#113: VC's Racing Towards vSaaS & Vertical AI , Is Embedded Payroll Right For Your vSaaS? Tidemarks vSaaS Benchmark Survey
One vSaaS breakdown. One biz story. One 'how to'. In your inbox once a week.
Todays newsletter is sponsored by Check, the leading payroll infrastructure provider and pioneer of embedded payroll.
Check makes it easy for any SaaS platform to build a payroll business, and already powers 60+ popular platforms supporting 20M+ employees such as Wave, Homebase, and HousecallPro .
Alright, let’s get to it…
One Vertical SaaS Breakdown:
VC’s Racing Towards Vertical SaaS, Vertical AI, Venture Buyouts
I have gotten SO MANY call requests / outreaches from VC’s.
It’s like Vertical Software is cool again.
I find it so ironic because I got BEAT UP by VC’s for the last decade :-). We raised a Pre-Seed, Seed, Series A, and Series B before exiting to Private Equity in Q4 of last year. But every round was hard.
The second we exit it gets cool again :-).
Cue the irony….
So I wanted to talk about a few reasons why everyone is racing here and why it is the BEST TIME to start a vertical SaaS company that I’ve seen since the dawn of the internet (Wow! That’s a big statement).
Reason #1: AI is only valuable in two key areas - the foundational / structural level and the Vertical AI level
In my humble opinion the winners will look similar to the mobile era. There will be the people that actually own the foundation - think Apple with the iPhone, and google with Android. In this era that would be someone like OpenAI or Claude. The next winners will be vertical specific - IE a specific job function within a particular industry.
You can’t build one of these WELL without a goldmine of industry data but the unique thing about vertical AI is that it doesn’t seem like you even need API access. This is going to DISRUPT a bunch of big / legacy industry-specific ERP’s who have literally NOT ALLOWED API access and have been milking their customers for years because it is just too painful to move.
I remember getting a lot of outreach when Friedberg said on the All In Podcast that vertical SaaS was going to go extinct because the foundational models could just replicate vertical SaaS solutions with natural language.
I said the same thing then that everyone has seemed to come around to, this will not happen.
Reason #2: The TAM Fallacy goes away in Vertical AI (assuming you can actually replace people)
Studying SaaS market sizes is what has caused VC’s for the last ~20 years to shy away from vertical SaaS. They’ve done a really intellectually lazy exercise:
Number of people that work in the industry X a SaaS fee = TAM
Some have finally gotten over that with embedded payments, going multi-product, etc. but now the smart ones are looking at the total market size in terms of dislodging actual people.
IE if your building a tool that replaces back-office staff at recruiting firms that number can get REALLY BIG because, with Vertical AI, your no longer constrained to a SaaS per user fee to calculate market size.
Reason #3: Buyouts create a huge opportunity in industries that are SaaS Graveyards
Finally, a few VC’s are starting to come around to Venture Buy Outs. These are the smartest investors, because they can start to fund concepts that are going after markets that have proven time and time again that a traditional VC-backed GTM SaaS motion DOES NOT WORK in. This is a crazy exciting opportunity because tech-enabled services companies will actually, for the first time, be tech-enabled.
So these are just three quick reasons VC’s are flocking, and I could probably list out a few more but the point is it is an incredibly exciting time to be building Vertical SaaS, Vertical AI, and Venture Buy Out companies. If the three items above hold this era of companies is going to be something special.
So if you’re serious about jumping in, a reader of ours built a freemium AI tool for you to go find an industry that checks all the boxes. He also just figured out how to make it a lot cheaper so go take advantage :-)
One Biz Story:
Tidemark’s Annual Benchmark Survey
Tidemark - a VC firm does a GREAT vertical SaaS survey every year. I’ve partnered with them again on it. Will share back the insights but this is your call to action to help shape Tidemark’s 2025 Vertical & SMB SaaS Benchmark Report!
10 mins to complete -> proprietary insights in return.
Fill out the survey here. I’ll be doing a deep analysis/write-up on the results when they come available: https://surveymonkey.com/r/RXT9LLM
One ’How To’:
Embedded Payroll for vSaaS - Is It Right For Your Company?
For those new to the newsletter, we focus a lot here on ways that vertical SaaS companies can embed features and functionality to drastically increase TAM, revenue, and retention. We’ve written playbooks on embedded AI, payments, ads, and more.
Today, we’re focusing on payroll – an incredible opportunity for vSaaS companies. So let’s start with a simple question, how do you know if offering payroll is right for your vSaaS platform?
How to know if offering payroll is right for your vSaaS platform?
Let’s say you run a platform that is one degree away from employee payroll. Maybe it’s time-tracking for restaurants, construction workforce management, or small business accounting. You’re already your customer's source of truth for their employee data, but they're still running payroll through a legacy, third-party provider. You could expand your offering to include payroll and become an all-in-one solution for your customers — but should you? Here are some helpful tips to determine if payroll is the right next step for your platform.
Understanding the payroll landscape.
Payroll is already essential to every business on your platform, so understanding how your customers currently run payroll is a great starting point:
• 60%+ of US businesses still manage their payroll using pre-internet technology.
• Of those using online tools, the majority use a legacy point-solution, like ADP or Paychex.
• Platforms offering payroll natively have a 90%+ retention rate.
So what does that tell us? First, if your customers are primarily inception businesses or Micro-SMBs running payroll by hand, offering payroll on your platform may be a godsend. However, with such high retention rates, those platforms aiming to acquire switchers from legacy providers are going to need a value prop that makes changing providers worthwhile for their customers.
Fortunately for the second, there are many verticals that battle inefficient payroll processes due to the complexities of their industry-specific needs. These businesses often already find point-solutions to be a frustrating bottleneck in their compensation workflow, and are far more likely to embrace an easier way. Vertical SaaS platforms can often demonstrate increased efficiency for their customers with a payroll solution that is tailor-made for their industry.
Assessing your customer’s industry-specific needs.
The experience of running payroll is not the same for everyone. Some businesses face massive challenges with payroll compliance due to the nuances of their industries – like piecework rates for construction businesses, commissions at a salon, or calculating hours and tips at a restaurant – while others may only require relatively simple, recurring payments to W-2 employees.
For a simple salary business, a legacy solution may work just fine – and convincing existing legacy customers to migrate to your platform could become a hurdle for your sales team. However, for workers in industries with specialized compliance rules, that isn’t the case. These customers are likely already struggling with inefficient processes, and wasting valuable time by manually transferring individual employee data to a third-party tool each week.
Solving for a vertical’s inefficiencies with an integrated payroll solution can increase your platform attach rate and customer satisfaction, either as an additional revenue stream, or a valuable compliment to your core product offering.
The path to all-in-one.
Becoming the one-stop-shop for an industry is the ultimate way to make your platform essential to your customers. Fortunately, the path to adding payroll to your platform is now surprisingly simple.
Until a few years ago, the only ways to become a payroll provider were to build a complex payroll engine from scratch or acquire an existing payroll business. However, new embedded payroll solutions have changed the game. Companies like Check offer a suite of run-ready interfaces, provide industry-specific tooling, manage the complexities of tax calculations and filing, and execute money movement on your behalf. Leveraging an embedded infrastructure now allows platforms to build and launch a payroll offering in weeks – instead of years – and make becoming an all-in-one solution for your customers a reality.
Last words.
If your VSaaS platform is serving a unique industry, and you’re already managing payroll adjacencies like employee management, job costing, or time tracking, leveraging an embedded infrastructure to add payroll to your platform can be a viable and valuable next step for your customers, and your business.
Friendly Reminder :-)
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