Linear #032: 10 Lessons From 10 Years of vSaaS Investing, The Story of Cloudbeds, 50/50 Rules
One vSaaS breakdown. One biz story. One 'how to'. In your inbox once a week.
One Vertical SaaS Breakdown:
10 Lessons From 10 Years of vSaaS Investing
For too long companies have suffered the pain of duck-taping together multiple software tools and trying to 'make it work'.
The answer? Vertical Market Software -- a huge and growing category.
Here is a summary of Bessemer's 10 lessons from 10 years of vertical SaaS investing 🧵
Lesson 1: To achieve market leadership in vertical software, you need to attack an underserved market, address an overlooked problem, or unseat sleepy incumbents. You also need to leverage platform shifts and technology catalysts to gain an edge over the competition.
Lesson 2: The best vertical SaaS companies build a “layer cake” of products to sell into their core vertical market. Product 1 Product 2 Product 3 Product 4 Product 5 5 Layer Cake This helps them increase revenue per customer, reduce churn, and fend off competitors.
Lesson 3: Some of the best layer cake opportunities are integrated services like payment processing, payroll, lending, communication, and managed services. They are easy to cross-sell and feel “free” to your customers and create new revenue streams and deepen your moat.
Lesson 4: Vertical software companies can unlock new opportunities by focusing on consumer experience and “systems of engagement”. They can also monetize the consumer end-users by creating marketplaces, lending products, booking fees, or consumer products.
Lesson 5: Vertical software companies can leverage data to improve their product quality, deliver user insights, build data networks, and sell data as a subscription service. Data is a powerful asset that can create network effects and competitive advantages.
Lesson 6: Pricing and packaging is hard but important for vertical software companies. They should experiment regularly with different pricing models, tiers, contract terms, price points, and use data-driven methods to optimize their pricing.
Lesson 7: Vertical software companies often start in the SMB or mid-market segment but need to move upmarket to sustain growth. This requires them to mature their product, sales motion, marketing efforts, and implementation/success team.
Lesson 8: Acquisitions can be used to accelerate the vertical software layer cake or consolidate market share. However, they are risky and require careful planning and execution. The best acquisitions have clear and immediate financial ROI and a dedicated owner for integration.
Lesson 9: If you are a market leader in vertical software, you should use your scale to invest more in product and GTM than your competitors. Increase your switching costs by capturing customer data, encouraging third-party integrations, and extending across multiple departments
Lesson 10: Build a platform that enables your customers to collaborate with other industry stakeholders. This can create powerful network effects. You can also offer integration or App Platforms. I write about this in the past:
Bonus Lesson: Embedded fintech is a new frontier for vertical software companies. They can digitize B2B payment flows online and monetize them through subscription, enhanced ACH, faster payment methods, cross-border payments, lending or early payment discounts, or credit cards.
Thanks for reading and thanks to the folks @BessemerVP for the fantastic article.
One Biz Story:
Cloudbeds: vSaaS for Hotels
10 years ago, these guys founded a software business by scribbling an idea on the back of a napkin in Brazil.
That "idea" has evolved into a software empire, used by 20,000+ hotels across 157 countries.
Here’s the amazing story of the Cloudbeds:
Back in 2012, Richard Castle and Adam Harris were traveling in Brazil and discovered just how difficult it was to book local accommodation. The modern guest experience that we've come to expect simply wasn't available to independent property owners. They found WHITE SPACE.
The two envisioned a software platform that could give a smaller, independent hotelier the same level technology that was powering a Marriott or Hyatt Hotel. So they got to work.
I've written about wedge products in the past - simple tools that are BADLY needed and get you in the door. Cloud beds wedge? A booking tool for local hotel providers that aggregated various search engines. Local providers were TIRED of managing so many different 3rd parties.
From there, they expanded into the initial version of their Property Management Software. They also raised their Series A in 2013.
With a few hundred customers, Cloudbeds made one of their first BIG moves. They acquired channel manager MyAllocator, a software tool that made it easier to manage your property's inventory and hook it up to various channels (your website, online marketing, etc.)
Fast forward a few years to 2017 and Cloudbeds reached a massive milestone. They hit 10,000 customers. This fueled their first big institutional round into the company, led by PeakSpan.
Cloudbeds now included: Property Management Booking Engine Channel Manager The product expansion continued, and they launched Pricing/Revenue Intelligence in 2018, and their very own App Marketplace in 2019.
Right before COVID struck, in March of 2020, Cloudbeds secured their Series C, led by Viking Global Investors. Incredibly fortuitous timing. The capital gave the company the ammo to help the industry during a tough time.
Having been around for nearly a decade, Cloudbeds had built out a large suite of software products. The next obvious step? Payments. A massive unlock and revenue stream for vertical SaaS companies.
Embedded Fintech has really enabled vertical market software to expand ARR rapidly. Cloudbeds was no different.
As we all know, post-COVID hotels came ROARING back. Cloudbeds took advantage of that, raising a MASSIVE $150M round from Softbank and Mayoshi Son. I'm assuming the valuation was in Unicorn territory but just a guess :-)!
Cloudbeds is a case-study in Vertical SaaS.
They've successfully:
Started with a wedge that got them in the door.
Scaled from one product module to many.
Launched their own App Store.
Launched payments (this likely massively scaled revenue).
Raised $250M+ to date.
What's next for them? I don't know. My guess? More embedded tooling similar to payments. Perhaps insurance?
Cheers to Adam, Richard, and the CloudBeds team. It's been inspiring watching you guys over the last decade.
One ‘How To’:
Some Rough 50/50 Rules (Jason Lemkin)
