Vertical SaaS and the Myth of the Industry Insider Founder

If SaaS were a religion, its catechism could be summed up in a single phrase: product-market fit. This concept describes a product that satisfies a strong market demand and was popularized by Marc Andreesen in the mid-aughts, who famously called it “the only thing that matters for a new startup.”

The general wisdom is that PMF is most often achieved by founders who?themselves?fit the market. So-called “founder-market fit” is achieved when founders have “a deep understanding of the market they are entering” and “personify their product, business, and ultimately their company.” There are two ways a founder can know if they fit their market: (1) They are building a product that?solves their own problems?or (2) their product addresses a need in an area where they have deep domain expertise. If either or both conditions are met, the founder can be confident that they fit their market and their product will too.

The problem is that both founder-market fit criteria assume the founder has insider status. The insight that launches their company either comes from previous experience as a consumer or a producer in a given sector. Does this mean a founder with no previous experience in an industry can’t build a successful startup? Of course not. This is where I should point to the two wealthiest founders in history as counterexamples. But frankly, most founders are not Jeff Bezos or Elon Musk — and they don’t need to be. A far more instructive example is to look at vertical SaaS as a sector, where startups often thrive not in spite of their founders’ outsider status, but?because?of it.

THE OUTSIDERS COME TO VERTICAL SAAS

Vertical software is not a new idea. Insiders have always built software tailored to the unique workflows of their industry and their expert understanding of the needs of their peers. But today many of the vertical software companies built by insiders are being dethroned by startups helmed by founders with little or no prior connection to their industry. How could this happen?

The short answer is that legacy software built by industry insiders usually sucks. It’s difficult to use and painful to look at. It’s better than nothing, but just barely. The truth is the industry insiders knew the features to build and problems to solve yet lacked the experience in software development to create a great product. These insiders had natural founder-market fit, but most only achieved product-market fit because their customers lacked better options.

The subpar quality of vertical software built by industry insiders created a massive opportunity for a new generation of founders who cut their teeth building modern SaaS products. Now that embedded fintech and other “second miracles” have shown investors it’s possible to dramatically increase an industry’s core TAM,?capital is flowing into vertical SaaS startups at an unprecedented rate. The incentive is finally there for outsiders to try their hand at building a better vertical SaaS product, but many would-be founders hesitate to take the plunge because they have little or no experience in the industry.

HOW TO BECOME AN EXPERT IN AN UNFAMILIAR INDUSTRY

An important lesson from vertical SaaS is that it is easier for a founder to learn an industry than to learn how to build great software. The previous generation of vertical software companies reversed the cart and the horse. The new vertical SaaS founders have consistently shown that they can overcome their lack of insider knowledge and transform entire industries with great software built through rigorous diligence and collaboration with industry experts.

The starting point for vertical SaaS founders is to acquaint themselves with their industry at a high level. They should understand key metrics like the number and size of the businesses in their industry, the industry’s software spend, and so on. But to deeply understand their industry, vertical SaaS founders must become intimately familiar with the day-to-day workflows of their target customers.

There are many ways for a vertical SaaS founder to get to know their customers. Interviews are a great place to start, provided the founders are asking the right questions. The key is not to ask the potential customers what they want from their software, but to discover what they need by asking them about how they work and the challenges they face servicing their own customers.

Ideally, founders should spend time shadowing potential customers and observing how they work. This can avoid the natural tendency for potential customers to confuse their wants and needs or gloss over key aspects of their workflow during an interview. The founders of Squire — a platform for barbershops and salons?last valued at $750 million?— took this logic to its extreme and operated their own barbershop for a year before starting to build their software so they could understand the minute operational details of their target customers.

Potential customers and other industry experts will help vertical SaaS founders check their implicit assumptions about the workflows of their target customers and can provide feedback that enables rapid product iteration on the path to an MVP. In fact, an MVP is one of the best ways to gain a deep understanding of an industry because it gives founders real data about how people in that industry work, and expert insight can significantly accelerate the time to a successful MVP launch.

The new wave of vertical SaaS companies proves that founder-market fit is something that can be intentionally cultivated through close collaboration with potential customers and other experts. What this looks like in practice will vary from startup to startup, but it’s time to abandon the myth that a founder needs to be an industry insider to launch a successful vertical SaaS company.