Vertical Market Software
Vertical Market Software (VMS) is software that applies to a specific sector, industry or niche. VMS products are highly customized and generally require extensive domain knowledge. Companies and products in this space may be attractive due to the potential for high margins and pricing power.
This contrasts with Horizontal Market Software (HMS), which applies to a broad number of companies and/or users. Think Microsoft Excel as an HMS product. Spreadsheets are ubiquitous and used by nearly everybody.
Characteristics of successful VMS companies include:
- High margins
- High growth
- Asset light
- Sticky revenue
- Recurring revenue
- Moat
- Less competition
- High barriers to entry
Because of the limited size of each market, VMS software products generally don't appeal to the largest tech companies like Google and Microsoft. These companies will only pursue HMS products that can scale.
Important Factors to Consider
When evaluating specific VMS products or VMS holding companies, it is vital to research each of the following criteria:
- Attrition: extremely important in determining a product's worth. If high, customers are either: switching to a competitor, don't actually need the product, or are indifferent to the point where a company doesn't have a sustainable business.
- Organic Growth vs. Acquisitions: applies to holding companies. Successful holding companies should be able to continue growing organically and should not be fully dependent on making acquisitions.
- Industry/Sector: many industries are cyclical. Also the regulatory environment can change which may impact any software products dependent on it.
Potential Drawbacks and Pitfalls
- Limited scalability: Since vertical market software focuses on a specific niche, the market size is inherently smaller, limiting expansion potential. Geographic scalability may be limited also for software products that specialize in a single market's regulatory requirements.
- Dependency on Industry/Sector: If the targeted sector undergoes a downturn, it can significantly impact the software provider’s revenues.
Companies
Listed below are holding companies that own an array of VMS products: