Embedded Finance & Vertical SaaS

7 min readAug 14, 2020

Howard Lindzon had Bill Libby of Upper90 on a recent podcast where they discussed the merits of “Delaying the A round” of venture, through the use of structured finance. The Upper90 team provides $2-$10mn credit facilities with the ability to scale to $25-$50mn+ for Seed to Series B companies as a flexible alternative to equity. They make investments across FinTech, Supply Chain Finance, eCommerce / Brick & Mortar 2.0, and Digital Content. Bill talked about the desire to “productize” what they do and partner with Vertical SaaS companies to deliver lending as a service to vendors / clients.

This is something we’ve been thinking about quite a bit as it pertains to the evolving world of SaaS and the inevitable convergence of Vertical SaaS with Embedded Finance.

SaaS Industry

The Ark Invest team published a great piece entitled Software As-a-Service: Could 2020–2030 be the Golden Age? In it they note that in 2019 SaaS companies generated ~$100 billion in revenue and accounted for ~25% of the enterprise software market. They expect SaaS revenue to grow 21% at a CAGR until 2030, reaching $780 billion or 81% of the enterprise software market.

They highlight a number of characteristics that have evolved over the last five years leading to the exponential growth in SaaS:

· The decentralization of IT purchasing

· New platforms that have attracted not only companies but also individual departments, expanding the total available market (TAM)

· The emergence of higher margin self-service and viral sales models,

· The incorporation of artificial intelligence (AI) that differentiates vendor offerings, and

· Accelerated investments in remote work software, again in response to the coronavirus crisis.

Just as we’ve seen an evolution in how software is distributed (on-prem + licensing vs. subscription SaaS) we’re also seeing an evolution in how it is sold. SaaS companies sold their first wave of products like they did traditional enterprise software. With large sales teams, they often invested a significant percent of revenues to acquire customers in a top down sales strategy targeting CIO’s / IT departments.

This next generation of SaaS companies took a product-led bottom up approach; which proved to be a more organic and cost-effective customer acquisition strategy. They end up targeting developers instead of CIOs or IT departments.

The Ark team illustrates the greater SaaS efficiency for those “viral SaaS” companies vs. the “classic SaaS” companies. They note by converting customers to sales reps, viral SaaS companies reduce CAC significantly and improve payback period.

Source: ARK Invest

This greater sales efficiency helps to reduce CAC, and in turn create greater sales efficiencies. Now that there have been quite a number of success stories within this go-to-market strategy (e.g., TWLO, WORK, ZM) how can you look to concurrently increase LTV and revenue within these similar models?

Vertical SaaS

Vertical SaaS solutions are those that focus on a single industry. While the features are analogous to those of horizontal platforms, they end up being tailored to the needs of a specific industry often times combining functionality from various departments. They tend to compete with a patchwork of horizontal solutions and are able to gain market share via a land and expand model. Three key characteristics of Vertical SaaS companies include:

· Winner Takes Most- Due to the fact that Vertical SaaS solutions are tailored to specific industries, the uniformity of users enables winner take most scenarios (e.g., DealerTrack in Auto Dealerships, Veeva in pharmaceuticals)

· Better Cross-Selling / Upsell Opportunities- There’s a more organic progression process for vendors to cross-sell or upsell clients in Vertical SaaS. A company can enter the industry as a CRM tool and ultimately add on functionality for finance, marketing, etc…The product / sales teams become intimately familiar with the pain points exhibited not just by the roles they are selling into but those unique pain points associated with the industry which allow for a more customized and holistic offering.

· Lower CAC- As a result of the industry concentration more efficient marketing measures can be taken; lowering CAC. VEEV is often put up as the poster-child of this as they raised a mere ~$7.0mn before going public and now boast a ~$39.25bn market cap on a $1.0bn in sales and $300mn+ in EBITDA.

The team over at Bowery Capital has been writing about the Vertical Software market since 2016 and in March of 2019 published their latest piece entitled Opportunities in Vertical Software v3.0. They highlight 10 different industries where they continue to see opportunities for disruption in vertically focused business software including: Insurance, Transport & Logistics, Drones, Manufacturing, Legal, Architecture Engineering & Construction (“AEC”), Education, Agriculture, Energy & Utilities, and Cannabis.

Source: Bowery Capital

We’ve seen continued interest in the Venture community in both early & late stage Vertical SaaS companies including in industries which had historically been underinvested in; given the public market success & differentiation between “CNS” stocks and “Appendix” stocks we would expect this to continue & start to see a wave of IPO’s for some of the later stage companies; a PE roll up (Vista might have started this with the MindBody transaction); or even a SPAC roll up of a number of these differentiated vertical SaaS companies.

Embedded Finance & Vertical SaaS

As we discussed in our last post while Embedded Finance is something those in the FinTech industry have been working on for years; there has been a lot written about it in recent months from the likes of Bain’s Matt Harris, A16z, Google’s Nik Milanovic, Anthemis, FinTech Today, Ron Shevlin, and countless others.

As this topic becomes more mainstream vertical SaaS companies are starting to ask how they can add financial service functionality such as payments, cards, lending, and payroll functionality to their solution in an attempt to concurrently lower CAC and increase LTV.

We discussed the concept of “Central Nervous System” Stocks which were those SaaS companies that had consistently high Net-Dollar Retention (“NDR”) and were critical components of their clients business. We noted in March / April when portfolio companies were cutting expenses many stopped paying their lease & legal bills but had to continue to pay AWS / Azaure / DataDog / Okta / Twillio; because their business ceased to exist without them.

When done correctly Vertical SaaS companies are the quintessential “Central Nervous System” companies / stocks. They become a critical component of their clients workflows; which ultimately leads to a debate around sales strategy. Do companies look to have embedded financial service product day 1? And end up offering their core product at a reduced price and monetize the FinTech offering to create a wedge? Or do they try to gain sufficient scale / market share first, become a captive part of that ecosystem and upsell their clients over time when it’s already too hard to remove them? Given the combination of lower CAC and higher LTV will we see industries that have had limited software penetration LTD adopt software if the entry price is palatable enough?

There are a number of financial service functionality that will either be cross-sold or embedded to these Vertical SaaS companies.

· Banking as a Service- There’s a growing number of firms competing in the banking as a service space as we highlighted in Banking Infrastructure re-imagined. While both Big Tech & FinTech firms have partnered with banks & often time middleware companies to enable this banking service it’s not unreasonable to expect this to be more common in Vertical SaaS industries with frequent payments.

o Potential Partners- Cambr, Rize, Synpase, Treasury Prime,

· Lending- Depending upon the relationship between the Vertical SaaS company & their client there are a number of capital allocation opportunities in the form of loans / revenue share, etc.. given the real time insights into the data. Whether it’s Square Capital / Shopify Capital.

o Key Considerations- What is the relationship between the Vertical SaaS company & their client, and ultimately the client’s relationship with their clients? Is it a capital intensive business with a mismatch of cash flows? Should invoice factoring be an alternative? Or revenue shares? Are point of sale loans feasible and do you have the appropriate data to underwrite them?

o Potential Partners- These Lending as a Service infrastructure players can look to partner with firms like Upper90 to “productize” their process. You can also enter into a simple referral relationship with some of the existing lending marketplaces e.g., Kabbage, or existing PoS players e.g., Affirm / Klarna

· Insurance- Once again depending upon the end market of the Vertical SaaS company and lever of visibility into their client’s end business these companies could enable the best delivery mechanism of insurance products (e.g., mortgage companies’ / home insurance.)

o Potential Partners- A variety of insurance as a service providers and those with specific domain expertise: Boost (P&C), Matic (Home), Rot (Auto)

· Payments- Enable clients to accept credit & debit card payments from customers

o Key Considerations- There’s the ability to white label payments from payment service providers or become payment facilitators themselves when the volume outweighs the operational cost / regulatory oversight associated with it.

o Potential Partners- Stripe / Finix

· Payrolls / Benefits- 80mn people don’t have access to employer benefits including freelancers, contractors, gig workers, founders, and full-time employees with inadequate benefits plans. Per IRS Data there are 10mn Full Time 1099s, 20mn 1099’s / W2’s & 50mn W2’s who don’t receive benefits. Vertical SaaS clients that enable these markets will benefit from a solution that can combine payroll / taxes and benefits many of which have been difficult to provide with existing solutions. These industries can also look to offer cards for contractors as a more efficient means of spend management / reimbursement; which is often a cash / paper / manual intensive process today.

o Potential Partners- Companies like Catch in the benefits space or Starship in the HSA space and leaders like Galileo / Marqeta in the card issuance space.

Ultimately we’re still in the early innings of the evolution in how software is both distributed & sold. Given the infrastructure being built in embedded finance, and the dollars flowing into Vertical SaaS solutions, the convergence of the two is inevitable. It’ll be interesting to watch what other businesses / industries / services are built as you can simultaneously lower CAC & increase LTV through these combined offerings.




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