Automation opportunities from vertical software’s data gold mine mean it has never been a better time to create purpose-built operational tools for overlooked industries. Plus, our market map of AI-enabled vertical software new entrants.
Vertical software founders build applications across many industries but with a common mission: to empower expert operators and owners to streamline and grow their businesses with software purpose-built for their own industry.
Over the past decade, Pear has supported founders building powerful applications for industries ranging from supply chain (Expedock, Beyond Trucks), construction (Gryps, Miter, Doxel), energy (Aurora, Pearl Street) and insurance (Federato) to home services (Conduit), travel (JetInsight, Skipper), agriculture (FarmRaise, Lasso), real estate (Hazel) and live events (Chainpass) – and more. These companies and plenty of others we admire outside of our portfolio have created hundreds of billions of dollars in enterprise value for themselves and for their customers.
Today, with artificial intelligence capabilities easier than ever to deploy in B2B products, we think it has never been a better time to build vertical software that automates core aspects of customer operations.
Any new vertical software opportunity — any sector that is not well-served by purpose-built software for industry-specific workflows — now looks even more promising. And, many existing vertical software tools have a rare opportunity to ramp up ACVs, increase stickiness, and build a powerful moat.
To understand why we might be on the verge of a golden age of intelligently-automated vertical software, we’ll take a look at two problems: First, the ACV problem that has limited vertical software opportunities. Then, the defensibility problem afflicting new AI application entrants.
The ACV Problem
Vertical software companies often sell into fragmented industries with many small-to-medium businesses. These businesses operate on thin margins and have limited ability to pay for new operational software. Contract values – and therefore market size – for many verticals have historically been constrained, which means that many sectors remain underserved by purpose-built, cloud-based software.
Historically, vertical software companies have sought to increase the value of their customer relationships by adding bolt-on monetization features like payments or banking. Other vertical software companies have initially sold to the fragmented base of a sector and steadily added operational features to move upmarket to larger customers within their industry.
In either case, the fundamental margin structure of the end customer remains unchanged, and few vertical software companies can reliably claim to impact their customers’ profitability in a major way. A vertical software customer might love their software’s intuitive UI, centralized system of record, navigable scheduling tools, and modern payment processing system. But these benefits rarely reduce the customer’s overall operating cost in a significant way.
The Defensibility Problem
Despite the excitement over applications of large language models in late 2022 and early 2023, many initial products were dismissed as “thin wrappers” over an off-the-shelf model. Critics argued that these initial applications lacked product differentiation and long-term defensibility.
At Pear, we believe that proprietary data is one of the keys to a defensible AI application. Proprietary data behind B2B AI applications comes in three forms:
Many early tools built over groundbreaking LLMs offered no form of proprietary data. At best, some products built over lightly-adapted models offered bronze or silver-level data-based defensibility. But we’ve been on the hunt for game-changing applications that build an advantage in proprietary model-training data from the start.
The Vertical Software Data Gold Mine
Traditional vertical software products generate enormous amounts of gold-level data, capture substantial silver-level information, and often themselves aggregate bronze-level data within their products.
Customer business logic flows through vertical software features. From operational decisions and administrative record-keeping to sales and product performance, customers of vertical software deposit reams of data daily into a rich system of record.
The most impactful B2B applications in the next decade will rigorously structure, mine, and harness gold-level product-generated data to enable workflow automation for their end customers.
Any business process with decisions and steps encoded in a vertical software feature set will be a candidate for automation. We’re most excited about automation that enables faster information processing tied to sales growth or cost-saving opportunities for an end customer: instant diagnosis and repair commissioning for field technicians, predictive inventory capabilities embedded in B2B marketplaces, copilot-style knowledge bases that help small business owners understand the impact of every decision on their bottom line.
Automation across many business functions will mean that vertical software companies can finally impact their customers’ margin structure – and as a result, help these customers break any linear scaling trap they face when they otherwise expand their business.
Early entrants: A preliminary market map
We have seen a proliferation of promising AI-enabled vertical software products in a handful of sectors, and we are proud to be the earliest supporters of teams like Expedock, Pearl Street, Gryps, Hazel, and Federato.
Many initial intelligently automated vertical software products target the largest sectors of the economy (we’ve looked separately at the ecosystem of AI in healthcare companies here). We’ll update this market map over time, and we’re eager to include companies unlocking automation potential in industries that have seen fewer capable purpose-built tools in the past.
What we are looking for
We hope to support many more founders delivering on a new and bigger promise of vertical software. Standout teams that we currently support – or just simply admire – typically excel on a few dimensions:
- They have an unfair data advantage.
- They have identified substantial automation potential.
- They can communicate their value without invoking AI.
We want to hear from you
If you share our conviction that we’re entering a new golden age of vertical software and you’re exploring startup ideas that help expert operators streamline and grow their businesses through intelligent automation, we would love to hear from you. Reach out at keith@pear.vc if you’re working on something impactful.