Michael Brown of Bowery Capital and Kelli Fontaine of Cendana Capital discuss trends and themes using Cendana Capital manager data.
Since 2016, we at Bowery Capital have spent a fair amount of time focused on the impact of business software on a variety of verticals. We chose 10 verticals for our inaugural piece, titled Opportunities In Vertical Software and went deep into understanding what it takes to build a multi-billion dollar software business in a single end market. Companies like Veeva Systems in healthcare, Guidewire in insurance, and Dealertrak in automotive, have paved the way for an entire ecosystem of emerging companies. We’ve invested heavily around this thesis too, with companies like Transfix and OnCue (Auto, Transport, & Logistics), Fero Labs and Alchemy (Manufacturing), and Expedi (Oil & Gas) in our portfolio. We updated our initial 2016 v1.0 piece with a 2017 v2.0. As we enter the new year, we release a v3.0 of Opportunities In Vertical Software and highlight below ten of the most interesting facts closing out 2018 as it relates to opportunities in vertical software.
1. A Vertically-Focused Marketplace Breaks Into The Global Top 10 Unicorn List. Ranking #9 on the CB Insights’ unicorn list and valued at $18.5B, is Lufax (lu.com), a Shanghai based financial asset exchange focused on P2P lending. The firm sources clients primarily across banks (lenders) and insurance companies, as it looks to enhance its relevance in the broader financial services sector. This represents the first vertical marketplace we know of that has broken into the top 10 and we expect more to join the list in coming years.
2. Vertical SaaS Continues To Expand Into The Unicorn Ranks. Topping the list is Outcome Health, an integrated software + hardware platform that services outpatient healthcare facilities. After recovering from legal troubles and a management shakeup, the firm retained a $5.0B valuation. Notably, these integrated platforms are becoming increasingly important in verticals where customers want consolidation and easy-to-use platforms. Another example is Toast, which services restaurants and is valued at $1.4B. Broadly, vertical software continues to expand into new sectors with unicorns such as Convoy (supply-chain), Momenta (automotive), Pony.AI (automotive), Procore (construction), Essence Group Holdings (health insurance), and SMS Assist (real-estate).
3. Gender Diversity Is Still Lacking Even In Vertical Markets. According to Pitchbook, as of the end of 2018 there were only 16 female founders at the helm of a unicorn startup. Our research shows that vertical software is no exception. Notable female founders and CEO’s in vertical software include Judy Faulkner (Epic Systems) and Tracy Young (PlanGrid which was acquired by Autodesk). While there have been a fair number of women founding companies in vertical markets over the past few years, we hope to see a better representation in the years ahead as it relates to opportunities in vertical software.
4. The Healthcare Vertical Saw The Biggest Outcomes Since Our Last Report. As a sign of continued consolidation in the sector, Athenahealth recently sold for $5.7B to Veritas Capital and Evergreen Coast Capital. The business plans to integrate with a former GE healthcare company. This is another example of a healthcare software platform integrating into a legacy firm, highlighting the push for digital recordkeeping and proficiency across the sector. The transaction mirrors a health tech M&A deal from earlier in the year that featured Roche’s $1.9B acquisition of Flatiron Health.
5. Bigger Funds = Bigger Vertical Fundraises. The average seed-investment through 2018 was $2.0M which is ~ 4x the $550K average in 2013. Unsurprisingly, we’re seeing this trend in vertical software with a number of companies making a splash in historically quiet industries such as agriculture (Farmer’s Business Networks’ $110M Series-D) and legal (Atrium LTS’ $65M Series-B). Nevertheless, later-stage firms continue to take the cake with the largest vertical software fundraise since our last report led by Compass’ $500M Series-E.
6. The Cannabis Vertical Continues To Show Triple-Digit Funding Growth. 2018 was a record breaking year. The number of funding deals has boomed from 11 (2013) to 300+ (2018). Similarly, overall funding has grown from $15M (2013) to $2.2B (2018) ~ a CAGR of 171%. Leading the trend are cannabis-specific investors such as Poseidon Asset Management, The Arcview Group, and Canopy Boulder. As a result, we have seen several cannabis technology firms successfully impact the entire legal marijuana value-chain, from R&D (Steep Hill Labs), to CRM (Leaflink), to POS management & regulatory compliance (Flowhub).
7. Construction Tech – If You Can’t Beat Them, Buy Them. Autodesk just announced its $875M purchase of construction workflow management software, PlanGrid. Since our last report, other notable transactions in construction tech included Oracle’s $1.2B purchase of Aconex and Trimble’s $1.2B purchase of Viewpoint. These transactions highlight how legacy firms continue to purchase innovation in a $13 trillion global construction industry that is often plagued by fragmentation, inefficiencies, and low productivity gains.
8. Despite Strong Funding & Consolidation Trends, No Vertical IPO Activity. Over the past two years and since our last report, there have been 18 software IPOs, however, none of the companies that went public were vertical in scope. The most recent vertical software companies to go public were in 2015 – Instructure (Education) and Mindbody (Health & Wellness). Both currently have a market capitalization of over $1B. While we don’t think this lack of vertical IPOs will be a trend going forward given the pipeline, it is an interesting trend relative to the success of the horizontal players.
9. Vertical SaaS Pipeline: A New Wave Of Potential Unicorns. We continue to see more vertical specialization with several sectors seeing up and coming unicorns. In the sports sector, there is Hudl valued at $460M. In manufacturing there is Plex Systems valued at $485M. In the consumer health sector there is Welltok valued at $625M. We highlight the three above but there are many more. We expect to see more examples as the next wave of vertical software unicorns shake up industries that have been digitally clumsy or laggard.
10. A Vertical Ag-Marketplace Takes The Crown For Fastest Scaling Vertical Company. Meicai just this past month raised an estimated $600 – 800M dollars from Tiger Global Management and Hillhouse Capital, and is now valued at $7.0B. Earlier this year, the company had raised $450M and was valued at a $2.8B post-money valuation. The platform connects vegetable farmers with restaurants and investors are willing to bet heavily in digital marketplaces that service the rapidly growing middle-class in China, as indicated by the company’s surge in valuation and funding.
We continue to be excited by the enterprise software movement and its impact on opportunities in vertical software. Some of these companies are administering enormous positive change while completely reinventing the way businesses operate. We expect the market to continue its rapid growth, further augmented by record breaking funding volumes, widespread consumer adoption, and emerging supplementary tech – AI, voice, wearables, to name a few. We remain positively encouraged by these trends and will continue to monitor the enterprise software ecosystem in the coming years. Please be sure to check out the full Opportunities In Vertical Software v3.0 report.
If you liked “Vertical Software Maturing Within The B2B Landscape” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog. Special thanks to Sri Bhamidipati for his contributions to this research and product.
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