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Dave Yuan

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2023-07-04

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2023-07-04

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1. “Grateful to the team to stick with it and keep driving and keep put one foot in front of the other and building this team.”

   2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

2. “So, I'm a long term listener. You were going to ask this question. And I think most people might think all right, what's the most authentic and what's the most novel answer? And hopefully you combine the two. The authentic answer is maybe not that novel. And it's one I'll go with here is it really is my family and the team around me. And I know that's not a specific answer, but if you want to be a great investor and I aspire to be that, if you want to go start a firm, if you want to go do anything, you break a lot of glass and you push really hard. And I really am grateful to my family. Like it's more than just going and achieving. And then the first two years at TyMark were pretty intense. We raised in 2021, we were fortunate to say no a lot in 2021, but it was really hard. We're trying to make a name for ourselves and that discipline was painful. And now as we build the business in probably one of the most turbulent times, I'm really”

   2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

3. “The big check build the DNA and get after it. I think there are probably ways to make it easier, but it's just a really instructive case study. So those are the three that come to mind.”

   2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

4. “Logic standpoint, of course. You take an operating system software company that has decent market share, you add a marketplace and it all works. And so just unpacking that experience, I think, is super interesting. I think the final one, which is probably less known as a vertical software player, but I think has a lot of parallels, and you could argue is as well as a zip recruiter. I wrote an essay on this, but I think just the high level is you go from a job distribution tool. I have a job spec that I want to push to multiple job boards rather than posting to all of them. I'll push just a tip recruiter to essentially creating their own pool of candidates through very clever tactics. And then they ultimately win all in and spent a lot of money to build a consumer brand. And just seeing those phases of development are super interesting. Ultimately, I think what it suggests is if you really want to build a consumer brand, there's no shortcut around it. You just got to write.”

   2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

5. “The unit of measure on all these things is really the property financial performance. And so there are various different slices that want to see different views of that. We invested in a horizontal business called OneStream, which is very similar in that regard. This concept of single search of truth, I think, is applicable across both vertical and horizontal. I think the other one that are really interesting case studies and the reason why they're interesting is just the different approaches to the consumer extension, which I think captures a lot of imagination and is quite challenging, but also huge upside. Spend time with mind body and their acquisition of, I believe, as ClassPass, I think that's super interesting how that came together. I spent some time with the team and there's some really interesting nuances that affect monetization and affect the success of that type of approach. Because I think from an industrial”

   2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

6. “Point out the ones that are less obvious. I'm no longer on the board, I'm no longer formally affiliated with the company, but people should take a look at CCC. So CCC is the business I described earlier that sells into the auto insurers. They move down to autobuy repair. They're now billing an online parts marketplace. That is, to me, super interesting. I think the strongest expression of extending through the value chain, I think maybe two others that are a little less covered. This isn't a comment on their valuations by any means or an investor recommendation. What Folio is doing is super interesting. They started obviously at the property management side and they've done a bunch of things on the engage with tenants, but they're starting to move up to stack into equity holders and creditors. If you think about this idea of like single source of truth across layers of the value chain, that's a really powerful concept. There's trust issues as we described earlier. But ultimately,”

   2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

7. “I do think Time Horizon matters a lot because most of these markets, just by the nature, do tend to turn over a little bit slower than horizontal market just by the personas and then also the organizational structures. And so I do think the best investors in this space need to have a very long time horizon because otherwise you'll be more driven by multiple than P&L. Some of these P&Ls do take a while to build out. Some of the best VMS businesses have been going at it for 30 years. So I think time horizon really matters.”

   2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

8. “That have been in business for 10, 12 years, and their tax rate is something like 20% to payments. And there's some operational nuances. There's some end market nuances as to whether you can get the attached 100%. And there in that difference can turn a what seems like a great deal into pretty mediocre deal and vice versa. So I think that our poop build is very nuanced. And so that's how I think about investing the space a little less on the exit multiple side, which of course is super important too.”

   2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

9. “10 month review. And I think the nuances that you pick up with a 10 month is on the location build segments really, really matter. Because if you think about from a first principles standpoint, back to your earlier question, a horizontal business looks at the universe as everything in a vertical business is taking a slice. Well, even within vertical, you need to think about subslices because first of all, there'll be competitive entry in subslices and then also your value proposition is tied to how tight your product market fit is. So ICP is really important. The ARPU piece really is an experience-driven activity. It's kind of what you put in the bucket and what you don't is ultimately tries to what you do. Right now, the conventional wisdom is if you own the merchant, well, you should get all the payments and then you should get all the payroll and all the other things. Well, the reality is there are a lot of nuances as it relates to attached to payments. You have great vertical software companies.”

   2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

10. “Yes, it's less around what the exit multiples are because I think you can align that to traditional frameworks. It's more about the PO. So every P&L is your typical recurring PL with an error or bridge. But for VMS, I think the important look is locations by RPO. The nuance there where I think you can take it like any investment framework, you can do a 10-minute review.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

11. “To this market. That being said, though, when I think there's a natural ebb and flow of these things and people will pull out as returns may not be as great as they anticipated or they get distracted by some other thing, I do think while maybe the painting this end market all of the same brush may lead on the margin to some companies getting overvalued, some companies will very much still be undervalued with what we're seeing as it relates to the multi-product orientation and also the ability to extend up and down the value chain. And I think it's just a really productive area to invest in. It's S&Bs, which again, the line very closely vertical SaaS employee, close to half of the US, these are big problems that need to be solved. They have a lot of work to do and a lot of that will come through automation. So I think it's just a great place to invest.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

12. “Be smart about what market you go after fairly obvious comment, but I think people still get that wrong. As an investor, I think it's largely the same, which is, I think, painting this set of companies where there is commonality, but very different end market attributes, the same is really dangerous. And I do think investors tend to go for the TLDR and go for the sort of quick instinct. And I think you're starting to see some particularly expansion stage investors sort of paint everything the same. I don't think returns will be great with that approach. I do think you have to be a bit more nuanced and be able to go from expansion stage to private equity to public to various different modalities to match the modalities of the end markets that you're investing in. I think there's some truth to that. I think you're starting to see people maybe over-indexed.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

13. “Restaurants construction, the trades, they have had software companies coming at them. But nonetheless, even in the big verticals, there's a lot of sub-problems that need to be solved. And so I think there's still a lot of runway. One quick plug is what we did was we ran all the NAICS codes and we looked at every single vertical by location and fragmentation to help entrepreneurs pick their spot. So if people reach out to us, we'll send out. So I think there's a lot of runway. But back to how we opened the conversation. Just like an entrepreneur or just like an investor who's investing their capital, an entrepreneur also needs to be pretty thoughtful how they invest their time and invest it accordingly to the market attributes. So if people are looking for a get rich fast approach, there's certain verticals that make sense. If they want to build a business methodically over time, there's certain other verticals where that's required. So I think you just.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

14. “I think it's certainly more saturated in the past, but man, there's so much greenfield, in my opinion. So I think there's still quite a bit of opportunity. Now the big end markets”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

15. “I think that's right. I think when you start thinking about extending through the value chain as our language, but you go sell from one customer to the customer's customers or the other constituents, the easiest, most linear way is by following the money. You start out with the buyer, then you try and sell it to the supplier. Now, to your point, fragmentation matters a lot. And so if there's only two suppliers and many buyers, well, you start with the suppliers first. It is very similar to an online marketplace mentality, which is what's the hard side? What's the scarcity?”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

16. “The actors for a very small amount of money would upload their content and their parameters. And so what a great business. You're taking a lot of the sweat labor out of the ecosystem. You're able to monetize the fat end of the market, which is all these actors looking for commercial gigs by providing this pretty simple tool at the top of the stack. And so it's sort of a very micro version of what Ariba's done over the years and other folks. It's a cool little business.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

17. “There's his business in LA, and I'm going to get this a little wrong because I talked to him maybe four or five years ago, but I got to know him more of the years. I won't name them because they haven't sold, and at some point in time we'll go chase them. But what they did is they went after probably the most manual market that you could imagine, which is the commercial casting market. It's literally finding people to show up and act for a commercial. And so where do you think the power is in that? It's in the casting. So what they did was they provided a tool for these casting directors. I didn't know this existed because I'm not in that industry, but they provided a tool for this casting director to go through hundreds, thousands of resumes and various different auditions in a very clean way and create a portfolio very easily. This used to take hours and hours of time. It just did all of the software. They were helped to basically offer that for very little, or I think it was actually free. And so they got all the casting directors. And so on the back end, they just built this LinkedIn where”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

18. “And so you had these sales reps. There's a great story of a sales rep that slept in a van and drove, I think it was around Hawaii and wouldn't come back until he booked every single tour operator in that geo. That combination of three factors built a significant business that he ended up selling to booking that is very far from mechanical and was the winning strategy and there's other providers in the space that have tried to match it, but there really hasn't been something as successful. So that might be a good example.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

19. “By changing the economics, he was making tens of thousands and sometimes hundreds of thousands of dollars on these tour activities where everybody else was trying to sell software at 30 bucks a month. And so what he could do is he could build a team to go build the product for the customer as part of the sales cycle. And then the final piece is he tied it in to a go-to-market model where he'd pay these young salespeople, these folks right out of college and realizing the annuity value of these businesses and the increased monetization.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

20. “Compared on these high ticket sizes if you're taking a helicopter tour, for example. So as a result, he was making money on the buy side fee. He would charge the Tor operator payments, but they were paying for payment services anyways. And he would also price match and really take the price quite low. So that's one piece. He totally changed the business model just through pricing. The second thing is from a product standpoint is he would go these operators and say hey, you really should think about redoing your website using software to take bookings, so on and so forth and be like, okay, well, I got to go around my business. We'll talk later. It's like, actually, we've done it for you.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

21. “A guy in our network at Tide Mark Fell Law Law Law Law Lawrence Hester. He started this company Fair Harbor. It's a bootstrap business that I think everybody chased and I chased hard. For three or four years, so what it was think about it as a booking platform, a website for tour activity providers, so helicopter operator, Luwao provider, fairly straightforward. As you think about building a business, all the tough things that we talked about earlier come to mind. How do you track these people down? How do you get them to buy software? How do you get them to use your software? And so the creative thing that Lawrence did is some combination of pricing strategy, product strategy, and go to market. So the first thing he did, he realized, is that a Torin activity consumer, we go on a trip to Hawaii and look for Luao is a transactional customer. They're probably not going to go to Hawaii again for quite some time or look for Lu. So what does that mean? You can charge them a buy-side feed. So he would charge, I think, some percentage. I want to say it's 67% of the fee. And it's just tucked in at the end. That's a lot of money.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

22. “You go towards the supplier side, then you think about things like procurement, you think about actually payment flows to them, you think about over time as you get back to this trust concept and getting density within a single level of merchants, you may think about group buying. It may be a GPO, maybe other formats of that. The consumer side, as we talked about earlier, that's the holy grail. That's where there's a lot of money and that's where there's a lot of joy and energy for your merchants. There's ways to sort of incrementally move towards the consumer. You start out with things like CRM. You think things like loyalty. You think about how to increase the conversion rate, things like consumer lending, those types of things. You can move into creating demand either directly and very rare circumstances, you'll actually start to see some vertical SaaS companies being able to create something that equates like a consumer marketplace.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

23. “If you go to the employee side, that usually can be a little bit more linear because these employees work for you and they engage with your systems anyways, then you start thinking about things like employee scheduling and payroll and this idea that if you think about your control point and data gravity, it's the data about your most important assets. Well, one of your most important assets are your customers and your employees and your suppliers. And so those are natural extensions.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

24. “I do think in the front offices, payments in certain circumstances where it's not a single transaction, it might be engagement over time for a service provider, various different things like the whole billing idea. So taking in money is always good. It's the lifeblood of these merchants. It's always great. And then once you get the flow in, you now have insight of the financial health of your merchants. So you could think about very low risk lending, some cash flow lending, a part of Squares P&L, for example, is instant deposit, which is getting money rather than waiting three days for the money to show up in your account, getting it instantly. And that's just time. There's very little risk associated with that. And so NSCOR makes quite a bit of money on that. And I think many vertical SaaS companies can do the same. I do think there's a step function in terms of effort as well as opportunity where you do think about what are the constituents around you. There's your customers. There's your employees. There's your suppliers.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

25. “You charge them four? Do you charge them one and a half? Do you charge them two? Because presumably the nice part about multi-product for the vendor, for the SaaS company, is there's very little in incremental sales costs. That's not fully true, but it's generally true. And so therein also is a really interesting TAM question. If you're in a big TAM, you've probably charged to the lower end because you're adding value and you're just creating this great compounding flywheel. And if the customers are bigger, maybe, then you know you're going to cross all sorts of other products over time. If it's a smaller TAM, then maybe charge it closer to four. Customers making a dollar because one plus one equals five. So they're getting $5 a value and paying four, but you're also forexing your RPU, obviously. It's a really nuanced question, but that's what makes us fun.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

26. “Describing which is an operating system for this merchant. And the more you can add, the better. And again, it tends to group in front office and back office, but generally the more you add, the better. Now, I think what you're also pulling on is this idea of monetization. So if one plus one equals five in that early example, what do you charge them?”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

27. “Me try and pull apart each of the pieces. You can push me where you want. Take toast. Most of these restaurants have point of sale system and they have a payment surviver. Man, it'd be a heck of a lot easier if there was just all in one. You take payment into your point of sale. There's no reconciliation. It's easy. And so the way Chris, the CEO of Toast, describes it, and I think he's created language that we've started to borrow and maybe even steal, is this idea of better together? One plus one equals five. They just work better together, reconciliation is better. And in this particular example, we've written an essay around the benefits of integrated payments. And because then you just get a lot of information on the financial health of your merchant as well as your consumer. That's the thought. And I do think because you typically are selling to an S&B where they don't want a ton of vendors, they just want stuff to work. You are able to move to what you're”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

28. “65% retention in an enterprise market that's really tough. There's a massive leaky bucket. But if you're in a big tamp and you have really broad and cheap distribution, let's say you're pretty good at linear TV, which is many of what these S&B products have done, well, that's okay because you're more like a consumer business. And any consumer business would die for 60% retention. They're more like 20%. So it's really this spectrum. I do think to be a great vertical SaaS investor, you have to think from perhaps expansion stage to buyout to public. And you also have to have a little bit of enterprise software DNA, a little consumer DNA, a little fintech DNA, and then obviously a lot of time in this core category.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

29. “But you make up for net retention. They could be lower, they could be solo practitioners. Many of their customers are actually solo endeavors. And if you look into it, if you look at zero, a big chunk of that market is FD of one. By definition, going to have relatively low retention rates there. And so what do you do there? And I think the really interesting part of that segment is a couple things. One is the best companies, and we have some fellows from some of these companies. What they do is they think about retention not on an enterprise basis, but on individual basis. So Joe started a lemonade stand. It doesn't work out. And he starts a taco stand. Well, as long as you keep Joe, that's pretty good retention. So that's one thing. The second thing, and this is what gets into the consumer side, this is why you asked me why I invest here and I love the encusters. I also love the confluence of function skill set. This gets more than the consumer side, which is, hey, if you have, let's say, 60%.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

30. “Through this methodical framework of how you cross attach a second, third, fourth product, you can go from gross retentions. And typically, depending on the segment you're selling into, they are lower than 90%, but you start increasing the expansion, that gets you well over 100%. So you have these nice cohorts that are growing in and of themselves, which is the goal of every recurring software investor. That is how we think about it. I do think there is this really interesting periphery area. You sort of break vertical SAS down to its basic levels, you are selling to S&Bs. And that is like an intersection between consumer and enterprise, right? Just almost like by definition. And so you look at these companies and the end customers can be in that spectrum. So they could be more close to the enterprise side where you get to your point mid 90s and gross retention. They could be more on the SMB side that gets lower the gross return.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

31. “Would make a distinction between net retention and gross retention, net retention factors in the expansion that you get from existing customers. Because if you are selling to small businesses, it is unlikely that you'll get into the mid-90s. There's natural attrition. And maybe the metrics people are citing are net of that. So that would make sense. But I think in all businesses, in all recurring businesses, there is this trade-off between TAM and cost of distribution with net retention. And more limited TAM scenarios, you really do want net retention higher than 100%. So your gross retention plus any expansion that you get from the existing customers, it just totally changes the economics of the business. Now, the question is how you get there. So I do think the nice part about this control point framework is it correlates very highly to gross retention. The more gravity you have, the less likely the customer is going to churn. And then if you think”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

32. “You should maybe diversify through secondary liquidity. Maybe it's MA. But the use of capital and therefore the provider, the provider's mindset has to be very different. And so one of the things that we've really, I've enjoyed and I think we as a firm has benefited from is when I start investing, I did my first three years at a bio firm in 2000 right in time to catch a bunch of falling knives. And then I went to a growth firm and learned the more secular high growth perspective. And I think these integration of the two really helps us look at these various different markets and these various different companies at really quite different stages of growth and maturity. So I think to do this right, to invest in this end market right, there are certain commonalities in terms of company formation and thematic pieces, but your mindset has to be really different depending on the end market and the company you're backing.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

33. “To our prior conversations, these markets are very, very different. The size of these markets are very different. The maturity of these markets are very different. The company's growth where they are in the growth phase is very different. To pick some barbells, if you're an up and coming, if you're a disruptor in a very large TAM, well, you should be very, very aggressive at the point of at times being fairly sloppy with your economics. You should overfund it. You should go win. That's the phase you're in. Likewise, if you're in a big TAM and you're the number one player by a small margin, you should make it a large margin. Double down, raise a lot of expansion capital, go big, very similar to horizontal strategy. On the flip side, if you're in a more modest category and you've gotten to category leadership and barring some sloppiness from the capital markets, you kind of have this thing pretty well understood. Well, you probably shouldn't raise a big primary round if there are other reasons to raise capital.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

34. “Do you need to start thinking about what's step two, step three, step four? And as an investor, I've had to train myself to back off the typical instinct of you can only do one thing well at a time. I think the best protocol SaaS entrepreneurs are thinking multi-product pretty darn early. So I think those are maybe the two distinctions.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

35. “I'll put a couple ideas out there. I'm not sure if I fully believe them. I believe enough of them to put them out here I think on the margin, there's been certainly counter examples of this, but I do think most of the best VMS entrepreneurs have really strong personal affinity or most likely real working experience in the operations of the merchants that they serve. The best VMS entrepreneurs live it and they breathe it. And obviously that's true of horizontal entrepreneurs as well. But I think there's a higher premium on that. And as you think about some of these market dynamics having credibility in the industry to get the tent pole customers actually may be more valuable all things being equal then in the horizontal context. I think the second piece, and this is probably a bit more controversial, is vertical SaaS businesses are inherently multi-product businesses. They require focus like every other enterprise. They require an ability to win the control point.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

36. “Merchants really resent the marketplaces because they're taking 20 of booking and oftentimes even higher than that and doing nothing. They feel like it's doing nothing. And so there's a really strong valued proposition to your end merchant if you're able to provide demand. Now, the big issue, though, is really twofold. Number one, it's DNA. People build software perhaps don't have the same DNA to go aggregate traffic, bid on keywords, create social media campaigns, whatever it is, whatever tactics required. The second piece is they lack density. So a marketplace really has pretty close to 100% of supply in a given geo. It's very rare when a VMS will have even closer to that market share in a geo. So you need to think about those two obstacles. But there's a number of different ways that you can get pretty darn close to creating demand or even creating demand and finding your way around. I think that is the frontier.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

37. “This is the cutting edge, Patrick. Let me talk about a couple different perspectives and we'll try to integrate them. The first perspective, which I subscribe to, is particularly for small merchants. It's all about demand. Even if they're low margin merchants, even if they're not making high margins on that demand, it's in your mindset. Your job is to build a product or a service and bring customers in the door. Bringing customers in the door, it's such an emotional need. If you're an entrepreneur, like the biggest thing is no one shows up. No one walks through that door. And so I think driving demand is incredibly strategic. And if there's an opportunity to do so, I think VMS should look at that quite hard. I think the other thing going in a VMS's favor is that a lot of the aggregators of demand, like the online marketplaces, even Amazon, are viewed as predatory. I've done interviews for various different vertical online marketplaces. And almost to the person.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

38. “To the point where the channel manager and siteminder becomes essentially an integration layer into this legacy system and enjoys a lot of the values that you might attribute to having the control points, this new generation of VMS players are thinking through how do we disrupt the existing control points.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

39. “We're really excited to make a bet in property management. Property management is the control point for hotels. Hotels are incredibly important in the ecosystem of online travel. And hotels are really struggling with this idea of syndicating or listening to multiple OTAs while keeping their inventory in sync and not overbooking. And so we looked really hard at the property management system layer. The issue was that at the time there were deep entrenched legacy players that would be really hard to displace. And so we chose to do is look one level up, the channel manager. The channel manager, and we happen to find this company called SiteMinder in Australia, essentially would integrate to every single PMS. They integrated to PMS is covering roughly 97% of the hotel global market. So integrated to all the PMSs and integrated into all the OTAs. And so what they've done, what they had done and what they continued to do is surround the PM.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

40. “We talked earlier about industry attributes, and one of the attributes was this general turnover or movement within an end market. And in many end markets, there is very little movement. So if you think about that, you have a small business owner who may have purchased legacy software in the control point. And while that software is not modern or doesn't do everything that they want to do, it works and it's fully amortized. So they're unlikely to switch. So what are your choices? Your choices are either fight the fight and try and slog it out and slowly over time displace this legacy software. Or you could do something like the language we use is integrate and surround, which is you integrate into the legacy software, but you provide surrounding functionality that's disruptive. So a great example of this is the property management system in hotels. I think it was now 10 years ago. The dates might be a little bit off, but about 10 years ago,”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

41. “Kill shot. And the nice part is if you just think about software automation, even just small increments of customization really do drive a ton of value. So every application is a database. It's a workflow and a UI. And so therefore you probably could customize every single one of these horizontals. And maybe there's a template that you can overlay a horizontal tool, but it doesn't get at the heart of what delivers values to the merchant. And that's why you see many of the best vertical SaaS entrepreneurs start out as customers. For instance, estimates and quotes in many markets is incredibly nuanced. If you take a horizontal tool and try and create a estimate for bespoke for a certain end vertical, you're basically creating an entire data taxonomy. Your workflows might be different. Your regulatory rules might be different. And so these small details actually have outsized impact in terms of”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

42. “The larger the customers are, the more the vertical versus horizontal equation changes. The smaller the customer is, the more likely they want immediate time to value, which favors vertical. There's also just an awareness aspect. If you're running a restaurant, if you're running a hotel, if you're running even 10 hotels, you probably don't run a broad RFP. You're looking for a tool that just works.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

43. “Yourselves to customers. And then I think the other thing that's quite interesting this isn't true of all verticals. And you asked about attributes earlier. This is another attribute that you can consider. But in some verticals, there's enough density locally that there actually is a flywheel effect. And so the best markers, I do believe think about it much like an online marketplace, which is you go city by city. You go nail the tent pole accounts. There's a halo effect associated with it. And you start to see in your flywheel markets that actually things get easier. That's the opposite of horizontal SAS. Horizontal SAS is the deeper you get in penetration, the harder it gets because you have to step outside your ICP. You do have a local network effect available to you in vertical SAS and the smartest marketers and the smartest go-to-market executives are taking advantage of that.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

44. “Think that's a really astute point. I think this is less around discovery, it's more around account based marketing. There's a lot more talented account-based marketers than I that can talk through the specific tactics. But let me share some concepts that maybe I see at the board level. I think the first point is you really can't outstrip your leads. If there's 100,000 locations within the US, maybe there's call it 10,000 in Boston, 10,000 in Seattle. Those numbers are probably wrong. It takes only a couple SERs calling that city in a year to really burn out their leads. So I think the first point is you got to be really careful with traditional sales tactics as it relates to these much smaller verticals. I do think the advantage, and you need to take advantage of this, is the product market fit is quite a bit stronger, right? You're building a product for a specific type of customer. And so really leverage that as it relates to the value proposition, the product marketing, how you introduce.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

45. “Think that's right. I think maybe if you tone it down a little bit too, if you think about just within a merchant class, if you get to leadership, the more they're at trust amongst the merchants themselves. There's a lot of cooperation. There's a lot of collective benchmarking that you could create. So it's a really interesting concept.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

46. “And there are various different phases of interactions between these two constituents that requires you as a service provider to create trust over long periods of time. It also requires there to be endemic rules of engagement, industry standards that you can also leverage to expand that gap. Admittedly, this is the out there attribute. This is something that people get to consider.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

47. “I'll specifically go a little bit further out on the growth and risk curve on the aspirational curve, which is trust. And so if you think about the framework of vertical SAS, you start out with a control point, you sell a number of products in there around that control point. Okay, that's great. The real home run is to go from one layer of the value chain. So let's say you sell into auto insurance. You do a great job there. You win the market. You get to market leadership. Then the question is, can you extend through the value chain? And in this case, you go from the auto insurers to the auto buyer repair shops. The auto buyer repair shops tend to be service survivors to the auto insurers, something like, I don't know, 70, 80, 90 percent of an auto buyer repair shop's revenue come from underwritten insured consumers. Now, the reason why trust is so important there is if you want to go from auto insurance to auto buyer pair shops, you're now selling software to both sides of a transaction. This industry has been around a long time.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

48. “Salesforce did this masterfully over the years, which is building S curs of sales capacity. This market that the CEO is describing is the opposite of that. Those three factors really tell you the type of company you want to build and therefore the investment strategy you want to pursue.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

49. “Not natural software buyers. And so once they find a product, they stick with it. And so if it's a very stable industry, there may be many locations, but the turnover is relatively infrequent. So your at bats are infrequent. So you don't really have that much of an opportunity to start taking share. So you may have to take different approaches to winning that control point. And you should pull that apart. The CEO of a public company of software companies selling into a very large vertical that you might expect to have lots of turnover, he described it really clear way one time. He was like, look, Dave, only about 5% of this vertical reevalues their software every year. And so my job is to see every single sales cycle of that 5% and win 75% of that. What that is, is a very measured go-to-market strategy. This is not your.”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source

50. “There's various different versions of TAM, but think of it as like 800 to a million locations in the US. Well, that's a very different market structure than if you're selling into, let's say, laundry mats. And so I do think that the size of the market really changes the company formation process. It also changes how you think about your investment strategy. The second is competitive intensity. What is the vendor universe look like? And those two things tend to be correlated. And the big TAMs looks a little bit more like a horizontal market where there's a lot of both software vendors and a lot of cloud vendors. I think the third piece is what is the growth dynamic within the industry itself? So the growth dynamic is important for all types of investing, right? The more change there is, the more growth, the bigger the TAM is over time, the more turnover. I think it's super important these industries because many of these merchants,”

    2023-07-04 · Invest Like the Best · Dave Yuan - A Primer on Vertical Market Software - [Invest Like the Best, EP.335] · IDENTIFIED FROM THE TRANSCRIPT · source