One of our early mentors in venture capital often spoke of the danger of the “case study of one.” In that context, he was referring to the often-repeated mistake of venture capitalists investing with bias for products or services they would themselves want. Despite being a perfect storm of logical fallacies, decision-making based on a single or small number of personal observations is common—intuitive, even. Humans evolved to pattern match, but mainly for survival rather than optimization. Even strong founders can be affected by the same bias. Demand for a prospective product will exist because [insert common sense reason here].
Customers Want a Solution, Not a Product
The premise always sounds logical in principle: this product will increase revenue and / or decrease costs. It’s cheaper and has a modern UI. The ROI is obvious. Why wouldn’t they buy it? The complicated answer is that nobody wants your product! Customers don’t care what you think they want or how you think their company should operate. Customers don’t wake up each day thinking about what new piece of software they should buy, and every minute spent on procurement is time not spent on growth or profits. The history of startups is littered with the corpses of failed companies and products that made too many assumptions about their ICP.
Vertical software markets can be especially cruel in this regard—buyers can be unsophisticated about technology (or even actively tech-phobic), budgets can be challenging to ascertain, and adoption hurdles can be steep and unintuitive. A software product may amplify existing demand by growing access or undercutting pricing. B2C successes of past generations have clearly illustrated that unlocking consumer surplus can expand TAMs (canonically, Uber and AirBnb). But we don’t believe they ever create a wholly net new demand, even when there is logic to it.
Before any solution can take hold, genuine, sustainable demand must exist in some form, even if market dynamics have suppressed that demand to date. What do you need to hear from your market to validate latent demand? You don’t need to hear a desire for software products. You do need to verify discrete and actionable “work to be done” that is top-of-mind for either a business owner (for SMB-leaning plays) or functional leader (for enterprise-leaning plays), that your solution could address.
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Vertical PMF Requires a Nuanced Approach
In vertical software, measuring true demand can be especially tricky. You may foresee a path to a 30% revenue uplift, were your product used in X and Y ways. But those envisioned use cases, unbeknownst to you, may bring additional complication that business owners are allergic to. Ability to and willingness to pay is deeply affected by pre-conceived notions of technology alternatives, time constraints to consider and implement them, and even the where & when of how the product would be used in the field.
Successful vertical solutions must adhere to the processes, procedures, and (yes) lived experience of their industry. For example, a financial services buyer may prioritize security as a complementary aspect, while a construction buyer could be concerned with mobility. And, of course, all these aspects shift over time with the macro, labor, and regulatory cycles a particular industry may experience. We believe good vertical solution discovery—leading into good vertical product-market fit—therefore starts with a nuanced understanding of true demand, before jumping to products. The magnitude of that demand in your industry, both today and in the future, will dictate your ultimate addressable market opportunity.
At Euclid, a significant part of our investment process as first-check investors is evaluating markets to determine the size and nature of true demand. In a previous essay, we shared the details of our approach for market sizing in Vertical Software at the inception stage.
One aspect we look for in founders is a hyper-focus on the mindset and workflow of the customer—understanding specifically what the customer is trying to achieve and why, rather than building product deliver a prescriptive “strong value prop.” Successful founders—even those deeply embedded in their vertical—spend time identifying how software can be built around the work to be done. This is a major motivator behind our affinity for founding teams with domain experience, which we’ve discussed in previous essays (Part 1 and Part 2). Teams with deep, differentiated domain insight have the baseline knowledge to identify weak points in a workflow, nurture demand by talking the talk, and connectivity to get high-caliber potential customers engaged at the idea stage.
Conditions for Vertical Product-Market Fit
While the core conditions for product-market fit (PMF) aren’t fundamentally different between vertical and horizontal plays, the process for achieving and validating them can vary substantially. We look for three progressive indicators:
1. Urgency
Prior to Euclid, we were involved with a company that built retention software for retailers. Early customers who adopted the product had positive results: higher retention, AOV, and LTV. As we grew, however, the company faced severe growth challenges: sales cycles and implementation timelines were long relative to ACV. We eventually realized an existential flaw in the business: while customers had high NPS, churn was low, and prospective customers understood the value of the offering, the company’s product was not solving a top three or even top five problem for the customer. Regardless of ROI, there was little desire to divert employee or budgetary resources away from more pressing challenges. The key lesson here is that solving a business problem isn’t enough; it must be urgent! Successful startups need to do more than identify demand; they also need to identify demand that requires immediate action to address the “hair-on-fire” problem.
In essence, the scale of the pain of the problem creates urgent demand. Consequently, customers actively seek a solution; in vertical markets, the initial options are often additional headcount, service providers, and legacy vendors. This is crucial: potential customers are not in the market for the latest AI-powered technology or even software. They have a specific demand to achieve something and are searching for solutions. Founders must deliver a software product that explicitly addresses what these customers want. When successful in meeting this existing, urgent demand, startups will find customers in marketing looking for solutions, creating the “market pull” that enables fast PMF iteration.
2. Repeatability
If the first customer(s) indicate prospective demand for your product, the following condition in pursuing PMF is identifying and nurturing repeatable demand. It’s expanding from zero case studies to one case study to several. In this journey, there is simply no substitute for selling. Customer interviews are fine for information gathering but have little to no cost for prospective customers beyond time. Purchasing software has a cost, and prospective customer must determine if their demand is immediate and urgent enough to require a purchase. Early founder selling needs to validate demand, deliver value to the initial customer(s), and leverage those successes to identify if additional similar customers exist. This is why we are firm believers in specialization for early-stage vertical software startups. Customers in a vertical or even sub-vertical are not homogenous, and a higher degree of focus allows founders to hone on the critical needs of their ideal customer profile. Specialization makes it easier to identify repeatable demand in the market across similar customers.
We have seen founders validate with only wireframes while others have a working MVP. Each market is different, but the target is the same: prove repeatable, urgent demand for your product by converting prospective customers into paying customers.
3. Scalability
At this stage, we’ve identified customer demand. That demand is repeatable across multiple customers and successful case studies. This is early evidence of PMF. However, the last condition of PMF is scaling that demand: identifying the path to grow from multiple successful customers to many. No business will succeed without satisfied customers who renew and expand their business at a high rate. From there, the critical factor is quickly growing the base of satisfied customers.
Our target is to identify prospective market demand, build a repeatable and efficient growth engine, and convert a certain percentage into customers. However, the degree of PMF will ultimately impact the ability to win a market and what separates good and great companies. It dictates the cost to acquire, onboard, and retain each additional customer. Scalability requires market pull in some capacity: customers want a solution that a startup can deliver. The degree of scalability will manifest in a company’s ability to find leads, convert a certain percentage into customers, and retain & grow those customers.
It’s also important to remember that PMF is not binary or set in stone once achieved. Some companies reach it quickly with incredible market pull but face challenges as the market evolves. Others may face challenges initially but iterate until finding a different approach or segment before taking off. Especially in the market excesses of 2020 and 2021, far too many startups raised substantial capital without reaching the scalability condition of PMF, leading in part to the stark graduation rate contraction we have seen in those cohorts.
Healthy Vertical PMF by Stage
Combining these three conditions—urgency, scalability, and repeatability—we have a simple framework for identifying levels of product-market fit. Of course, rarely does a company achieve all at once. At Euclid, we generally like to see a healthy velocity of PMF progression through the seed stage, with the aim of achieving the full model in advance of a Series A. Again, while the individual stages are extensible across vertical and horizontal software, the strategy behind achieving each stage and the signs to look for are unique to vertical platforms.
Level 1: Pre-Revenue
The founding team is working to validate a hypothesis in a vertical, often leveraging prior experience and connectivity. If seeking venture funding, it is vital also to demonstrate an understanding of the scale of demand (market size) and conditions required for scaleability. The target milestone at this stage should be near-term paying customers or at least committed design partners.
As discussed above, vertical market plays require an agile mindset when it comes to design partnership—even if the original product hypothesis is correct, there are usually frictions and complementary workflows that would have been impossible to see without being live in industry stakeholder hands.
Level 2: First Customers
Some customers indicate an urgent demand and willingness to pay for the product. The team should be focused on delivering a superior customer experience for and enthusiasm amongst these early adopters. Meanwhile, work begins to ensure that demand exists with other customers in the vertical and understand why initial ICP is the way it is.
Ideally, these first customers are high-quality and standard bearers for the segment. If there are 800-lb gorilla customers in the space that aren’t ready for our product, we should begin understanding the path to courting and winning them, but no customer regardless of its market share should pull product roadmap off-course. Doubling down on early adopters with similar profiles and needs—assuming they are representative of much of the larger market—are far more valuable signals for PMF than identifying disparate use cases. The target milestone is building the ability to identify, acquire, and onboard additional customers.
Level 3: Signs of Traction
A stable of satisfied customers within a vertical that grows each month or quarter as the team demonstrates an ability to attract repeatable demand. There is repeatability but not predictability. At this stage, go-to-market is typically founder-led and crude. That said, in cases where their backgrounds are additive to founders, an “industry evangelist” hire (usually sitting somewhere between sales, marketing, and customer success) can be highly impactful—the trick is finding one that can bring a rolodex and talk to users as industry peers, but still thrive in a startup environment.
Continued focus on the core vertical and customer profile is critical to this milestone while working to evaluate prospective go-to-market motions. At this stage, the startup has further dialed in ICP—not just by sub-vertical, but by size, buyer type, need, etc. You develop a sense for who gets it right away, which should result in improving sales cycles. Work is being done to understand how best to reach other segments of the market, and to what extent this is a marketing or product challenge. In other words, don’t be everything to everyone—we are still very much focused on a slice of our beachhead.
Level 4: Early Growth
There is a growing base of successful customers with high retention. Market pull begins to appear in the form of improving conversion / win rates, high NPS, and customer referrals. Go-to-market has formalized beyond founder-led sales with additional hires—the timing of a VP Sales should be dependent on founder backgrounds and the sales motion (low-ACV products with more repeatability may start here earlier).
The next important unlock is identifying the growth to scale efficiently. Depending on their market approach and access to capital, vertical software startups should also start allocating resources to growth opportunities, typically additional products or customer segments. The goal here would be to identify the first expansion product and demonstrate viability in advance of a Series A—demonstrating capture of a control point (to borrow a term from our friends at Tidemark) that has won them true platform potential.
Level 5: Scaling
The easiest way to describe this level is “you know when you see it.” Market pull is enormous. Conversion / win rates (and hence CAC on initial product) improve further as word-of-mouth expands. Customer referrals become a sizable channel. Engagement and retention rates are best-in-class. Peripheral industry products and service providers are proactively interested in partnerships.
As we touched on previously, this stage is not binary, and market conditions can change. For vertical software startups, it is critical to leverage early success into expanding ARPU, market share, and a competitive moat. As we discussed in our essay on value creation in Vertical Software, startups that continue to win at this stage must successfully pursue expansion opportunities—extending their scope through multiple products, business models, and / or customer segments. At this point, the business is demonstrating that it can be a category-leading platform in its vertical.
Thanks for reading! And thanks to the various thought leaders below for their inspiration and / or feedback.12345 As always, we’d love to hear your thoughts on our work. If you’d add to or remove anything from our framework, please shoot us a note or reply in the comments.
Lauchengco, Wilson (2024). Product Market Fit (PMF) is dead: for early stage startups, it’s MARKET Product Fit. Costanoa.
Poyar (2019). From Product-Market Fit to Product-Market-Price Fit. OpenView Partners.
Rachitsky (2023). A guide for finding product-market fit in B2B. Lenny’s Newsletter.
Snyder (2022). The Path to PMF. Reframe.
Yuan (2024). Multi-Product, Multiple Choices: How to Determine Product Priorities. Tidemark.
Last week, we shared Part 1 of this essay, which showed that Industry Insiders drive outsized vertical SaaS outcomes—or at least that similar founder backgrounds correlate with exit success—looking at the last several years of data.
While our initial findings warrant a deeper historical dive, the quantitative evidence in support of our Industry Insider thesis is very strong. By raw deal count, teams with an Industry Insider (or “Vertical Founder” in the chart below) represent 73% of all exits. By gross exit dollars, however, teams with a Vertical Founder capture 84% of dollars.
Today, we’ll dig deeper into why those backgrounds lead to superior outcomes.
Why Do Industry Insiders Outperform?
Reflecting on our own experience investing in the space for years—as well as lessons drawn from some of our favorite vertical software success stories over the last decade—we distilled four leading factors behind the Industry Insider advantage:
1. Singular Insight Into Market
Our analysis demonstrated a correlation between founding vertical software teams with industry connectivity and significant venture-backed outcomes. While we can’t prove causation, we can make an educated guess as to the link: the ability to zero in quickly on the unique issues, dynamics, and solution paths within a vertical has become increasingly difficult without first-hand experience, while building powerful software experiences has never been more accessible.
Industry connectivity has proved more important over time because the use cases of SaaS–as software has consumed more of the economy–have become steadily more complex. Put another way, 2024 knowledge workers aren’t impressed by a digitized spreadsheet anymore–they want a digitized workflow that goes beyond what much of vSaaS 1.0 was able to offer. Workflows, and the human interactions that compose them, are domain-specific and dependent on tribal knowledge. Building software for industries that rely on large groups of skilled, “deskless” workforces is especially tricky. This is likely also why “real economy” sectors generally weren’t seen as “low-hanging fruit” for SaaS entrepreneurs of the early 2000s and remain comparatively greenfield today.
A software startup attacking these markets is no longer an unthinkable undertaking for an industry expert without a development background–at least for those with the networks to attract quality technical co-founders. Innovations, from cloud infrastructure to LLMs, have decimated startup barriers to entry. Equally important, those advancements enable software to solve more complex problems in greenfield market segments.
As vertical SaaS cannibalizes spend traditionally allocated to headcount, goods, and services, nearly every sub-vertical of the economy over $20B in revenue has become capable of supporting an IPO-able startup. We believe these qualitative factors support our data-driven conclusion: insiders with singular insights are entering the startup world armed with a competitive advantage.
This doesn’t mean, of course, that we believe industry outsiders can’t achieve vertical software success—from Faire to Toast, there are plenty of exceptions to the norm. Even in the case of winning teams that seem new to the industry, however, a closer look over uncovers deeper ties. Alex Kates of VetCove, for example, was formerly a marketer and financial analyst–but grew up working in a large family-run veterinary practice. Veeva Systems, a favorite case study on vSaaS success, outwardly seems the product of a Salesforce executive turned outsider startup CEO. Peter Gassner, however, was supported by co-founder Matt Wallach, who formerly ran HealthMarketScience—a data provider to the healthcare and life sciences industries that sold to Oracle.
CEOs don’t have to come directly from a non-tech strategic to be an Industry Insider, in other words. The Industry Insider profile we reference in these essays, rather, speaks to a holistic level of domain expertise across a founding team. As mentioned in our last essay, this expertise can take many forms—one reason we at Euclid spend significant time understanding the backgrounds and experiences that drive founder conviction.
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2. Industry Access
Perhaps the most critical early-stage advantage of industry-insider founders is their strong credibility with relevant stakeholders. Credence often stems from brand name recognition (e.g., working at a leading strategic or startup in the space) and/or specific prior work experience (e.g., previous projects or products launched). It gives founders a baseline level of trust with buyers, partners, and prospective employees that helps set up the foundations for success.
Beyond credibility, these founders bring essential ties to industry stakeholders. Actionable relationships are crucial in identifying early adopters and high-value reference-able customers. We have found that driving behavior change in an industry requires trust and buy-in–especially in more traditional sectors. These founders are selling a digital-first vision of their industry's future to historically tech-averse businesses. At our investment stage, many are attempting to sell that vision pre-product or with a very basic MVP. Without the ability to call on friends or even speak the vertical “language” fluently, even market discovery can turn prohibitively time-intensive.
As we touched on above, there is sometimes no substitute for lived experience when it comes to strategic industry transformation. Industry insiders can leverage credibility and strong relationships to drive early wins in ways others can’t. The same principles hold in the path to product-market fit and market-wide adoption.
3. Recruiting
Recruiting for vertical software can be quite different from traditional software. We see two key areas that set industry insiders apart. First, we find that strong vertical founders can attract high-quality technical and startup talent to join the founding team for a few key reasons: (1) the credibility they bring from day zero of access and understanding of the target market as we touched on above; (2) the gravity of an ambitious vision of industry transformation vs. the tedium of competitive horizontal markets; and (3) advantage with distributed talent in non-coastal tech hubs, where vSaaS companies more often form.
Second, vertical startups often take different approaches to building out the individual contributor layer of an org. For example, vertical SaaS companies frequently leverage high-performing industry talent to fill sales and customer success roles (folks that “speak the language”). Many of Toast’s best AEs are former chefs or food distribution reps. Mike Powers (CEO of our portfolio company, BuildVision) was previously a sales leader at BuildingConnected (BC)—he joined after BC’s CEO Dustin Devan tried to sell him on using their software, while Mike was at Turner Construction. Recruiting intelligent, young, and ambitious people with crucial industry knowledge is a superpower and growth accelerator for vertical software startups.
4. M&A
The credibility, knowledge, and networks industry insiders bring can directly accelerate a successful M&A outcome. We’ve seen three paradigms in the vertical software world:
- A founder’s former employer is a natural strategic acquirer. Such founders generally build something new because they encounter a big problem that needs to be solved in their former seat. In some cases, they oversaw the procurement or sponsored the acquisition of startups, but when it was clear no proper solution existed, they left to build it. It follows that this same former employer is likely to benefit from the solution and see clear benefits to the reintegration of proven innovation talent. One example in the Euclid portfolio comes from Frontier Risk Group. Co-founder Jeff Richardson led Specialty Insurance at Travelers and Intact, where he focused on new risk products for underserved markets and influenced M&A considerations.
- In their former industry role, a founder built relationships with major vendors who later became buyer candidates. Often, they directly managed internal adoption and usage of the vendor’s product, getting to know their strengths and weaknesses intimately. One example is Shashank Saxena, founder of VNDLY. As an SVP at Kroger, Shashank was responsible for adopting HRMS systems like those offered by Workday—the company that would acquire VNDLY for $500M following their Series B. For founders who emerge from the industry, deep experience with market-leading vendors serving the space can pave the way for M&A.
- A serial vertical software operator-turned-founder leverages past partnerships or exit experiences. CEOs with this background have worked at vSaaS startups selling into, or peripheral to, their vertical of focus. They built close ties with strategics through partnerships or remained with the business through a strategic exit (perhaps even learning more in a post-acquisition role). As we actively target founder profiles with such combined industry and startup aptitude, this path to exit is one we expect to feature prominently in the Euclid portfolio.
Impact on Euclid’s Strategy
A. Sourcing
Industry Insiders, on average, tend to emanate from different networks and geographies—effective VC sourcing strategies should evolve accordingly. Adding to our particular challenge is that, at the pre-seed stage, most of the best investments have no pre-existing external presence or venture funding. At Euclid, therefore, we re-imagined sourcing as an exercise in nurturing “influencer” relationships across emerging tech hubs and the vertical innovation world at large. We have found that successful founders in a particular space or region act as gatekeepers to the next generation of vertical software startups, serving as the mentors and sounding boards that vertical founders turn to first at the moment of inspiration. These touch-points occur prior to mainstream venture conversations, at the pure ideation stage, which is when we aim to meet founders, if not beforehand.
One interesting output of our focus on Industry Insiders over the years is the wider geographic footprint of our portfolio. Today, about half of our companies are headquartered outside the Top 5 startup metros (San Francisco, Boston, New York City, Seattle, and Los Angeles).
B. Founder Needs
If top vertical software entrepreneurs are generally industry insiders, it follows that most don’t need industry experience, customer introductions, or generic advice and support services from a VC. They need a lead-quality partner who understands how vertical platforms succeed and the roadmap for leveraging a discrete Industry Insider insight to build a category-winning software company.
This insight crystallized our conviction in building Euclid from the ground-up for the best entrepreneurs in vertical software—at the risk of cliche, a different kind of fund, built for a different kind of founder.
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Weekly vertical software insights. Analysis from the Euclid investment team. Learnings from Vertex, a collective of 50+ vertical SaaS operators.