Empowering the growth mindset: Next gen people SaaS

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The employer-employee relationship is being reshaped and the next generation of HR software vendors are helping employers attract and retain the best talent

At long last, companies are waking up to the reality that the talent they employ is their most strategic, and ultimately differentiating, asset. However, in a somewhat ironic twist of fate, attracting and retaining talent is more difficult than ever before, driven by near decade-low unemployment rates, the much touted Covid-induced “Great Resignation”, and global competition for increasingly diverse and inclusive talent. Employers are also facing hybrid work as the new normal, as well as a generational shift to Millennials as the dominant employee base. 

The task for navigating these challenges is being laid at the feet of HR teams, whose responsibilities now span everything from driving Diversity, Equity, and Inclusion (DE&I) initiatives and improving organizational health and wellness to reducing employee attrition and navigating hybrid work / the return to the office. All of this in turn necessitates a much more strategic approach, and has escalated the importance of People teams to mission-critical as organizations recognize they need to do everything in their power to hire, nurture, and retain top-tier talent.

At the same time, People teams have historically relied on a legacy stack of outdated and inflexible software tools (e.g. ADP, SAP Successfactors, Oracle HCM, and Ceridian) that have acted primarily as systems of record rather than systems of engagement built for a hybrid work-environment and focused on employee user-experiences and organizational ROI. These tools are unable to drive employee engagement and lack the functionality required to enable People teams to operate effectively.

Enter Next Gen People SaaS, the new-age of HR software tools seeking to empower People teams looking to align People operations with overarching company strategy. 

These vendors are going after a massive market opportunity – Paychex, Workday, and ADP alone comprise $200Bn in market cap. That said, the market is not homogeneous, and the dynamics in each segment are nuanced. For instance, while the SMB market is largely greenfield (running many HR processes on paper and Excel), the enterprise market is rife with legacy solutions that are difficult to integrate with and thus organizations are left with tool sprawl, where a spaghetti-mix of 50+ different HR tools is not unusual. 

We at TCV have been lucky enough to partner with next gen HR leaders including LinkedIn, Grupa Pracuj (the largest job board in Poland), Hirevue (AI-driven talent assessment and video interview platform), Perceptyx (employee surveys and people analytics platform), OneSource Virtual (Business-Process-as-a-Service vendor for the Workday ecosystem) and more recently Darwinbox (cloud-native end-to-end HRIS platform for Enterprise), and Humu (enterprise-grade digital training platform). In addition, we have also had the opportunity to both collaborate with and learn from a deep bench of People-team leaders across our portfolio, including TCV Venture Partner Jessica Neal, the former Chief Talent Officer at Netflix. We continue to believe there are enormous opportunities ahead in HR and expect to see innovation arise from every corner of the globe. Here are three of the major themes we believe will shape the HR-tech landscape in the coming years.

#1: HR products built for employees

While we are now used to frictionless, user-friendly tech experiences everywhere in our personal lives, the software tools many of us use daily in the workplace are clunky and counter-intuitive. Next Gen People SaaS is changing this paradigm by putting employee experience at its heart and, in the process, turning systems of record into systems of engagement, driving ever-higher ROI, as well as enabling flexibility with how employees engage with employers.

Best-in-class UX is required for Next Gen People SaaS

Superior UX enables employees to self-serve to a much greater degree, alleviating the administrative burden on People teams. Geographic and vertical context also becomes relevant. For example, offering a truly mobile-native and mobile-optimized (note: not the same as just having an app) UX in emerging markets and frontline industries can be critical in driving access and engagement across the full employee base. This is a key factor that underpins the  strong momentum seen in companies like Darwinbox. Many new-age tools also monitor traditionally “B2C” KPIs (e.g. DAU/MAU, sessions per day), while also continuously A/B testing to drive better user engagement, thereby unlocking workforce insights that legacy tools with poor user uptake are simply unable to access. By utilizing Next Gen People SaaS, People teams can drive heightened employee engagement while also gaining meaningful insights in culture, sentiment, and employee performance.

Employing talent on its own terms

The days of inflexible, full-time, in-office employment are largely behind us. Companies have realized that, in the war to hire world-class talent, the ability to offer flexible employment (e.g. remote work from anywhere in the world, freelancing) can be a critical differentiator. That said, this creates enormous challenges for People teams, as running onboarding and compliant payroll and benefits across full-time and freelance employees in several countries is fraught with complexity. This has driven the rise of a host of new tools (e.g. employer of record, aggregated global payroll, end-to-end freelancer management tools) to simplify this process and alleviate companies of onerous compliance and administrative burdens. We believe these tools will further embed themselves into the core-HR stack of the hybrid workplace of the future.

#2: Talent is at the forefront of HR product innovation

The ongoing war for talent will dramatically reshape the HR tech-stack in the years ahead. Given the criticality of talent as a key differentiator, we expect to see accelerated innovation and the rise of best-in-breed point solutions (particularly for larger enterprises) at every stage of talent management process:

Sourcing

Professional networks, such as former TCV investment LinkedIn, have become staples of the HR toolkit. That said, there are further opportunities to enrich data from existing networks and build more advanced, automated searches powered by AI:  e.g. aligning with an employer’s diversity and inclusion goals, helping to automatically elevate talent at the right stage in their careers, prior candidate rediscovery, etc.

Screening and recruitment

We are seeing two major, and often simultaneous, themes reflecting the growing war for scarce talent – 1) a pivot towards building candidate-friendly recruitment experiences vs. being employer-centric (as much as employers are trying to better evaluate whether a candidate is a good fit for them, savvy candidates are doing the same with potential employers); 2) a pivot away from interview processes focused on subjective individual assessments towards more quantitative, standardized screening that collects dozens of data points along the candidate journey to reach better, less biased recruiting outcomes. 

Enablement

Retaining and nurturing talent have become highly strategic areas for employers, exacerbated by the generational shift towards a Millennial employee-base. We have seen the rise of increasingly sophisticated solutions for engaging and training talent, including a focus on individualizing content delivery. For instance, TCV portfolio company Humu helps teams instill and develop effective workplace habits through the use of behavioral nudges. At the core of Humu’s differentiation is the focus on delivering the right content, to the right person, at the right time.

Although the supply of world-class talent in every department is scarce, nowhere is the effect of the war for talent felt more acutely than in R&D. As ‘technology’ has shifted from being a standalone industry vertical to a horizontal foundation that nearly every industry depends upon, demand for engineering talent has never outweighed the supply more dramatically. Given that analysts continue to forecast a global technology talent shortage of nearly 5M workers by 2030[1], we anticipate this will be a defining trend of the 2020s and will continue giving rise to engineer-focused talent solutions.

While we expect the proliferation of talent-focused point solutions to continue, at the same time, we expect to see other segments of the HR stack begin to rebundle. Many mid-market and enterprise People teams have experienced massive tool proliferation over the last years (some using as many as 50+ different HR apps!) and tool sprawl is now becoming increasingly challenging to manage. As a result, we expect to see many core HR tools (e.g. time & attendance, benefits etc.) naturally aggregate thereby providing HR teams and employees with seamless, end-to-end integrated workflows.

#3: The specialization (and verticalization) of HR

In spite of the fact that both employer and employee needs vary significantly by size, industry, and geography, many vendors historically have offered a ‘one-size-fits-all’ HR proposition. As a result, there have been a number of historically overlooked and underappreciated market segments that represent massive greenfield opportunities when innovators focus on them explicitly. Going forward, as we have seen with broader vertical SaaS over the last decade, we expect to see the rise of verticalized HR vendors who focus on a specific customer segment and offer a much deeper, more tailored proposition than a generic, horizontal platform. In addition to this, we believe there are clear parallels with our theses around the office of the CFO and SaaS as a network whereby the verticalization of HR also gives rise to the opportunity for vendors to offer a bundled solution which in turn can drive TAM expansion, improved retention, better unit economics, and a more strategic relationship with customers. Two major expressions of this that we are focused on are 1) the rise of SMB-focused platforms and 2) tool-building for frontline workers.

Rise of SMB platforms

People teams in SMBs have historically been notoriously overstretched, understaffed (or even nonexistent!), and undertooled. More often than not, the “core People” platform is pen-and-paper or an Excel spreadsheet that is error-prone, time-consuming to update, and only acts as a very basic system of record. 

Increasingly, as SMBs are having to up their game and offer great employee experiences irrespective of resource constraints, we are seeing a new generation of arms dealers cater to this enormous yet enormously underserved market segment. Given the greater propensity for SMBs to purchase bundled solutions, we believe that vendors who can land with a mission-critical beachhead have an opportunity to expand their footprint and build a single-aggregated People suite for SMBs. 

We see two primary beachheads into the SMB today – the central people data repository (“HRIS”) and Payroll (mission critical from day one). Companies in such a position have a unique opportunity to build an ecosystem of integrations with best-in-breed tools (e.g. for performance, engagement, training and onboarding, interviewing, etc.), further embedding themselves as the epicenter of the new SMB People stack, and potentially over time branch out and cross-sell other People modules and even financial services (e.g. insurance, expense management, etc.). As outlined above, this drives a multitude of benefits (ARPU expansion, improved retention, deeper customer relationship, etc.). 

Given the sheer scale of the SMB base (e.g. SMBs typically represent ~50% of national GDPs[2]), the market opportunity for even national or regional champions is enormous.

Building for the frontline

Despite the fact that nearly 2 billion people currently work on the frontline and nearly every organization employs a combination of desk-based and frontline workers, HR tools have historically catered primarily to longer-tenured, desk-based employees. That said, this is changing as organizations are increasingly recognizing the importance of engaging their frontline workforce, in no small part catalyzed by the recognition of the critical role frontline workers played in helping navigate the Covid-19 pandemic.

The requirements of frontline employees can differ significantly from those of desk-based workers. As a starting point, many frontline workers lack access to a desktop (so being truly mobile-optimized and deliverable to a variety of endpoints is mission critical); they may not have a company email address (which has implications for security as well as means of communication); and they often have more flexible, shift-based working hours (which has implications for time/attendance/payroll). In addition, hiring, training, and onboarding may need to happen in a matter of hours, versus days or weeks for desk-based employees.

We are now seeing the rise of HR tools optimized to service the unique requirements of this historically underserved segment of the workforce. Going forward, mirroring the rise of vertical SaaS in the past several years, we expect to see continued specialization of HR platforms by worker type, which in turn is a stepping stone towards industry verticalization. As with the SMB opportunity, this could in turn drive opportunities to offer bundled HR solutions such as employee learning, time and attendance, and payroll.

What excites us

While great progress has been made modernizing the HR technology stack in recent years, the unprecedented challenges HR teams face when looking to hire and retain world-class talent are more pertinent today than ever before. We believe this will continue to create massive opportunities for problem-solving technology vendors across the HR stack, especially into historically underserved market segments. We at TCV are incredibly excited about what the future holds for HR tech and look forward to backing and supporting visionary teams building the seminal businesses of tomorrow across every corner of the globe.

[1] Future of Work: The Global Talent Crunch, Korn Ferry, 2018

[2] 2020 Annual Report on European SMEs, European Commission; & “Measuring the Small Business Economy,” Bureau of Economic Analysis, US Department of Commerce, 2020

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The views and opinions expressed are those of the speakers and do not necessarily reflect those of TCMI, Inc. or its affiliates (“TCV”). TCV has not verified the accuracy of any statements by the speakers and disclaims any responsibility therefor. This blog post is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by TCV or any of the securities of any company discussed. The TCV portfolio companies identified, if any, are not necessarily representative of all TCV investments, and no assumption should be made that the investments identified were or will be profitable. For a complete list of TCV investments, please visit www.tcv.com/all-companies/. For additional important disclaimers regarding this blog post, please see “Informational Purposes Only” in the Terms of Use for TCV’s website, available at http://www.tcv.com/terms-of-use/

Full Potential SaaS

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We believe that SaaS vendors, particularly vertical and SMB, that provide a “system of record” are seeing massive increases in TAM, competitive moats, and economic opportunity. By extending and leveraging their workflow, data, and account ownership, SaaS vendors are delighting end customers while creating platform and networks.

With opportunity comes competition, both from within one’s category (e.g. application area) or from adjacent categories within one’s vertical (e.g. industry). As boards and management teams wake up to the opportunity, they realize that the race is on to capture the full potential of their vertical.

This post is a framework to help leaders of SaaS companies think through the strategic choices and hopefully increase the odds of reaching their full potential.Strategy is implemented by focused alignment of execution, talent, M&A, organizational structure, functional excellence, and financial and governance/board frameworks.

Finally, it’s important to acknowledge that very few companies have reached “full potential,” and this framework is inherently aspirational. However, “most entrepreneurs aren’t building a house, they are putting bricks in the foundation of a skyscraper” (Naval Ravikant). Aspiration is important, so hopefully this is an articulation of what is possible.

Lead the Category

This phase of the SaaS strategy is well understood. A SaaS company aspires to:

  1. build a great product (and service)
  2. over time, build an efficient and repeatable go-to-market model (marketing -> sales -> onboarding)
  3. and then “add capital” and execution to press its advantage against sluggish incumbents or poorly capitalized competitors

This is the playbook that Omniture and our portfolio company ExactTarget pioneered a decade ago. Despite massive capital inflows into SaaS and deteriorating economics, this model generally still works today.

On the product side, scale in data + AI can create increasing differentiation. For example, when you start to have more data than anyone else, you can flip your product from being reactive to proactive — having the product tell users where to look and how to optimize the system. Both Xero and Shopify have done this well.

Five other things to think about in this early phase that don’t get enough attention:

  • Scalable onboarding: Onboarding friction can be unaccounted drivers of CAC and churn. A great onboarding process builds the trust and confidence that are the foundations of virality/word of mouth, future cross- as well as third party channel strategies. Carefully measure funnel metrics and be attentive to new customer NPS. Automate early as “throwing bodies at it” can create process debt that will be difficult to unwind later.
  • Expansion: Expansion drives net revenue retention and most of the strategies we are about to discuss. With all sales processes, it’s a lot easier to learn, iterate, and optimize with fewer bodies and less complexity.
  • UI and Architecture: Like onboarding, these can be long-lead time fixes that compound as your business scales and gets more complex. A specific call out is to plan for an API strategy. It can facilitate future partner strategies and increase the value and stickiness of your offering.
  • Pricing structure/strategy: You will constantly revisit tactics, but it’s important to have some sense of how your pricing structure might change over time.
  • Foundations for global, including a work culture that can support distributed executives and operations, and good product feedback loops that incorporate non-home market needs.

Hyperscale Locations, Feed the Beast

A lot of ink has been spilled on forward investing in sales and marketing, and arguably it’s part of a/the “lead the category” strategy. But, it’s worth a call out as it’s important you don’t take your eye off the ball too early. So much of winning and future monetization is getting location market share. When the wind is at your back, go get it done! Market structures have a nasty habit of shifting, future secular tailwinds may abate, or competitors may leapfrog your product or your go-to-market model. If your churn and sales economics are sound, keep “feeding the beast!”

One particularly powerful unlock is Channel. There are verticals and categories, where influencers in a channel are kingmakers and can help you engage with segments that are otherwise difficult or uneconomical to reach.  Furthermore, Channel partners’ engagement and contributions can enrich your products and increase overall customer value. A great example is in tax software, where Xero’s wooing of accountants proved to be an effective source of customers and a formidable competitive moat (thereby disrupting the incumbent provider). Xero went as far as offering free practice management tools to help accountants run and grow their business on Xero.

Win the Control Points: Own Your Vertical

This is where management teams are faced with a paradox of choice: “Where should we go next? How should we spend the next incremental dollar? On increasing ARPU, acquiring incremental locations, or expanding into new verticals, geos or segments?” At this juncture, it is our belief that you should focus on winning the control points. In vertical SaaS, there are typically one or two control points, “systems of record.” Usually one control point in the front office (e.g. Point of Sale, CRM, e-commerce) – “that drives sales, that grows the business, that serves as the cash register.” And one control point in the back office (e.g. general ledger) – “where everything else reconciles to.” Hopefully, you provide one of the systems of record, so go build or acquire the other system(s) of record and secure the high ground! 

Pragmatically, a system of record is the last software package a customer will “turn off” in a tough economic time.

We also like to think about the concept of “gravity”:

  • Workflow gravity – the system that all other systems integrate to – it’s where the most users spend the most time. Not all workflows deliver the same value; in my experience the system of record workflow tends to deliver the most value.
  • Data gravity – the system that creates and holds the most critical information and is the hardest to migrate. That data can be critical to a client for a wide range of applications, from understanding their customers (e.g. CRM) to managing risk (e.g. compliance). Data also can be critical in two-level situations, such as loan underwriting (e.g. a bank underwriting a merchant’s risk via POS data) or supplier information management (e.g. a client managing risk by validating supplier capabilities and quality). Data depth and scope also create gravity where AI technologies can be highly productive.
  • Account gravity – the user/sponsor of the system is the highest-ranking individual in the customer organization; it’s the system that requires the biggest financial outlay, etc.

Winning the other system of record is not easy. By definition, a system of record is hard to displace and unless the market is greenfield pen and paper, competition can be challenging. You may be able to do it organically with product innovation, but M&A can be the more desirable path if “integration debt” is manageable. If M&A is not possible, a slow winnowing of your competitor may be the only approach available to you.

If you own multiple systems of record in a vertical, the benefits are enormous:

  • Customer delight: automation from integrated workflows and potentially unified data and data models allow efficiencies and offerings unavailable before
  • “SaaS as a Platform and SaaS as Network” opportunities
  • Stronger account ownership to capture incremental spend and drive more efficient growth
  • A new level of durability and stickiness

A good example is Veeva. The company started in 2007 with the launch of a CRM and a sales automation platform for pharma sales reps (e.g. record their activity, keep track of the doctors they meet with or drop off samples for, etc.). After becoming the dominant player in that category, Veeva saw an opportunity to move backward into research and development for their life science customers (developing new drugs, conducting clinical trials and bringing those drugs to market). In 2011 Veeva launched Vault, a suite of applications that first centered on the core content management needs for clinical trials, regulatory submissions, and quality documentation. The company then expanded to include a series of core data applications that help manage clinical trials, quality processes, safety processes, etc. Veeva is expected to finish 2019 with $1.1B in revenue (26% YoY Growth) and 37% EBIT margins. Vault represented 51% of total revenue and grew 38% YoY. Analysts also estimate Vault meaningfully expanded Veeva’s addressable market. 

Another recent example might be front office player Shopify’s $450M acquisition of 6 River Systems to move into back office fulfillment and warehouse management. Some financial analysts estimate that merchants spend up to ~10-15% of their GMV on logistics which could potentially provide multiples of Shopify’s current take rate.

Expand Headroom

With category leadership comes high market share and potentially high saturation. Long-term growth is driven by location growth, as there’s generally a finite share of wallet you can access. It’s important to invest in the S-curves of geos, segments, and adjacent verticals that can unlock new location TAM. This can take a couple of tries before you’re successful, so start this during your growth phase when there’s less pressure on maximizing profitability.

Extend Through the Value Chain

This stage of growth can be transformative. By leveraging the strengths of your core customers, you can expand into a new market with a new set of customers. Typical patterns include moving from front office software to extend to your customer’s customers, or from back office software and extending to suppliers. These can be riskier bets, but success can pay out big here:

  • Increased TAM
  • Workflow that spans multiple parties and creates increased customer value and vendor stickiness
  • Two-level network effects

Supplier

Extension seems to work best by “following the money” and leveraging purchasing power. TCV portfolio company Ariba articulated the “golden rule”— He with the gold rules! By using their leadership in procurement software at large corporate buyers, Ariba extended to build a robust suppliers software business for merchants that serviced those corporate buyers. More recently, Avetta has followed a similar path in the supplier information space by building a strong two-level network effect. We believe corporate clients want to be on Avetta because it has the largest network of suppliers, and suppliers want to be on Avetta because it has the most corporate clients. Avetta’s advantage gets stronger as it scales. Moreover, Avetta has an opportunity to help suppliers do more than just manage compliance information. As a result, Avetta sees growth in helping suppliers grow and operate their business.  

CCC is on the third generation of this approach. They started by serving large auto insurance carriers and then extended into autobody repair shops that serve the carriers. CCC is now in the process of expanding to parts suppliers. By getting all the key constituents on its software platform, CCC is able to leverage AI and automation to massively reduce friction and provide a great customer experience across all steps of the auto insurance process.

Employee

The employee opportunity is similar to the supplier opportunity in terms of “following the money.” Companies can use integrated payroll or time & attendance offerings to establish a relationship with the employee. Employees are also consumers who represent significant B2C opportunities such as consumer lending, insurance, etc. There are big dollars here, but perhaps less opportunity to build significant network effects.

Consumer

The consumer/demand opportunity is the white whale. We believe that SaaS companies tend to capture ~ 50-100bps of GMV for software subscription, whereas online demand channels can take 15-20% of GMV in categories such as hotels and restaurants. In addition to the massive revenue opportunity, Consumer also represents a strategic flank worth monitoring carefully. Online marketplaces have large competing salesforces that engage with your merchant customers and have strategic interests encroach on the software layer to try to control supply.  Booking.com bought Buuteeq and Hotel Ninjas to vertically integrate into hotel supply. Uber is rapidly expanding its driver offering to over-draft protection, a debit card, and likely lending over time to manage driver churn. This is another example of increasing marketplace + SaaS convergence.

That said, success stories of extending SaaS to Consumer are rare. Few SaaS companies have consumer product DNA, the funds, or the skills to build a consumer brand. While a SaaS provider can have a high market share of merchants in a vertical, it’s rare that it has the supply ubiquity that an online marketplace would require. Eventbrite is one of the few companies that has landed as a software tool for creators, built liquidity, and created a marketplace.

Some derivative Consumer monetization models include:

  • Consumer pay: FareHarbor approaches tour and activity operators with a free to merchant, consumer pay model: “We’ll build your website and booking engine for free, with no work on your part; you just pay us for payment processing and the customer will pay us a booking fee.”  
  • Channel management: SiteMinder offers channel management to help hotels manage existing channels in real time. SiteMinder has extended that value proposition to “Demand Plus,” an offering that helps hotels easily expand into new channels to scale demand.
  • Existing customers: While 15-20% marketplace take rates may be sensible for new customer acquisition/discovery, companies such as Olo are looking to move existing customers to lower cost channels through their dispatch offering while taking a much lower percentage of GMV.
  • Customer Co-opt: By seeing consumer data pass through their systems, some SaaS vendors are building consumer profile databases that they might monetize over time. In the recruiting market, we’ve seen players leverage job distribution tools to build a candidate database. Shopify similarly has built a large shopper profile database across all their merchants. While Shopify hasn’t monetized directly, the uplift in conversion rate is likely significant. This model is the most capital efficient but can create conflicts with the vendor’s core merchant customers.

The biggest benefit of extending through the value chain is that it gives you a beachhead and a right to win in a new vertical to start the “full potential” growth cycle again. As you do this, it’s important to reconsider your end market and focus. When Ariba transitioned from procurement software to supply network, they started to represent a front office “system of record” for their suppliers. In doing so, Ariba was both a large enterprise “procurement company” and an SMB “supplier enablement company.” The question was: “Which priority should dominate?” When extension leads to conflicts, there are no easy answers. As such, it is important to acknowledge that this growth strategy is ever-evolving.

Deepen Functionality/ Monetization

Deepen Functionality/Monetization doesn’t literally mean waiting to pursue this step until all other strategies have been completed. It’s more a reflection of priorities. Acquire as many customers as you can, win the control points, and you will likely have many of these profit pools locked up to pursue in the future.

In winning the key control points, for the same reason a single system of record has a lot of “gravity,” you now have an even stronger opportunity to turn your product into a channel. This enables entry into adjacencies with data, workflow, and account ownership advantages for you as well as for the end customer. The most extreme example is the “platform/ecosystem” play, where you monetize third party vendors that want access to the channel your product has become (e.g. Salesforce, Intuit, Shopify). However, most commonly a SaaS vendor will pursue additional monetization with in-house or white-labeled products.

Another key consideration in prioritizing adjacent function/monetization is consistency with your core go-to-market channel and proximity to key decision makers. Go-to-market will determine the financial leverage of the cross-sell and often the overall success. The core advantage of SMB software here is that often the decision-making is relatively consistent and concentrated across software purchases.

Every vertical is different, but there are some common functionality/monetization patterns emerging. Each of these patterns deserves its own write-up, but for the sake of brevity here are some highlights:

  • “Integrated payments -> integrated banking”: The attachment of payments to SaaS has been well covered. That trend is expanding to the attachment of integrated banking. We had an opportunity to interview two of the smartest people in the business, Tim Barash and Jackie Reses. Square is out front here with broad based merchant and consumer plays. To understand the magnitude of the opportunity, Square’s Subscription & Services (most of which are financial services) are expected to reach $1.3B in 2020. This represents 23% of 2020 total GAAP revenue and 47% of 2020 Total Gross Profit (incremental gross profit is ~90%). Brex is earlier in its progression, but we’re excited to see how the company leverages its initial corporate card and expense management offerings to extend into broader financial services.
  •  “Follow the workflow”: At times SaaS companies have actually observed customers at work or mapped out the physical sites to understand all the areas their workflow touches as areas of expansion.
  • “TAM shark”: HashiCorp CEO David McJannet describes expansion as “TAM Shark,” constantly circling the biggest, fastest growing (most change/opportunity) markets. He requires product managers to report on market size and growth of all adjacent categories to make sure they are focused on the biggest opportunities. Generally, over a 2-3 year period companies have one, maybe two opportunities to build distinct add-on businesses. Make sure you’re picking the biggest markets and therefore the biggest payoffs.

Summary

If the typical SaaS playbook is “Lead the Category” and “Hyperscale Locations,” clearly the full potential for vertical SaaS players is dramatically larger than conventional SaaS wisdom would suggest. We’re excited to work with — and hopefully invest in —the frontier players as they explore the “Full Potential of SaaS.”  

If you found this useful, let us know, and we’ll continue to publish and explore the topic. We look forward to hearing your adds, edits, and challenges.

Caveats

  • There’s a tension between aggregating as big a profit pool as quickly as possible vs. “winning the market.”
  • This framework is characterized as a sequential strategy. In reality, most companies are pursuing multiple steps concurrently, and the sequence is more a reflection of prioritization.
  • Time horizon: this approach is a long-term strategy to winning, which may often be at odds with short-term maximization of valuation multiple and financial performance.
  • This approach is informed by a U.S./western/mature approach. In emerging/more greenfield markets, less focus and value chain expansion earlier in company development may make sense.

The views and opinions expressed are those of the authors and do not necessarily reflect those of TCMI, Inc. or its affiliates (“TCV”). TCV has not verified the accuracy of any statements by the authors and disclaims any responsibility therefor. This blog post is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by TCV or any of the securities of any company discussed. The TCV portfolio companies identified above are not necessarily representative of all TCV investments, and no assumption should be made that the investments identified were or will be profitable. For a complete list of TCV investments, please visit www.tcv.com/all-companies/. For additional important disclaimers regarding this document, please see “Informational Purposes Only” in the Terms of Use for TCV’s website, available at http://www.tcv.com/terms-of-use/.

[1] See TCV’s SMB and Vertical SaaS investments at the end of the document.