Over the course of the past few months, I’ve been working with Brian Feinstein and Trevor Oelschig on creating some content pieces around industry cloud—an area that Bessemer Venture Partners has been following closely and is actively looking for quality companies to invest in. Bessemer’s focus on industry cloud, particularly now, is smart for a variety of reasons.
At a very high level, business software can historically be described in four distinct waves. At the dawn of the computing era (the ‘60s and ‘70s), the first wave of software was built for the mainframe computer. These two decades gave rise to hugely successful companies like IBM, NCR and Honeywell. The next wave of software, which dominated the ‘80s and ‘90s, was focused on the client-server and personal computer. In these on-premise environments, companies like Adobe, Microsoft, Oracle, SAP and many others rose to prominence.
The third wave of software came with the rise of the internet and cloud computing in the first decade of the 21st century. This wave was focused on horizontal saas—i.e. companies that were functionally focused in areas like sales, marketing, CRM, human capital management and supply chain management. Some notable companies that came out of the horizontal cloud include: Salesforce, Eloqua, Cornerstone OnDemand, Marketo and many others.
In the past several years, we have begun to see the beginnings of a fourth wave of software businesses—companies that are building industry-specific cloud solutions. Rather than focusing on horizontal functions, these industry cloud companies build vertically integrated end-to-end solutions that are designed for a specific industry. Athenahealth, which provides physician practices with online practice management and electronic medical record services, is one example of a successful industry cloud company. Today the company is worth ~$5B. There are a number of other industry cloud companies that have likewise been successful:
From an investment perspective, the traditional belief has been that vertical saas companies are operating in markets that are too small to create $1B+ outcomes. As a result many investors have shied away from investing in these companies. But that belief is entirely misguided. The table below provides a sampling of several industry cloud companies that have been tremendously successful:
There are several reasons why industry cloud companies such as the ones above have the potential to succeed in today’s world.
- First, there has been a fundamental technological shift; we are witnessing a migration from the clunky client/server environment to the more efficient cloud world. This shift has created an opportunity for industry-focused entrepreneurs to replace slow-to-move incumbents.
- Second, the cloud has created new markets for software. Software used to be limited to knowledge workers in a select number of industries. Today, cloud solutions, and particularly mobile offerings, appeal to industries as wide-ranging as real estate, healthcare, and education.
- Finally, SMBs are now potential clients due to decreasing costs. In the on-premise world, small businesses were ignored by software companies because it was too expensive to sell to them. In today’s world, however, the internet has made it far easier to sell and distribute software, reducing CACs and making it possible to sell to SMBs.
Building a much-needed cloud solution for an industry may not get much publicity in the press, but it’s certainly worth pursuing from a value perspective. Moreover, there are a number of industries that are completely wide-open such as: agriculture, oil & gas, metals & mining and the non-profit & public sectors. These industries and many more are in great need of vertical cloud solutions. At Bessemer, there is a lot of interest in finding the best cloud companies supporting these industries. If you’re an entrepreneur building a vertical saas company in one of these areas, I’d encourage you to reach out.