In November, we at Bowery Capital released our Opportunities in Vertical Software v2.0 report. The report included our point of view on various industries, the positives and concerns, the industry leaders, software spend metrics, funding activity, investors, and key trends. For 10 weeks post the release we delivered 3 vertical specific deep dives per week covering Vertical Software Market Themes, players & investors, Market History and dynamics, and an industry expert interview. As a conclusion to our Vertical Software series we release our Vertical Software Learnings, Insights, & Takeaways to highlight some of the most interesting insights that came to light through the vertical deep dives and release two new infographics covering the 10 largest public vertical software companies & the 10 largest vertical software M&A transactions in 2016.
Vertical Software Learnings, Insights, & Takeaways: History & Market Dynamics:
Rapid technological innovation allowed the 1970’s & 1980’s to be a pivotal time across several vertical software domains.
(1) Tools used for planning, accounting, and collaboration for the Construction industry began to take hold in the 1980’s and grew as the broader software market expanded and improved in kind.
(2) Application software began to make an entrance into the insurance market in the 1970’s. Policy Management Systems Corporation (PMSC), started in 1974, was the first large scale provider of software and information services in the industry. Vertafore, one of the largest insurance software companies in the world today, was started shortly after PMSC in 1976.
(3) Restaurant order processing technology saw increased innovation when the first POS graphical interface was release in the 1980’s by the founders of Viewtouch. This new advancement in order processing technology allowed for streamlined order fulfillment and payment processing, changing the way the industry operated.
(4) Legal software began to make a market entry in the 1970’s as documentation software companies began to enter the space. In 1973 LexisNexis introduced their “UBIQ” terminal, which allowed lawyers to search legal documents online. Shortly thereafter in 1976, Wang Laboratories, founded by Dr. An Wang and Dr. G. Y. Chu, introduced their word processing machine — the Wang 1200 WPS, which was considered by many a technological breakthrough.
(5) Companies began to aggressively adopt mainframe computers and stemming from this adoption, manufacturers were able to move their financial accounting and inventory management functions from paper to software based approaches. The major ERP players Lawson, Baan, and SAP were founded in the 1970’s.
(6) In the 1980’s GPS came to fruition and for the first time farmers were able to leverage the new technology to spatially determine field conditions to be able to make analytically driven farming decisions.
Vertical Software Learnings, Insights, & Takeaways: Market Themes, Players, & Investors:
(1) Data proliferation is a major driver for growth amongst all vertical software segments. With over 90% of the world’s data having been created within the last 10 years, companies have more information than ever before to drive decision making processes. Across all industries, companies are able to obtain data regarding all factors of consideration to their business. Processing and extracting insight from these data sets has created a multibillion dollar opportunity for software companies. This has added an exceptionally large opportunity for industry focused software players who are able to create tools and platforms that meet the unique needs of their customer base.
(2) Data analytic maturity varies by vertical due to varying levels of adoption and data availability. Industries such as insurance, logistics, & healthcare have generated high levels of data for several years which in turn allowed for quick adoption of data analytics to leverage this data for business management. Other industries have highly unstructured data or no historical data at all, and so the journey begins with establishing means of data creation and collection. One example of this is the agriculture industry, agriculture professionals are beginning to adopt sensor technology on farming equipment to generate data on soil and crop health which will enable greater insight over time as more and more data is aggregated.
(3) Vertical Software Market Players are not concentrated in “Silicon Valley.” Founders of vertical software companies often have years of domain expertise within their specific industry of focus. Through this deep expertise, they are able to identify areas of weakness and build a solution around them. Furthermore, their deep understanding of the market enables them to develop strong business models that will provide rapid market penetration. Given the high level of experience within an industry of the average vertical software market founder, vertical software companies tend to be located near the “industry capital” or close to the place the founder calls home, rather than the Bay Area.
Vertical Software Learnings, Insights, & Takeaways: Industry Expert Interviews:
(1) Vertical software is hot but still has lots of runway for growth – All industry experts were in consensus that there is a great need for industry specific software solutions to meet each industries specific demand. Often times processes are managed through multiple horizontal software providers with varying levels of integration. As companies see the value of transition to a vertical solution, the market will continue to grow at a rapid pace.
(2) Data sophistication is key to the success of vertical market software players. With the proliferation of data availability, the ability to provide a seamless & precise method to generate insights and drive decisions at varying levels of the organization will be the key differentiator for software providers. Given the unique needs and processes within different industries, this provides vertical focused software players with a unique advantage.
(3) Vertical Software should not be bought as a “point solution” – The main advantage of vertical software solutions is the ability to manage several processes and functions within one environment. Software buyers need to assess the broader needs of the organization to ensure that the solutions they purchase allow for seamless data flow across the organization as a whole.
Ten Largest Public Vertical Software Companies by MarketCap
Ten Largest Vertical Software Acquisitions in 2016
Thanks for reading our Vertical Software Learnings, Insights, & Takeaways. Please be sure to check out the full Opportunities in Vertical Software v2.0 report as well as our weekly Vertical Software Market deep dive reports for further insight.
Weekly Vertical Deep Dives: