous with payments. This conflation is unsurprising, as we see many companies start their embedded finance journey by monetizing the payments that run through their platform. Founders can leverage easy-to-use payfac solutions like Stripe or Adyen to start payments at a moment’s notice, streamline transactions, reduce friction with their end consumers, and increase revenue. Running this playbook isn’t terribly novel, and such adoptions work pretty darn well for many vertical software companies.

Payments really only scratches the surface of what’s possible for companies, however, which makes it unfortunate that it’s also where too many founders stop in crafting their embedded finance strategy. We get it – financial services can be painfully complex to integrate and navigate, and daunting to understand for an industry outsider. But by successfully offering payments, founders create a unique wedge for providing other high-value financial products to their customers. These include (but are not limited to) insurance, lending, treasury management, and payroll.

As time passes, we’re seeing more software companies take advantage of this attractive opportunity and grow into dominant, category-leading companies. One such vertical software success story is ServiceTitan, which was founded in 2012 and has since become one of the world’s largest cloud-based software companies selling to the field service industry. While ServiceTitan began by selling subscriptions to customers, over time the company added payments, business lending, consumer financing, and other financial products to its offering. It now generates more than $350M in annual revenue and is eyeing an IPO in 2024. While the success and scale of ServiceTitan is an outlier amongst vertical software companies, an appropriately executed embedded finance strategy can nonetheless bring varied monetary and intangible benefits to much smaller businesses too, including:

• Unlocking Revenue Potential: Embedded finance presents one of the most significant opportunities for vertical software providers to expand and diversify revenue. By monetizing a suite of financial services, a business can unlock streams of highly reoccurring revenue, and capture a more significant market share. Moreover, they can unlock this revenue a cost to acquire a customer (CAC) that’s typically a fraction of what it costs to acquire a net new software customer.
• Streamlined User Experience: The ability to embed financial offerings into vertical software platforms gives end users access to the full breadth of crucial business workflows, all centrally located. This integration has the potential to eliminate additional interfaces, enhancing product stickiness and resulting in a more efficient, user-friendly experience simultaneously – providing customers with a singular point of contact when they need service.
• Improved Efficiency:Embedded finance can also help automate several financial processes, reducing the need for some resources and streamlining operations. Tasks such as reconciliation, accounting, and reporting can be automated, saving time and resources for both businesses and their customers. This automation can be particularly helpful for SMBs, which already operate with fewer resources and are therefore forced to be scrappier than their enterprise counterparts.

We’re Eager to Help!

Our team at Sageview is eager to help founders of vertical software companies navigate roadblocks and unlock the full breadth of possibilities offered by embedded finance. We believe that vertical software businesses are uniquely positioned to execute this strategy, in no small part given their ability to leverage proprietary customer data and conduct more efficient underwriting of financial products. Executing an effective embedded finance strategy can provide benefits for all parties involved by meaningfully increasing a company’s revenue, improving the stickiness of customer relationships, and providing a better user experience for end consumers.

If you’re the founder of a vertical software company and would like to meet with our team to discuss this strategy and the opportunities presented in greater detail, please reach out – we would love to talk!