🏴☠️ ⚡️ Defining the SaaS Ecosystem & 'Niche Verticals' for Investment Precision (Acquisition Concepts)
This newsletter is dedicated to Acquiring and Operating Micro SaaS firms. Join us every Saturday morning for acquisition case studies, operational tactics, growth frameworks, and more!
Quick heads up:
As Acquisition #1 transitions from transformation to steady state and we gear up for Acquisition #2, you’ll start to see our content adjust accordingly to ‘Acquisition Concepts’ from ‘Deal Teardowns.’ Simply put, we are now hyper-focused on tuning our screening, diligence, valuation, and value-creation playbooks, which we will, of course, share with you all. All deals in the pipeline are those we are actively pursuing and, thus, will be kept confidential…
Lastly, we just finalized a brand refresh and are eager to share it with the world. You can access our updated Investment Criteria & Select Growth Frameworks below:
Now, on with the show!
TABLE OF CONTENTS:
SaaS Taxonomy (Segments, Categories & Target User Bases)
Working Definition: Niche Vertical Sectors
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SAAS TAXONOMY (SEGMENTS, SUBCATEGORIES & TARGET USER BASES)
Many legendary investors have commented that their biggest losses were the result of investing in a business they thought was one thing when, in fact, it was another.
To support clarity here, we’ve spent time defining a view of the SaaS landscape, utilizing a scientific concept called ‘Taxonomy’:
The science and methodology of categorizing or classifying objects, concepts, or information into hierarchical groups or types.
This is, of course, a dynamic exercise that evolves as the world does.
To access the full version of our current list, please click on the notion table below. For convenience, I’ve also included a sample of 10x SaaS Segments with definitions, subcategories, and target user bases.
CRM (Customer Relationship Management): enables businesses to manage and analyze customer interactions and data throughout the customer lifecycle. By compiling information on customers across different channels and points of contact, the goal is to improve customer service, retain customers, and drive sales growth.
Subcategories: Sales Automation, Customer Support, Marketing Automation
Target User Base: Small Businesses, Mid-market Businesses, Enterprise-level Clients
ERP (Enterprise Resource Planning): integrates various functions into one complete system to streamline processes and information across the entire organization. The suite of tools includes applications for accounting, human resources, supply chain management, and more, facilitating information flow between all business functions.
Subcategories: Financial Management, Supply Chain Operations, Human Resources
Target User Base: Small Businesses, Mid-market Businesses, Enterprise-level Clients
SCM (Supply Chain Management): designed to manage the flow of goods, data, and finances related to a product or service from the procurement of raw materials to the delivery of the product at its final destination. It helps companies manage and optimize their supply chain operations for increased efficiency and reduced costs.
Subcategories: Inventory Management, Order Management, Logistics & Shipping
Target User Base: Small Businesses, Mid-market Businesses, Enterprise-level Clients
Retail Technology: provides retailers with the tools to manage and analyze consumer interaction and retail operations. It can include point of sale (POS) systems, inventory management, customer relationship management, and analytics for both online and brick-and-mortar stores.
Subcategories: POS Systems, Inventory Management, Customer Loyalty Programs
Target User Base: Retailers, E-commerce Businesses, Omnichannel Retail
Logistics and Fleet Management: optimizes the management of logistics and vehicle fleets, providing features such as real-time tracking, route optimization, inventory management, and maintenance scheduling.
Subcategories: Route Optimization, Fleet Tracking, Supply Chain Visibility
Target User Base: Logistics Companies, Fleet Operators, E-commerce Businesses
Education Management: facilitates the management and administrative processes of educational institutions, including student information systems, learning management systems (LMS), and classroom management tools.
Subcategories: Course Creation Tools, School Administration, Student Engagement
Target User Base: Educators, Schools, Universities
Legal Technology (LegalTech): provides tools for law firms and legal departments to streamline processes such as document management, client management, case management, and legal research. It enhances efficiency and productivity in legal practices.
Subcategories: Document Management, Legal Research, Practice Management
Target User Base: Legal Professionals, Small Law Firms, Large Law Firms
Real Estate Technology (PropTech): assists in the buying, selling, managing, and leasing of real estate properties, integrating tools such as virtual tours, property management systems, and real estate analytics.
Subcategories: Property Management, Real Estate CRM, Virtual Tour Software
Target User Base: Real Estate Agents, Property Managers, Real Estate Investors
Low-Code/No-Code Development Platforms: enable the development of applications with minimal coding, allowing non-technical users to build or customize applications using graphical user interfaces and configuration instead of traditional programming.
Subcategories: Application Development, Workflow Automation, Database Builders
Target User Base: Non-Technical Users, Business Analysts, Small to Medium Businesses
Generative AI: a category of SaaS that leverages Large Language (or Inference) models to generate content, predictions, or decisions based on input data. It can include capabilities like creating text, images, or videos, providing recommendations, and automating decision-making processes.
Subcategories: Content Creation, Design and Media, Code Generation, Data Analysis and Synthesis, Personalization
Target User Base: Content Creators, Designers and Creative Agencies, Developers and IT teams, Business Analysts and Data Scientists, E-commerce and Retail
WORKING DEFINITION: NICHE VERTICAL SECTORS
As an extension of the above and in accordance with the best practice of ‘defining terms’ to drive alignment across the team, we’ve worked to establish a definition of what it means to be a Niche Vertical. As you know, our strategy relies on acquiring SaaS firms that participate in Niche Verticals so that we can avoid competition from insanely well-resourced tech titans/incumbents and venture-backed players pursuing large addressable markets.
Here’s where we are at:
1. Vertical Focus: SaaS solutions designed exclusively for specific industries or sectors, characterized by tailored functionalities that address unique challenges or requirements of those industries. This specialization and customization of SaaS offerings are not just niche in terms of market size or business type but are intrinsically linked to the specific operational and strategic needs of particular sectors, potentially leading to higher adoption rates and a greater impact on operational efficiencies.
2. Less than 250,000 U.S. Business Entities: Setting a threshold of fewer than 250,000 businesses helps focus on smaller, more specialized markets that are less likely to be saturated with competition. This size indicates a targeted yet sufficiently large market to sustain a new entrant or allow for growth within niche offerings.
3. Less than 3% of Total U.S. Businesses: This parameter aligns with the need to find markets that are not overly crowded. By keeping the focus on industries comprising less than 3% of all U.S. businesses, you're likely looking at industries that are specialized enough to have specific needs, which can be highly advantageous for Micro SaaS solutions designed to meet very particular business requirements.
4. Growth Rate of Less than 20%: A cap on the growth rate of less than 20% helps avoid industries that might be experiencing a bubble or are overly volatile, which could represent higher risks. It targets industries that are growing but not so rapidly that they might become too competitive too quickly or might not sustain long-term growth.
5. High Proportion of SMB and Mid-Market Entities: This criterion focuses on industries predominantly made up of small to mid-sized businesses. It ensures the targeted niche naturally aligns with the intended customer base for Micro SaaS products, emphasizing sectors where decision-making processes are quicker and organizational agility is higher.
6. Moderate to High Fragmentation: Indicating less dominance by a few large players and more room for smaller players to defend market share (and profitability). This characteristic often leads to faster adoption of innovative solutions, as businesses in fragmented industries are looking for competitive advantages.