$100m+ ARR in SME Vertical SaaS: What’s the path to success?

SME vertical SaaS (VSaaS) companies develop specialized software tailored to specific industries, ranging from construction and hospitality to healthcare, restaurants, and fitness centers. The common wisdom for many years was that horizontal SaaS players tend to produce larger outcomes than vertical SaaS. And for the most part, this has been true. For example from 2018 to 2021, out of 80 software IPOs, 76% were horizontal SaaS companies, while only 24% were vertical SaaS companies. However, success stories such as Toast ($14bn+ market cap), Procore ($9.4bn+ market cap) and ServiceTitan ($9bn+ valuation) have shown that SME vSaaS business models can also produce outliers.

At Eight Roads, we have been long-term believers in the category, supporting companies such as:

• Toast ($14bn market cap), vertical SaaS for restaurants, our US team invested in the Series B in 2015
• Treatwell (exited), vertical SaaS & marketplace for the wellness industry, our EU team led Series B in 2011
• Lighthouse ($100m+ raised), vertical SaaS for hospitality, our EU team led the Series A in 2017
• Amenitiz ($30m+ raised), vertical SaaS for independent hoteliers, our EU team led the Series A in 2022

SME Vertical SaaS in the Spotlight

We foresee a marked acceleration in both innovation and investment in SME vertical Saas in the coming years, driven by 4 main trends:

• Generational change: we've seen a significant shift in the business landscape. Younger generations of business owners have taken up the reins, leading industries that were once considered traditional or "old-school" towards a more digital future. Additionally, many small businesses now struggle to hire and retain staff, a problem that's sometimes severe enough to force them to close their doors. This shortage exacerbates the pressure on these businesses to adopt technology, not only to stay competitive but also to compensate for a shrinking workforce.
• The emergence of embedded finance: technological and regulatory progress has made it much easier to embed financial services into vertical SaaS, covering payments, lending, account management, and more. This is thanks to the growth of Banking-as-a-Service (BaaS) providers and other infrastructure players, whose robust systems support these integrations. This development strengthens the business model of SME-focused vertical SaaS companies by boosting ACV and customer retention. By integrating financial services, these platforms become a vital part of small businesses' daily operations, enhancing loyalty and dependence.
• Increasing market sophistication and post-Covid shift: as industries increasingly embrace digital solutions, the demand for specialized software has surged. This shift has raised market expectations, pushing SMEs to seek more comprehensive and user-friendly tools to compete in a landscape often dominated by large multinational giants with advanced pricing strategies, sophisticated demand forecasting, and exceptional customer experiences. To stay competitive, small companies have no choice but to modernize.
• The AI revolution: SME vertical SaaS companies hold a treasure trove of proprietary data, uniquely positioning them to capitalize on the AI revolution. In particular, AI will bring further workflows automation (automated note taking, appointment taking bots, decision-making assistants) and business intelligence (dynamic pricing, predictive analytics) which can lead to substantial productivity enhancements.

From our investments and thorough market analysis, we have distilled six key insights for SME vertical SaaS (VSaaS) companies.

Learning 1: Becoming multi-product is essential

The most successful companies SME VSaaS have all evolved into industry-leading platforms by diversifying their product offerings, including services like payments, analytics, e-commerce, fintech, and marketing. These multi-product companies demonstrate higher ACV, LTV, and net revenue retention rates (NRR), resulting in larger TAM, accelerated growth, and enhanced profitability. For instance, Mindbody expanded its client base from 42k to 68k (+62%) in 6 years (2014-2022), with ACV doubling from $2.4k to $5.2k (+116%) through product diversification (initially started just as a scheduling tool, then added payments, marketing tools, lead management and others).

Having said that, one cannot rush this journey: Procore took 10 years to find product market fit for its initial product, which focused on job site communication. It waited 14 years to introduce a second product and 20 years to incorporate financial services into its solution.

Learning 2: As a result of becoming multi-product, ACVs increase over time. It is difficult to create a large business with small ACVs

SMEs Vertical SaaS Average Contract Values (ACVs) can range from $1 to $60k, increasing over time due to upselling and new product additions. As a vertical SaaS company, ACV is a key metric that a company should continually strive to increase by incorporating additional modules, offering premium tiers, going up-market, or benefitting from the growth of the end-customers.

As illustrated in the chart below, most success stories in the SME vertical SaaS sector have managed to double or triple their ACV over the past 5-10 years. For example, Mindbody's ACV was $1.2k when the company started, and it has since increased by 320% to $5.1k.

Top-performing companies also regularly reassess pricing, incorporating annual increases during renewals. For instance, Doctolib Patient started at €1.2k per year and now stands at €1.7k per year (3.5% CAGR).

Learning 3: Payments and fintech products typically represent a high portion of revenues for SME vSaaS

Most of the Public SMEs Vertical SaaS are making 50%+ of their revenue from financial services. For example, Toast’s fintech solutions now account for more than 80% of their total revenue. A couple of key learnings:

• Payments in the US is more lucrative than in Europe, hence in EU you need to have a very strong benefit for users to be able to attach payments
• Additional financial services can include payroll (Mindbody Staff management ), lending (Toast?Capital Loans ) or even cards for spend management

Learning 4: The power of community: many players developed specific industry associations, communities or conferences to build credibility around their brand

Building a community—whether online through platforms like YouTube and Slack or offline through conferences and in-person events—is essential for establishing authority. Beyond just creating connections, these communities enable companies to become the voice of the customer and thought leaders in their respective verticals, guiding industry trends and shaping the conversation.

Success in this area requires both scale and consistency. ServiceTitan's Annual conference or Amenitiz's "The Hotel Club " are excellent examples of this approach in action.

Learning 5: M&A can be a great tool to enhance product capabilities or go international

Most leading SME VSaaS have performed multiple acquisitions - to grow internationally or expand their product into adjacent categories.

M&A can be a more cost-effective way of acquiring customers compared to traditional go-to-market strategies. However, building expertise in M&A requires dedicated legal and sourcing teams to execute it effectively at scale.

Learning 6: There has only been a handful IPOs in the space, but a greater frequency of exits through Private Equity (PE) or Strategics (~8x EV/Rev LTM)

Recent vertical SaaS IPOs have been rare, and companies were sizeable and profitable before listing (median LTM revenue of around $200M, YoY revenue growth of 40%, LTM free cash flow margin of 8%, and net dollar retention of 115%). IPO is an exit strategy that is typically only viable for companies that are best-in-class in their industry (ie. 20%+ market share) and have a strong presence in the US. ACVs and Gross Margin matter: Public companies in the space trade differently based on Gross margin (22% for Toast vs. 82% for Procore) and ACVs ($30k Appfolio vs $4k Lightspeed)

That said, Private Equity (PE) firms often find vertical SaaS companies particularly attractive because they can be platform plays for future roll-up strategies. Also, they tend to have a sticky product, high margins, and tend to achieve positive FCF faster than horizontal companies. PE firms will typically want to see at least $20M in ARR and profitability.

Acquisitions?are a central part of?the growth strategy of companies like Visma, Access Group or Septeo. These players often prefer entering new markets and verticals through acquisitions, which represent an efficient way to expand and improve their existing software offerings. Visma for example has acquired over 300 companies in the last decade (tens of companies in the Vertical SaaS space).

Relevant large transactions in SME VSaaS include, but are not limited to:

In conclusion, we believe that key factors of success in SME vSaaS are industry expertise, international mindset, and multi-product strategy.

Some common traits of successful SME vSaaS include:

• Industry expertise: Extensive vertical knowledge aids scalability (ie. 2/3 of Toast employees previously worked in a restaurant)
• “One-stop-shop” approach: companies can become the system of record for an industry by adding features like CRM, analytics, marketing, booking scheduling, people management, invoices
• Multi-product strategy: this will allow you to monetize via different direct and indirect revenue streams (SaaS, marketplace, fintech products, etc)
• International mindset: looking at Europe, often most verticals are not deep enough to build a unicorn in one country only; founders have to expand in additional markets to expand their TAM
• Finding the right distribution channel: companies often need to combine different distribution channels to find the right balance between growth and unit economics
• Increasing TAM: companies need to be able to demonstrate that the vertical they are going after is large enough. TAM expansion can be achieved through (1) ICP expansion, (2) International, and (3) Product expansion
• Note: It’s easy to underestimate the TAM of a vSaaS. Shopmonkey (SME vSaaS for car repair) started by selling a SaaS product at $99 per month to independent car repair shops in the US. If we had done a bottom-up market sizing at the time, it would have given a $336m TAM which would be considered too small for a VC-backed startup. Today, Shopmonkey has already expanded its TAM to $3.7bn by adding non-independent repair shops, increasing prices and embedding financial services

We're on a mission to uncover the next wave of unicorns in our SME vertical SaaS landscape. We are working on mapping out new and promising players across Europe, with plans to publish our findings in the coming weeks. If you’re building a business in this space, we’d love to hear your story.

Feel free to reach out to Lucile Cornet and Virginia Bassano ,?let’s have a chat!

Eight Roads is a global venture capital firm managing $11bn of assets across offices in Europe, Asia and the US. We focus on venture and growth equity investments of $10-50m across B2B SaaS, Consumer, FinTech and Healthcare. Together with our associated funds, including our US sister fund F-Prime, our 50-year history of investing includes partnerships with 500 companies such as Alibaba, Amenitiz, AppsFlyer, Chewy, Fareye, Fever, Flywire, Fireblocks, Funnel, Gloat, Hibob, Icertis, Lighthouse, Neo4j, Owkin, Paidy, Spendesk, Tibber, Toast, Wallapop and Xoom