The Case For Vertical Software Amidst AI Disruption
By: Jake Colognesi, Michael Browne & Bradley Tatz
The disruption artificial intelligence, or AI, is poised to bring to software companies is a hot topic at the moment, and for good reason. AI is revolutionizing the software industry by fundamentally reshaping how applications are developed, deployed, and utilized, and its integration into software has produced technology that’s capable of learning, adapting, and automating tasks that were previously deemed too complex or time-consuming. Moreover, AI-infused software is dramatically enhancing users’ ability to analyze massive datasets swiftly, ushering in new insights and predictive capabilities. This is a transformative shift, and AI’s impact has not only enhanced user experiences by personalizing services, but has also led to the emergence of entirely new categories of software.
As technology growth equity investors, our opportunity (and challenge!) is to invest in established companies that are best poised for growth amidst disruptive forces. In today’s changing environment, one area where we’re eager to invest and reap the benefits of AI augmentation, rather than disruption, is in Vertical Market Software (VMS) businesses.
First-hand Experience Solving Problems
At their core, VMS companies exist exclusively to solve the unique needs of users in specific industries. When you look under the hood, many of the most successful ones in existence were started by entrepreneurs who have personally experienced specific pain points and set out to solve them. I recall meeting Tooey Courtemarche over 10 years ago and hearing about his background as a carpenter and the troubles he experienced when managing the contractors building his house – a struggle that ultimately led to the development of Procore. More recently, my colleagues and I were fortunate to encounter what we believe is the auto vertical’s best CRM platform, DriveCentric – an application built by auto industry veterans who were unsatisfied by incumbent solutions. The likes of VMS giants such as ServiceTitan, Toast, and Veeva share the common thread in their DNA of Founders that lived the problems they set out to solve with their companies.
When you cut through it all, the value of first-hand experience in vertical software can’t be overestimated. Real world experience paves the way for tailored, informed solutions that address unique and sometimes odd challenges only familiar to those who have done the job, and while modern solutions are increasingly AI-powered they can also lack the practical industry expertise and experiential knowledge that’s expected in a user-friendly software and services offering.
The Value of Proprietary Data Sets
AI uses machine learning techniques to identify and generate patterns learned from the data it has been trained on. The more diverse and extensive the dataset used for training, the better the model’s understanding of nuances, context, and relationships becomes. The magic of AI is in the speed with which it can handle large, publicly available data sets. However, there are obvious limitations when data is not readily available. VMS companies, particularly system of record applications, hold a unique advantage in that they are able to harness the power of AI to analyze large quantities of proprietary data that is not publicly available. More specifically, unlike horizontal SaaS vendors, VMS companies operate within specific sectors, accumulating a wealth of unique and targeted industry-specific information over time. This data is the lifeblood of AI applications, and by applying AI to this proprietary data VMS companies can unlock valuable insights, streamline processes, predict market trends, and offer highly tailored solutions to customers. This symbiotic relationship between specialized data and AI empowers these companies to innovate and create value within their respective verticals, fostering a competitive edge that sets them apart in the market.
As growth equity investors, we seek to support established companies with existing customers, rich data, and functioning go-to-market processes. Recognizing AI’s need for proprietary data sets in order to generate competitive value, we are excited (not threatened) by the technology’s potential to augment – not replace – the established players we aim to invest in.
The Need for Customization & World Class Customer Support
Frequently, industries powered by vertical software demand highly customized solutions and customer support that aligns with specific workflows, regulatory requirements, and business processes unique to the vertical. AI’s current capabilities are often generalized, and as such the technology is not yet adept at providing the high degree of customization demanded by end users. Moreover, customer support and trust are cornerstones for vertical solutions, especially in sectors like healthcare and finance where compliance and data security are primary concerns when implementing new software. The best VMS providers are not “black box” technologies, but are instead taking advantage of their history and competitive position to cater to their customers’ specific needs. They recognize that the ‘human element’ remains crucial, and that AI cannot fully replace human intuition and decision-making. Independent of the technology being used there will always still be a plumber fixing a boiler; a metal worker handling a laser cutter; a pest control technician ridding a building of bugs. Ensuring the success of these end users demands meticulous implementation, tailored customization, and world class support. These tasks are best addressed through a personalized, hands-on approach, a capability which is unique to vendors specializing in specific verticals.
Our Focus as Investors…
Instead of viewing AI as a disruptive force, the most successful VMS platforms that our team sees are those who are embracing AI as a collaborator. These businesses are gradually integrating AI capabilities to enhance their offerings, improving efficiency and data analysis capabilities simultaneously – a symbiotic relationship where AI becomes an ally, enhancing the value of vertical software rather than disrupting it. The resilience of VMS companies in the face of AI disruption lies in their specialization, ability to customize, assured trust and compliance, and an essential human element. The best VMS companies will adapt and integrate AI as well as other emergent technologies over time, and our team is eager to invest our time and capital and support their growth in the coming years.