A Deep Dive Into Vertical Software

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April 4, 2024

DESCRIPTION:

Mike and I had the pleasure of sitting down with Todd Saunders (CEO of Broadlume), and Chetan Narain (co-founder and CTO of Pepper) to discuss the concept of vertical SaaS and its application in different industries. We explore how Broadlume and Pepper leverage vertical SaaS to serve the flooring and food distribution markets. Our conversation delves into the evolution and advantages of vertical SaaS, emphasizing the importance of owning customer relationships and leveraging industry-specific data. We speak about the potential for vertical SaaS companies to expand into broader markets beyond software, highlighting scalability and value proposition, particularly in high transaction volume industries. Additionally, Todd Saunders and Chetan Narain discuss the impact of AI on their businesses, focusing on its role in increasing internal efficiency, improving customer experience, and driving profitability. Our discussion underscores the broader implications of AI adoption, including its potential to enhance productivity, customer satisfaction, and shareholder value across industries.

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TRANSCRIPT (this is an automated transcript):

MPD: Welcome everybody. I'm Mark Peter Davis, managing partner of Interplay. I'm on a mission to help entrepreneurs advance society. And this podcast is definitively part of that effort. All right, today we're going to play a segment from our annual meeting. Now, as a venture capitalist, we do an annual meeting.

Annually to update our investors and our limited partners. And typically when VCs do these meetings, they weave in some content. Usually, CEOs of the portfolio companies will come in and speak to help educate. And share information that the VCs are seeing on the front lines of the market. So to that end, we had a panel where Mike and I talked to two really strong founders from our portfolio, Todd, the co-founder and CEO of Broadlume, and Chetan, the co-founder and CTO of Pepper about how they think about vertical SAS.

B2B vertical SaaS is a really interesting segment of the market that we at Interplay spent a lot of time looking at and have a lot of investments in and around that space. I think it's a pretty well-informed group conversation and very candid. So I hope you enjoy it. Welcome guys.

Mike: Excited today to have two of our favorite portfolio company founders here to discuss their business and a vertical SAS in today's market. With that, I will turn it over for quick introductions from the two of you and we'll jump into a friendly conversation.

Todd Saunders: You want to take it? Sure.

Chetan Narain: My name's Chetan Narain.

I'm co-founder and CTO of Pepper. Pepper started about four years ago to build software for the trillion-dollar food distribution market. So food distribution is. Something that we all interact with every day of our lives. Everyone's got to eat, but we tend to interact with the food supply chain at the retail layer.

And what we learned during our previous role at Uber Eats, where we met lots and lots of restaurants is that the process. Getting food to that point of retail, whether it's a restaurant, a grocery store, or a convenience store is super complicated. So we hopped in around four years ago to start to work with food distribution and build technology and digital services to help the food supply chain operate a lot more efficiently.

Awesome. And I'm Todd

Todd Saunders: Saunders. I'm the CEO of a company called Broadlume. We are a vertical SaaS company for the flooring industry. So just like everyone needs to eat, I think everyone also needs to walk on floors or, I don't know what you would do if you weren't. We do full vertical software.

So website, CRM, ERP, and payment processing. We refer to ourselves as like a business in a box for a local flooring retailer. We have about 4, 000 local flooring stores that we work with today. And if you're asking yourself how I got into flooring, that's a much longer question, but to make a long story short, I started my career at Google and was there for a few years.

We launched an ad tech company, which I think you guys invested in when you were an ad tech company or right after we met when you were an ad tech company, pivoted it, pivoted into a vertical SAS company for the flooring industry. It's where Interplay came in and the rest is history.

Mike: I'm pretty sure the term vertical SaaS hadn't been coined when you made this pivot, but you were an early adopter of it.

Todd Saunders: Yeah. Early adopter, of that and making the flooring industry cool, cool again? Yeah, exactly. I wasn't going to go there, but you got it. Yeah. I think

MPD: that's, that kind of begs a question, right? I don't think most entrepreneurs wake up and say, Hey, I'm going to do vertical SaaS. They see an industry that they feel is defective.

And stumble into a vertical SAS model and approach. What got you guys thinking, Hey, this is something I want to lean into. What are your individual stories? Do you want to go first? Sure.

Chetan Narain: Yeah. So how did you land here? Absolutely. So I, in my previous role was the first product manager on Uber Eats. And I joined at a point in time where it wasn't even called Uber Eats.

And there were five of us driving around in cars with sandwiches, trying to figure out how to sell the things. And I was there up through, became a multi-billion dollar business. Eventually spent a lot of time with restaurants and restaurants. They used to just talk to us about, Hey these are the problems that I'm seeing in my business.

They always used to talk about problems on the demand side. And that's what Uber Eats was for, but they also used to talk about. All of the difficulties and challenges that they had working with their wholesalers and distributors. And that kind of opened our eyes to the other side of the food supply chain.

Where there's all of this stuff that happens in the background. So in New York, every day, up in Hunts Point, there are thousands of people that wake up at 3 in the morning, moving around boxes of food. Tomatoes and cucumbers and everything you can imagine and truck them to all the restaurants and convenience stores and grocery stores before we all wake up.

And it's that whole industry that for a long time has just been underserved for technology. And, we were exposed to that. The things that we learned through restaurants is that the way that they interact with these wholesalers is still through text messages, phone calls. email and you go talk to distributors, they're equally annoyed by people calling them up at three in the morning and screaming about spinach.

And you look at that from the perspective of someone in the tech industry and you're like, okay, there's clearly things that technology can do to help. But then the more time you spend with food distributors, the more you appreciate the scale of the industry. And you learn that there's a trillion dollars a year in sales between food distributors and retailers.

You learn that for a lot of distributors, everything from finding their next set of customers to figuring out how to nurture and upsell existing customers, to figuring out the right inventory levels. So they're not wasting a bunch of food, figuring out pricing to figuring out logistics is still run off pen and paper.

And you realize that there is an opportunity for someone to come in and build a lot of the same technologies, and data insight that have helped a lot of other industries flourish over the last couple of decades as they've embraced e-commerce. And bring it to this world.

MPD: That's one of the themes as we see vertical SaaS companies is this general concept that there, someone's churning over a rock and finding out the internet kind of hadn't made its way underneath that rock yet.

And there's an opportunity to tech enable in a place where maybe it's 10, 20 years too late. So it's these fallow underdeveloped tech worlds that you've had this tech, you have tech entrepreneurs bumping into seeing it. Yeah.

Todd Saunders: I think when I hear stories of vertical SaaS companies, they're all how we got into it is very different.

Get experience at Uber Eats. I did not have experience in flooring. Our story is we were an ad tech company and one of our customers was a website company for the flooring industry. And they were just a channel partner. And for the first time we looked at our data and we're like, this cohort of customers has a 90 percent logo retention.

And this cohort has got, we were our horizontal ad tech was like 70 percent retention. But when we were partnered with this website company, it was like 90 percent retention and that opened our eyes. And then a similar experience, I think to most vertical SaaS companies, you open up the hood and you realize the process is painful.

They're in the Stone Age on everything. And to your point, Like a lot of our customers feel like we're telling the future. The truth is we already know how this plays out because you can just look at other industries and apply it to your archaic industry. I think one of the hardest challenges we have as vertical SaaS companies, it's not necessarily the innovation because all of our industries are 10 years behind where everyone else is.

So we have a roadmap of where we have to go. I think the hard part is how do you get adoption how do you get scale and how do you make the TAM large enough to keep that compounding? But every vertical SAS story I hear, like I could have taken out distributors and put in flooring distributors and flooring stores.

And I could have given you the same answer. I think that the thought process of going down the supply chain and the painful experience is like every single vertical task company and what gets you going every morning. And

MPD: macro that's very different than a lot of other companies we see in the tech landscape, right?

Where people are building the next CRM, the next newsletter tool. But it's this. They're competing with other tech people. The kind of the sub-story of vertical SaaS is upgrading old industries to modern tech practices. And it's a process of discovery of these pioneers who stumble into an area.

I'm like, wait, the internet hasn't got here yet. And then they figure out they're going to just go do it. Yeah. So that's a fascinating kind of way to look at this particular

Todd Saunders: market segment. Yeah. I think there's another thing to look at there, which is like every vertical SaaS company. I think we used to look at vertical SaaS companies as what is the TAM of flooring software, right?

The TAM for flooring software, we've estimated to be like 800 million, right? And you would first look at that and you'd be like, that's not big enough. But if then you look at what vertical software is doing, they're all eventually going after the GDP or, for us, the 76 billion of flooring that's bought and sold.

And that's actually where you get through. And if you look at how all these vertical SaaS companies toast, slice, all these big guys, how they got this big is. FinTech or taking a percent of the total GDP ends up being actually their addressable market. They just use software to get into that bigger market.

And that's what I've found really intriguing about the difference between how people used to look at vertical SaaS, and what is a software market. And now I think people are looking at it as what is the total actual market of food logistics or flooring. And at some point, they're going to take basis points of every transaction that happens.

What do

Mike: you guys, so as Mark alluded to, you turn the rock over, you realize, Hey, these guys are pen and paper, or maybe there are some of them are using an Excel sheet. Why build software specifically for them versus piecemealing things together that already exist? There's already email marketing out there.

There are already CRM products out there. Why does it make sense to build specifically for a vertical?

Todd Saunders: I think

Chetan Narain: there's this natural cycle in the technology of bundling and unbundling, which is it's a common theme across a lot of different things. And I think that's what's going on here as well with a lot of vertical SaaS, where over the last decade or two like you did have email took over and Salesforce took over, and there were all these general-purpose tools for how early, horizontal tools in a sense for how people can upgrade communication in general, upgrade your Salesforce in general.

And it sets a new standard for how the world works. And what emerges out of that is all of these horizontal companies are solving for the general use case. And. No one sends letters to anyone anymore. We send emails, but that leaves an opportunity for someone to think about the problem from an industry-specific place and build all of the stuff that will make email, for example.

Mesh with the specific use cases of an industry. And I think that's where we are in the tech cycle where, again, we've talked about how the internet is, 10 or 20 years old at this point, and it's ubiquitous in all of our lives. And there's already this baseline of okay, like here's technology.

And so the opportunities with vertical SAS are okay. There's all of this technology that exists. So how do we adapt it and how do we mold it to the specifics of any individual industry, which is hard for someone to do if you're solving for that general use case? Yeah. Can I take

Todd Saunders: that from a, I look at it a little bit differently and it's probably our backgrounds being he's on the tech side and I'm, kind of sales and marketing background because For me, realistically, our software, every, our website, CRM, and our ERP each have one feature that makes it unique to flooring.

Realistically, could you use this for any industry? The answer is yes. Could they get a website from Squarespace? The way we've looked at it though is, If you want to show inventory on your website and get real inventory from manufacturers, you have to work with a flooring-specific software company because we have access to all the data.

There's no aggregate API where you can just tap into and get access to thousands of manufacturers of data. You really would have to go to a flooring-specific company to get that, who has the relationships to get those things. So where I'm going with this is I think being vertical SAS makes the customer service.

And the customer acquisition easier. I am constantly thinking about one customer, which makes my marketing much easier, which makes our sales much easier. It makes training people internally much easier, which means customer service is easier. So I think from a business standpoint, from a tax standpoint, from a retention standpoint vertical SaaS is very what's the right word I'm looking for is interesting.

Less on the product, because I think all the products could be ubiquitously used across multiple industries, but more on how you operate efficiently to go after just one target customer versus multiple target customers.

MPD: Can I pull on a thread you got on earlier? You said you're looking at software sales, the initial market, and then you think about GDP, and I know you mean GDP in that market segment.

Yeah, exactly. Okay. Bye. Can you give a sense of what the basic playbook is for vertical sass what the software plays, and how it expands to participate in the GDP as you described?

Todd Saunders: Sure, so I'll give our example, and I think everyone has a slightly different variation of this, but I do believe every vertical sass company ends up being some sort of, percent of the transaction company, whether that's FinTech.

I think most people think of that through payment processing, right? That's the obvious way. So my view of the playbook is you start with software, you get a big enough network that then you get into FinTech, right? That's the bread and butter thing that most people think of because then you get a percent for us.

We make about 600 a month per retailer in software. But then if I'm getting 60 basis points or a full point on their credit card processing that Tam is the 70 billion of flooring that's bought and sold every year. So I think that's bread and butter for most companies. I think what's interesting about our company, and I actually saw this recently with Slice.

Is they took it a step further where they now start offering their own brand of pizza box, right? Because all of their pizza restaurants need pizza boxes. They can bulk buy it. They can then brand it and they can make money on the supplies around the pizza restaurant, not just the credit card processing.

For us, it's similar in flooring. Flooring is a commodity. So now what's happening is manufacturers who are making flooring are coming to us and saying, we want to launch our flooring product through you to your customers. So we can offer this unique digital experience. So we're wedging our way in there.

We couldn't do that if we were. Vertical SAS for cars, right? Because cars, each of their own brand, it's not a commodity. We wouldn't really be value. So for us again, it's payments. And then we actually are able to get into the. The widget and the actual thing, but I think in other markets, that's not possible.

It's not like in food distribution, they're going to launch a someone's going to go live with a new brand of tomatoes through them, but everyone has their own, spin on that. Yeah. So we actually do have our own brand of tomatoes.

Chetan Narain: We do not have a pepper brand of tomatoes, but one of the interesting things that's happened and to your point and to your point.

Around, every vertical SAS company has a wedge into the market. And then once you build a network of customers and distribution and so forth, there's a lot of other people that want to participate in that network. And one of the dynamics that we're seeing is because we have a bunch of restaurants and grocery stores and convenience stores ordering digitally from wholesalers for basically the first time ever, what's happened is there's this very high intent digital surface.

That's super interesting to a bunch of food manufacturers and food brands out there. And these are all the brands, Nestle Unilever that, we all see on the shelves and they have these huge consumer marketing arms that want to sell more stuff to more people. And they've always had a hard time replicating what they're doing on the consumer side and the B2B side, because this digital medium hasn't existed.

And so one of the things that's been interesting recently is we started to engage with these big brands and. A lot of them actually do want to launch, Hey, I've got this new brand of chicken wing that I want to push out to restaurants, or, I have the new drizzle that I want to sell to, a bunch of restaurants.

And we're seeing that emerge as one of these interesting new use cases that to your point, like just doesn't exist in a world before vertical SAS. And so there's a, that's just an example of what you're saying around. You're creating additional value beyond the existing 10. Yeah,

Todd Saunders: I think it's like going after.

It's like payments or distribution, right? Like we look at as every software, every website or ERP we sell is a new customer as part of our distribution channel. And then who's interested in that distribution channel. For them, it could be a new, uh, whatever I said, tomato or a new chicken wing.

And for us, it's a new flooring product. But in the day, like having distribution in one industry outside of just payment processing is a really interesting opportunity to go after the GDP of that industry specifically. Yeah. And

Mike: to your point, that's what makes the network so valuable, right? And what could potentially make you guys so valuable to an acquirer one day.

I think the term we'd use on our side of the table is a SaaS enabled marketplace. Yeah. Absolutely. I think it's really interesting because I know in, in pepper's history and some of your competitors took different approaches to this market. Some say, Hey, we're going to build a marketplace for goods and we're going to let people, buyers and sellers come on there and try to fix this market this way.

You guys determined pretty early on that wasn't the right way to go. And I think the more we've seen companies build, the more I think we think that most markets actually require or should be built as SAS first marketplace or distribution layer second instead of marketplace for SAS second. Okay. I think just to give such a unique moat to the business, to really own that customer relationship, have the embedded software own their website, right?

Own their distribution to then bring in things like advertising, to bring in things like flooring, to bring in things like your own tomato brand. And I think that's, what's really exciting about the vertical SaaS industry too, because these are monster TAMs. Like to your point, flooring is a hundred billion dollars a year or whatever it is, and you're in a trillion dollar market, which is a number that most people can't even

Todd Saunders: comprehend.

It's if I had 4, 000 flooring retailers, that's really interesting to a flooring manufacturer. If I had 4, 000 customers across multiple industries, that's essentially interesting to nobody.

Mike: 4, 000 flooring retailers, your point, if you, in the old days, the big four manufacturers would have to hire an army of salespeople to get access to them.

They would drive around in four Tauruses door to door trying to sell flooring to all them across Nebraska. It would take weeks, months, years, steak dinners, et cetera. Now you own their

Todd Saunders: website. Yeah. So we can digitally do distribution and

MPD: overnight, right? One thing I think is so interesting about this is if you look at it from up the LP perspective.

They might've looked at the world before and said, Hey, I want exposure to an industry. Who's the big player in the industry. I'm going to buy some of their stock on the public markets. Vertical SAS represents a way to get exposure to a broad industry across a lot of companies within you're really indexing the industry.

So from like this diversification financial exposure concept, a little bit abstracted from the day to day operations, it's very fascinating. It's a way to buy in and ride a broader wave, not just an idiosyncratic

Todd Saunders: company. Yeah, it's good and bad in that way. Like our transactional revenue, listen, we're 90 percent recurring software revenue.

So our balance is still, we're still in the recurring. Software revenue side of the business where we believe long term transactional revenue will get us to hundreds of millions of revenue at much higher margin, but we're not there yet, but we are on the path and we're seeing the right traction. I will say that's good and bad, right?

For us, when we're in 2020 and 2021, flooring retailers couldn't keep up with how much flooring they were selling. And for us to be in the transactional side, that was amazing, right? Every graph we showed up into the right, up into the right, up into the right, Now consumers are pulling back. I see it every single day with our flooring retailers, but our transactional side is then hit.

And what's hard for investors is they're used to like, you've your software side of the business, it's growing at whatever, 30 percent year over year. And it just compounds, but then they have to wrap their minds around this like transactional side of the business that I think if you look over a 10 year period goes up into the right, but in a one year or six month or two year period is, impacted by economics impacts or the vertical that you're in.

So the exposure is good as long as you know what you're getting yourselves into and you have a broader look at it. Totally.

Mike: Switching gears for a second here. Everyone's favorite topic is your Mark and I talked a little about this before, but what's the AI read in your industries. Now, I think we, you read the news now and the overwhelming consensus that AI is going to be everywhere.

It's going to steal your job. It's going to kidnap your kids. It's going to be, it's game over, right? You guys work in huge Tams, right? The majority of Americans work it places and enrolls that you guys are servicing, right? Or companies like yours. What's the read from your customers on AI? Do they expect it from you?

Are you building it in a way that they'll never know it's there and increases productivity? How are you guys thinking about

Todd Saunders: this?

Chetan Narain: One of the things that was actually interesting and surprising to me in our industry is we talked about before food distribution in general has been under penetrated by technology and it's taken a while for the internet to get there and so forth.

And it was actually surprised that at an industry conference last year, this was one of the trade groups that exists in the food distribution industry. They have a tech committee that talks about tech related things. And one of the topics at that tech committee meeting was actually AI. And what does AI mean for food distribution?

So I was genuinely surprised by how quickly this AI thing has made its way like into our customer base. And I think it's playing out in a couple of ways. So first things first, I think when people in our industry say AI, I think It's a broad term that just means like a computer is going to do something that I don't have to think about.

And there are a lot of things that will fall into this AI category that a year or two ago we would have just thought of as Hey, this is a push notification that happens when an event is triggered. Or Hey, here's like a customer alert when someone hasn't ordered in a while. And. The idea or people thinking about that as AI, I think is a reality, right?

And so there's all of this reframing of some of the stuff that was just happening before. That's more interesting because it can be framed in the AI light. And the second thing that's happening is I think in general that a lot of the LLM stuff. He's a pretty good replacement for a lot of the e commerce UIs that we have out there.

And if you think about e commerce, there are two major reasons why you're going to go to an e commerce site. One is to browse and you're not sure what you want. And for that, I think all, a lot of the UI experiences that we have, continue to make a lot of sense. And the second is you know what you want and you just want to place your order.

And for that there's no real reason to like fire up your Uber Eats app and find the restaurant you want, tap on it, go find the dish you want and tap on it. And it's much simpler to just be like, Hey, I want two tacos. And what compounds that in our industry is because it's historically been under penetrated, there are a lot of customers that still place their orders in this way, right?

The email, their order to the sales rep or text it or leave a voicemail. And so the transition from that to an app is much bigger than the transition from that to, okay, like now you're just texting a different number and the AI will do it. So I think there's actually a huge opportunity to get greater penetration in the industry by enabling some of these, AI forms of ordering.

The third thing that I think is going to happen is there's a lot of ways that AI can just drive efficiency throughout the industry. And food distribution in general, I think is an area where there are like hundreds and hundreds of manual tasks, right? You have someone that's in charge of figuring out whether or not payments have been processed.

You have someone that's in charge of answering random customer support questions. You have sales reps who have to go out there and okay, what are all the restaurants in the world? What do I say to them when I walk in? And I think there are a lot of things that AI and, the LLM sense of the word can do to help make a lot of those decision, that decision making easier.

So one of the things that we're investing in right now is a set of tools to help distributor sales representatives transition from a world where primarily they're just taking orders as they come in via text and email to a world where they're actually out there, like building the business. And if you're out standing in the middle of New York City, what are the restaurants around you that don't buy from you, what are their menus and how can we map their menus to items in your catalog and give you a playbook for what to say to that restaurant when you walk in so that you can make a compelling pitch.

So those are some of the ways that I think AI is going to help our customers. And then internally for us, I think, we're already experimenting with AI in terms of efficiency in a number of ways. One of the things that we do a lot of is integrations between pepper and various ERP systems. And if you think about what those are, it's really a mapping of one data structure to another.

And that's something that, LLMs as they stand are actually pretty good at. And so we've seen some success where, LLMs can help our integrations be written faster and help us debug things when things are

Todd Saunders: going wrong. Yeah, I would totally agree with all of that. I think for us as an, our customer biggest pain point today is they can't find people to install the floors that they sell.

So most of what they're thinking about is like, how do I get blue collar people to trades people to install the flooring? Now, our version of AI at this point is we offer an email marke