Linear #008: A Guide to vSaaS Creation, Raising Money via Cold Emails, the Story of Okta

Feb 20, 2023

Happy Sunday folks!

Another episode of the linear newsletter here.

One Vertical SaaS Breakdown:

A step-by-step guide to creating a large vertical software business

1/ Pick the market

The goal here is to identify the largest possible, underserved industry. You should look for markets with: >Bad NPS scores >Little to no VC-backed competitors >Low software penetration >Good distribution of company size (SMB's, MM's, Enterprises)

2/ Learn the operation

You must know the ins and outs of how these businesses work. Toast's S-1 perfectly illustrates EXACTLY how the restaurant industry operates and were able to encompass it all into a simple picture: Create this chart for the industry you're targeting.

3/ Build the wedge product

You don't start out with an end to end solution. So you have to create a great wedge product. This is the product that gets you in the door and enables you to prove value and become a trusted partner, all while learning more about the market.

My advice for wedge products is twofold.

Requirement #1: Build a wedge product that does one or more of these as this is what C-level's and/or owners care about... 1. Drive additional revenue 2. Protect revenue / decrease churn 3. Maintain compliance 4. Save time.

Requirement #2:

Build a wedge product that... 1. Is easy to understand 2. Has a quick time-to-value and implementation 2. Clear ROI The wedge product is the holy grail. If you nail it, you set yourself up for success. If you miss, your company will likely die.

4/ Extend offering to become the 'platform'

Every great vSaaS solution ultimately becomes an end-to-end platform. The singular destination a business within a particular category goes to for EVERYTHING. How do you do this?

By expanding from your initial wedge product into new offerings at each key phase of the business. Let's look at trade schools as an example. The high-level operation of a trade school looks like this:

#1. Market to prospective students

#2. Enroll prospective students

#3. Train students

#4. Credential students

#5. Place students into the workforce #6. Ensure compliance

There is more complexity here than meets they eye but as a simple example, CourseKey started with a wedge product addressing ONE of these. Then over time built out an end-to-end platform that offers tools for ALL of these. The same is true with Toast, Procore, Veeva, etc.

5/ Expand TAM via new products & biz models

Yes, it is true that SaaS is the eight wonder of the world BUT in vertical markets you hit a ceiling much faster on the traditional $X per user per month type of fee. FinTech, Insurance, and Pay-by-performance are 3 ways to expand.

Expanding via FinTech example: Restaurants.

At some point, you get tapped out on a subscription SaaS fee. So you introduce payments. You take small percentage on purchases. Now, the TAM just went from every restaurant in the world to every PERSON who eats at a restaurant. 🤯

Expanding via Insurance example: Construction.

You offer a SaaS solution for construction companies. So you launch a marketplace of commercial insurance for them. Liability, business, auto, etc. You likely just 10X'd your TAM.

Expanding via Pay-By-Performance example: Salons.

On top of your recurring SaaS fees, for every lead you help find (via the marketing software you offer) that CONVERTS ie. ends up as a paying customer, you receive a commission. Your customers customer just became your customer.

This process takes years. But it's worth it.

You'll look back having created something magical. So go for it. It might just end up better than you could have ever imagined.

In summary, here is the playbook:

1. Pick the market

2. Learn their operation

2. Build a great wedge product

3. Extend offering to become the 'platform'

4. Expand TAM via new product/biz models (Fin/InsureTech/PBP)