Tidemark’s Vertical SaaS Evolution

July 2024

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Tidemark was founded on a simple premise: if we build an incredible community around ourselves and do right by them, we’ll earn the right to invest in three to five companies in this community each year and (hopefully) create one hell of an investment firm along the way. 

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Vertical SaaS was an obvious place to start since Vertical SaaS companies have a superlative, multi-product business model. Beyond that, we love these companies because they’re life-changing for mainstream entrepreneurs. By digitizing and automating routine tasks, they allow founders on Main Street to focus on the things they do best. We think a world where it's easier to build a company is a better world, and Vertical SaaS makes that happen.

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One of the first steps in our vision for Tidemark was the Vertical SaaS Knowledge Project (VSKP). What started as Saturday morning journaling several years ago has become a framework on Vertical SaaS that’s traveled globally. I knew that if I did my job crystallizing patterns, founders would have the language and frameworks to articulate the big dreams they have for their companies. Beyond simple tactics, the VSKP was meant to show founders how spectacular their companies could be, pushing the boundaries of what was considered possible.  

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The project has far exceeded my expectations. Our team has met with companies implementing the strategies on every continent, and the VSKP has led to collaborations with like-minded investors in Europe, LATAM, and ANZ. Thanks to all the feedback and interest offered by readers, this project has transformed from my SaaS scribbles into a living, breathing community of operators. 

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To put those insights into action, we assembled non-competitive groups of companies for our VSaaS Collective initiative to create communities of collective knowledge and earned wisdom. To make these working groups even more powerful, we’ve invested in proprietary data (like our 2024 Vertical & SMB SaaS Benchmark Report, which we’ll link when it's live!) and resources to solve critical issues for these companies and advance the collective. A rising tide(mark) will lift all boats. 

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Framework → Action

With this volume of energy and effort, I discovered (unsurprisingly) that some initial ideas were wrong. 

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In particular, the “layer cake” strategy is a concept that investors and operators have oversimplified. The idea was that building a Vertical SaaS company was basically a Betty Crocker recipe: own your control point, add water (payments), and suddenly, 50-100 bps of net revenue across all your GMV appears. Then, spread the frosting (payroll), add the sprinkles (lending), and you have your layer cake/multi-billion dollar outcome. 

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This both overstates and understates the Vertical SaaS opportunity.

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The layer cake is a lot harder to pull off than you think. Few companies can get away with mandated payments, so you have to convert your customers to your embedded payments offering. Even some large, established Vertical SaaS Vendors (VSVs) a decade into the journey still only have about ~30% payment attach rates. As far as payroll or lending, these have become even more complex than payments. 

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Simultaneously, the layer cake understates the opportunity. Rather than creating layers of revenue-building products on top of control points, a VSV can build concentric circles with multiple stakeholders. You create control points and subsequent multi-product layer cakes to sell to your merchant’s customers, the merchant’s employees, and the merchant’s suppliers—extending through the value chain. Adding these customers dramatically increases the opportunity for Vertical SaaS companies. The team and I are most excited about this frontier and its opportunity. 

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Additionally, and perhaps most importantly, after three-plus years of research and 16+ published case studies, I’ve found that the dispersion between potential and outcomes is much greater than I thought, and the opportunity is far larger. 

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Thus, the VSKP is coming back bigger and better than ever. Tidemark is doubling down on the category with the following: 

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• VSaaS Collective: Monthly deep-dive sessions for a cohort of CEOs and functional execs to highlight industry best practices and build a trusted community among non-competitive peer operators led by the leaders of iconic Vertical SaaS companies. This is the next step in our promise to create collective knowledge. 
• VSaaS Collective Live: We're launching the first Vertical SaaS industry event led by practitioners for practitioners. CEOs of VSaaS companies will gather annually for a day of in-person, in-depth discussions and networking led by legendary VSaaS operators. More to come on this soon! 
• 2024 Vertical & SMB SaaS Benchmark Report: Many startups have requested to know how their performance stacks up relative to their VSV peers. We’re solving this issue by building the most comprehensive Vertical and SMB SaaS dataset out there. We’ll update this post once the report is live! 
• Dedicated staff: We’re very excited that Michael Tan joined us earlier this year as an Investor and Director of Ecosystem. Michael’s experience as a Vertical SaaS operator at GlossGenius and Check and his financial experience as an investment banker at Goldman Sachs give him the unique background necessary for this role. We’re excited for him to take the VSKP to the next level. You can reach him at michael@tidemarkcap.com. 
• An expanded and improved VSKP: We’ve rewritten the VSKP to be more accurate and useful for founders. In the fall, we’ll publish our refreshed chapters (particularly around the Extend category).

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You can subscribe at the bottom of this post to receive emails updating you on the latest in the VSKP and for access to our Vertical & SMB SaaS Benchmark Report when it is ready. 

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We look forward to continuing to serve the VSaaS community in 2024 and beyond! 

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Onwards,

Dave