The rise of vertical AI

Andreessen Horowitz’s recent blog on Vertical SaaS and AI outlines some compelling arguments, but my own experience building VSaaS products and businesses within regulatory compliance, logistics, and HR further reinforces the potential of this space. Yesterday, I had my third call this year (only 16 days into the new year) with a domain heavyweight looking to build a Vertical SaaS product. Each of these conversations revealed a recurring pattern: the inefficiencies of disconnected tools and the unparalleled advantage of integrated systems.

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What makes Vertical SaaS so powerful?

At its core, Vertical SaaS focuses on serving the entire business operations of companies within a specific domain. This is different from horizontal SaaS models, which target a broader audience (ie. task management, customer service). Implementing AI features within a vertical SaaS product works significantly better because the product already encompasses the entirety of a business’s operations. Instead of isolating AI features within a single-purpose tool, VSaaS allows for deeper, more integrated applications.

For example, a lot of companies have multiple tools connected via Make or Zapier. While they’re great for connecting disparate solutions, the integrations often prevent AI features from going deep. They remain siloed, unable to fully utilize the rich data that could transform processes. Vertical SaaS eliminates these barriers, creating an environment where AI can thrive

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Opportunities in the Vertical SaaS landscape

Why is now such an opportune time for Vertical SaaS? Apart from compelling arguments from leaders like A16Z, I found something else that I am confident about. Many existing vertical products were built a decade ago. Their architecture was designed for the challenges of that era, not the demands of modern data structures and AI integrations. Despite running tens or hundreds of millions in ARR, these legacy systems are difficult to replace due to their critical role in business operations. This opens the door for newer solutions to enter the market that are designed for new data and AI related possibilities, laying a clear path for hyper-automation and potentially turning the majority of their customers' labour into their software.

Additionally, while much of the SaaS world is focusing on horizontal models, the rise of Vertical SaaS is already happening. For example, at Eli5, we built a task management feature within a regulatory compliance product. Unlike general-purpose tools, this feature aligns perfectly with the specific workflows of compliance professionals and integrates seamlessly with all other data and features in the RegTech product.

Now, how can we pinpoint opportunities for building new VSaaS products and businesses?

1. Identify businesses using a multitude of tools

Look for companies relying on numerous solutions to run their operations. Yesterday, I spoke with an incredibly smart business owner who provides legal and financial services for a specific industry. He walked me through the 10+ tools his business uses. It worked for him, and he probably already has a better setup than 99% of his competition. Each tool was connected to the others, but the system created a lot of headaches and limitations:

• Employees had to be trained on every tool.
• Some client software couldn’t integrate with his tools, requiring alternative solutions.
• There was no single source of truth for all data.
• Employees constantly switched between tools and accounts, further reducing efficiency.

A Vertical SaaS product that consolidates these functions into one integrated platform would be transformative for businesses like his.

2.Target high-stakes domains

Domains where mistakes lead to high costs are prime opportunities for Vertical SaaS. For example, banks face enormous fines for non-compliance. At Eli5, we built a product that provides banks with fully transparent and accessible audit trails, enabling them to prove compliance or pinpoint exactly why they’re not compliant and what needs to be done. This high-stakes environment creates a clear need for robust, domain-specific solutions.

Other examples might include:

• Healthcare: Mismanaged patient data or errors in billing can lead to legal repercussions and financial losses. A Vertical SaaS product could unify patient records, billing, and compliance into one system.
• Construction: Tracking materials, labor, and compliance across multiple sites often requires juggling several tools. A Vertical SaaS product could streamline operations, reduce waste, and improve project outcomes.

3. Find Domains That Are Both Heavy on Data and Human Labour

In many industries, companies rely heavily on both extensive data handling and labor-intensive tasks to manage critical operations. Identify domains where automation and integrated systems can streamline workflows, reduce human error, and enhance efficiency. For example, logistics companies often grapple with intricate scheduling, tracking, and reporting processes. A Vertical SaaS solution tailored to their specific needs could revolutionize their operations by deeply integrating AI for predictive analytics and seamless data management.

Building the future of Vertical SaaS

At Eli5, we’re already seeing the potential of Vertical SaaS in action. By focusing on domains like regulatory compliance, logistics, and HR, we’re building products that are transformational. The key is to go deep, understand the pain points of a specific domain, and create a solution that serves as the backbone of their operations.

I hope this sparks some ideas! As always, feel free to reach out when you want to bounce some ideas around. If you enjoy this post and want more insights like these, you can subscribe to my newsletter here.