Investor perspective: The Rise of Verticalized Supply Chain in Large Enterprise SaaS

Spend Matters welcomes this guest post from Jack Freeman, Principal at PeakSpan Capital who is a growth-stage software investor.

The next generation of supply chain software leaders will be verticalized. The pace of innovation seen in the supply chain software space over the past handful of years suggests we’ve reached an inflection point, in no small part due to our ability to collect, analyze and harness the power of data, but that is a story for a future guest post. When you look at where supply chain scale-ups have found success over the years, it’s quite telling as to the future direction of this space. The time for horizontally oriented SCM platforms has come to an end. The next class of leaders in supply chain management will compete (and win) off focus and specialization.

Let’s start with Amazon (because that’s where it always starts). Amazon’s supply chain continues to dominate with no close second, putting immense pressure on the entire supply chain ecosystem to “do better.” Some may liken Amazon to an evil overlord, but as a growth-stage software investor, I credit the behemoth with pushing founders to enhance innovation with a goal toward arming enterprises with a fighting chance at competing with 48-hour delivery. This is good for the space.

It’s no surprise why the enterprise segment has initially been the most active. The supply chain complexity, implementation breadth and levels of spend garnered by platforms like Oracle is no joke. We’ve analyzed scale-ups attacking the enterprise segment with a “next-gen” approach and candidly don’t see much opportunity there.

Coupa’s recent acquisition of LLamasoft solidifies its place among the giants where the top three players already represent 50%+ market share. That said, we do see product-focused solutions like strategic sourcing, analytics, supplier management and tail spend (among others) as viable paths to success.

However, these are surely paths to acquisition versus market leadership.

The probability of a new horizontally focused player reaching significant market share is low. But we see ample opportunity for verticalized platforms to emerge as market leaders over time.

What do we mean by “verticalized” supply chain?

Examples include Yapta, a spend management business acquired by Coupa, focusing exclusively on travel spend. Sticking with procurement, the most infamous example of verticalized software is SciQuest — which dominated through just targeting the life sciences vertical. The business of course expanded into industries like retail, manufacturing and CPG and ultimately became Jaggaer in 2017, but for the most part, SciQuest rose to power by dominating a single vertical. Other examples include Procore in construction, and SPS Commerce in retail.

Zooming out from supply chain, we’ve seen vertical software picking up steam, including demanding premium valuations in the public markets.

Why has this strategy been successful? Let’s first shoot down the biggest knock on vertical SaaS in general — “the TAM isn’t big enough.”

Nonsense.

The growth and penetration in business software broadly, but specifically in supply chain and procurement is now at a level that can support multiple market leaders, each dominating their respective vertical. In the enterprise segment where ACV deal values can reach $500,000 to $1 million+, the absolute number of accounts required to build a $50 million ARR business is low. Furthermore, the path to doing so is not only more straightforward but is tried and true by the folks mentioned above (or take any public vertical SaaS company: Veeva, Medidata, etc.).

Why is verticalization so attractive?

When you verticalize, your product roadmap can be precisely mapped to the specific needs of your ideal customer. Your reps become much more effective as you sell to the same large enterprise CPG company over and over again. Customer success teams pack a way harder punch, and at a certain point may know even more about CPG supply chain strategy than the customer. When you’ve achieved this level of thought partnership — it becomes impossible to compete, even for the Coupa’s of the world.

Last but not least — the integrations, ecosystem partnerships, and data assets being formed are all hyper-focused and relevant to your target market. Sticking with the CPG example, having the largest aggregation of CPG supply chain data will lead to “next-level” insights that can’t be offered elsewhere, resulting in differentiation and market leadership.

Bottom line, verticalized supply chain platforms will win the hearts and minds of large enterprise customers this next decade.

Check out Spend Matters’ investment coverage in Jason Busch’s Nexus columns.