The Defensibility of Vertical SaaS

The Defensibility of Vertical SaaS

Vertical SaaS companies face an existential threat from LLMs such as OpenAI and Anthropic, which has caused a dramatic reset (downwards) of SaaS valuations. Soon there won't be many tasks left that AI agents can't do well.

We're observing four themes playing out, powered by the democratization of access to AI-powered tools:

1. LLMs/Hyperscalers (backed by an unlimited amount of capital) will find opportunities to encroach on the more attractive vertical SaaS companies.
2. Incumbent companies leverage AI-empowered development speed (and cost) to attack and eat the small/strategic vertical-SaaS players.
3. Entrepreneurs are emboldened by greatly lowered barriers to attack the big incumbents.
4. Customers (SMBs) are empowered to build their own software solutions.

All four of these trends should be watched closely and evaluated from an investment perspective.

How should companies be thinking about defensibility?

We believe that in this world of AI-powered disruption, companies should be shoring up their thinking across four areas:

1. Brand (Trust): Customers will continue to give their business to brands they trust.
2. Networks: Companies should be thinking about building out partnerships, integrations, and how they can become embedded into customers' existing workflows.
3. Proprietary Data: AI craves access to high-quality, unique data. Whoever has the best data should be positioned to extract defensible economics.
4. Channel Ownership: Locking in supplier, customer, or distribution channels will be more important than ever.
   

Whether you're an entrepreneur or a well-established incumbent, you should be focusing your AI defensibility strategy around the four areas listed above.

My takeaway: It's an exhilarating time to be an early-stage investor. The role of the entrepreneur, and how they're thinking through the issues above, is more important than ever.

Exciting times ahead.