Ok, not completely, but it’s a catchy headline, huh?

Last year, I set out to find a new startup idea with a straightforward thesis:

• There’s important B2B SaaS software to build. It’s easy to feel like so much software has been built, but if you look under the surface, there’s so much that’s broken. There’s much opportunity to build B2B SaaS—especially for underserved markets.
• Specific markets are grossly underserved by technology. For instance, founders and engineers don’t generally build for civil engineers or landscape architects, but developers love building devtools and infrastructure.
• If we build modern software for these underserved markets, they’ll eagerly adopt it.

(I have some specific thoughts about AI and how that changes the startup landscape, but I’ll leave that for another post.)

After a couple of months of investigation, I’ve concluded that I was wrong. Here are the specifics that we were looking for:

• B2B
• 100M ARR TAM
• Pure software. No hardware, no lobbying, no consumer.

Some examples

• https://www.gnosisfreight.com
• https://www.spectora.com
• https://convertkit.com
• https://carta.com

Why I Was Wrong

Solution Fatigue is Real

The reason for this is that the market is not as competitive as it used to be. Many non-technical industries feel like they’ve been burned by buying software in the last decade.

Startups came to them promising the world, giving dates for future feature releases, and committing to fix any deployment bugs and make implementation easy. In many industries, these promises were broken, and instead, companies were left with houses, half-baked software that didn’t work for their use case. They decided it’s just easier to hire humans to do the manual work than pay consultants to implement and maintain software that is half-broken.

After all, they entered whatever industry they are working in because they didn’t want to be in tech.

I saw this very clearly in construction.

Construction workers love construction because they’re not on a computer. They want to work with their hands. This is one of the reasons that nearly all construction software companies have failed to grow beyond $10M in ARR. Construction workers inherently don’t want to use technology, have more work than they can handle, and have enough money to fund their lifestyle. As long as what they have works well enough, they just don’t want to deal with thinking about a computer or another app.

Underserved Markets Aren’t Underserved by Accident

When you walk into Costco, the software is from the 90s. When you go to your mechanic, you’ll notice they’re using the same software for the last 10 years. Your doctor is still using paper clipboards for intake forms.

My assumption here was the reason for this is that there is no software built specifically for these verticals.

However, I’ve switched my viewpoint: the reason certain markets are underserved is the culture within those verticals. It creates a high enough CAC that the unit economics of building new software for these verticals just doesn’t work. With ACVs low enough, and self-serve not being an option, the go-to-market costs increase to a level where it’s just not worth it for venture to invest in these industries.

I think bootstrapped lifestyle businesses have a big opportunity to serve the remaining niche vertical SaaS left out there to build. If you know enough about a particular vertical, there are a lot of sub-10 million ARR businesses to be built out there. However, you would have to be willing to go through the grind of building a bootstrapped business with no revenue for a couple of years.

Terrible Software Isn’t So Terrible

To technology people, when we look at software that professionals in other industries use, it’s easy to see so many things wrong with it.

Take NetSuite as an example. I’ve worked with NetSuite for many years and know how terrible it is in a very deep way. Any developer that touches it slowly builds a massive hatred for the system. Many other types of users, like product managers, marketing professionals, and other folks who are more used to modern software also hate it with a passion.

However, those professionals aren’t its core users. The people who buy NetSuite are CFOs and CEOs looking to de-risk a boring yet critical part of their business. The folks who use it every day, accountants, are inherently conservative and do not like change. All they want to know is that they can do their job the same way every day and the software will keep up with any compliance. This is what NetSuite does exceptionally well.

Additionally, accountants and finance folks are generally not well-loved. NetSuite has built an incredible sales force that knows how to treat the finance teams well. I heard stories of NetSuite sending margaritas and mobile bars to prospects on Fridays when they heard they had a hard week. They have great parties at SuiteWorld each year; they know how to play the game to get complex sales. NetSuite has built an incredible sales force that sells specifically to the finance team demographic.

Additionally, they know that finance teams are never able to get internal tech resourcing to improve their systems. For this reason, the professional services ecosystem around NetSuite is critical to actually closing a deal. Without this, it’s a really hard sell to convince a finance team to use a new product. Largely because any customizations, which always exist, would have to be done internally and you cannot rely upon a deep bench of professional services consultants.

This is all to say that although NetSuite is terrible software from the vantage point of any technologist, its users and buyers actually think it’s quite good. It does what they need, it doesn’t change, and it has a non-technical ecosystem that makes it easy to implement, maintain, and sell to others in their organization.

I think there’s a lot of software like this—software that’s good enough for the people who need to use it every day. Organizations operating in those spaces know their market enough to understand exactly where they need to excel and how bad they can let their software get before it really opens up an opportunity for a competitor.

Businesses Don’t Want More Money

At least, lifestyle businesses don’t want more money. They aren’t purely capitalistic enterprises.

I’ll define a lifestyle business as one that generates a high salary (2-5x what they can make working for someone else) for its founders but inherently does not have the opportunity to scale exponentially.

For instance:

• Dog Walking
• Car wash
• IndieHacker and MicroConf businesses
• Counseling
• Doctors
• Lawyers
• Mechanics
• Real estate agent

The founders of these businesses want to make more money and have more freedom than working for someone else, but they inherently want to focus on their craft and do not want more complexity in their lives. The e-myth outlines this type of business well.

What this means is as soon as the founders of the company are making great money and enjoying their life, they really don’t want to buy new software or tinker with the operations of their business too much. Sure, that software you’re selling could yield another 10-20% revenues and another $100K to their personal bottom line, but if it introduces more stress, complexity, or risk to their life or business, they just don’t want to deal with it. They have enough. They’re happy with their life. They’re happy with their business. They enjoy what they’re doing. Why would they tinker with new software if all those things are true?

It’s exactly this question that makes it hard to sell into these sorts of lifestyle businesses.

Now, this isn’t to say there’s no businesses to be built here. There’s always going to be tinkerers and tech-forward founders at these lifestyle businesses that will try new things. However, it’s really hard to build a venture-scale business around these customers, which is why there is still opportunity in this space.

VC Went All-in on the Vertical SaaS Playbook

Fractal and many other funds exclusively invested in the VSaaS playbook and generated hundreds of startups building vertical SaaS. Private equity has also purchased lots of vertical saas (most of it unannounced).

There’s been a lot of money dumped into the space and that means all of the low-hanging fruit has been picked.

Is There Still an Opportunity in VSaaS?

Yes, but it’s much harder.

My co-founder has this saying: "Business advice has a shelf life." I don’t think this applies to all business advice at all times, but it’s true that playbooks that worked before may not work now.

This is probably even more true now: LLMs have completely changed how companies are built.

If you want to build a large vertical SaaS company, the playbook has changed, and the revised edition hasn’t been published. There’s still opportunity, but it looks different.

Here are some of the categories where I’m still seeing interesting opportunities.

An External "Why Now" Moment

Investors love to discuss the "why now" moment for a particular idea. It’s a good framework for evaluating whether an idea is worth pursuing.

A way to think about the "why now" moment is– why hasn’t this particular business been built already? The following reasons could all be true but probably aren’t: "No one’s thought about it yet!", "I’m the perfect founder for the idea!", "Other people have tried and failed, but for some reason, I’m the one to build it!"

Changing regulatory policies, new technology innovations, and changing consumer behavior are all good examples of exogenous change agents that can create new opportunities in SaaS (vertical and otherwise).

Business Model Innovation

If you can devise a way to create a completely new business model for a software business that (a) increases your take rate or (b) increases the market size, you can make a small business big.

For instance, instead of selling a SaaS product, you sell a digital franchise (like Moxie). Instead of helping someone run a business, you help them create the business, and demand a much larger % of revenue.

Before running into Fora Travel, I would have thought travel agents were a dying industry. Fora figured out a way to make it easy for folks to start a micro travel agent business, increasing the size of the market and generating a large opportunity out of a space that would have been considered dead.

Clever Distribution

There’s a host of businesses that haven’t been built because the cost of customer acquisition is too high. Think of any marketplace, any business that doesn’t respond to cold email, phone, etc. If you can discover a way to distribute software effectively to customers in a way that gets you a 10x better CAC, you could find a really interesting business.

The most obvious example here is partnering with someone who can distribute the software for you. Possibly by force.

Imagine a manufacturing company with enough leverage over its suppliers to demand that they use a new piece of software. If you can build a strong partnership with them on day one—probably in the form of a strategic investment—you’ll immediately have motivated design partners and a clear path to cheap distribution (instead of paying for Google ads, a sales stack, etc., you’ll be ‘forced’ on their suppliers).

If you can unlock a clever distribution mechanism that makes the unit economics of the particular vertical work, I believe there are still interesting companies to be built.

Vertical Integration

The previous generation of SaaS companies was focused on pure software. Hardware, service organizations, physical distribution, etc., were all viewed as elements that would destroy margins, slow product velocity, and make the business harder to acquire.

Take residential real estate photography for instance.

For example, a vertical SaaS company could offer a comprehensive solution that includes not only software for managing photography bookings and editing but also hardware, such as high-quality cameras for capturing images efficiently. Even better make those cameras able to detect issues within the house, as a sort of light-weight home inspection, so real estate agents and their brokers can break into a completely new line of business (real estate photography) without acquiring any new skills.

Another example here is health care. Instead of selling software to insurance companies or doctor offices, become a TPA or create a PCP franchise. It’s much harder—especially operationally—but this is why it hasn’t been done yet. AI will allow services to look much more like products, especially over the long run.

Building in this way means making a very specific bet about the future of AI and embracing the complexity of running operationally-laden businesses. If you can pull it off, there’s a big market to be served.