Vertical AI

Bessemer Venture Partners coined the term “SaaS cloud” and have been highly influential in shaping the SaaS landscape. Among Bessemer’s contributions stands out the “State of the Cloud” annual report.

In their latest 2024 edition, titled “The Legacy Cloud is Dead – long live AI Cloud”, Bessemer identifies 5 trends that are defining AI Cloud. Here, I will focus on the fourth one – “Vertical AI shows potential to dwarf legacy SaaS with new applications and business models” – as it could influence Fabrica Ventures’ investment strategy.

The key question is whether new Vertical AI startups are likely to replace incumbent Vertical SaaS companies.

In certain service verticals — especially those that are (i) outsourced to third-party providers (accounting, legal services, medical billing, etc.), (ii) labor-intensive, (iii) low-margin, and (iv) challenging to differentiate — AI (LLMs, Agents, Copilots) is enabling the development of entirely new SaaS solutions. For these unserved (until now) verticals, the opportunity lies in creation rather than replacement.

However, many sectors are already well-served by established Vertical SaaS solutions, such as Procore in construction, ServiceTitan in field services, and Yotpo in e-commerce, to name a few.

From our perspective, these incumbent Vertical SaaS companies, with the advantage of scale, are well positioned to integrate AI into their offerings. In fact, we are seeing Vertical SaaS incumbents incorporating AI features daily – do not expect them to be sitting ducks.

Recently, the CEO of a Fabrica Ventures SaaS portfolio company emphasized this point in a conversation with us: “matter of fact we are releasing a fully automated [xxx] product in November… Why? Because we have the scale and our customers want choice between fully human mode, copilot mode, and full autopilot”.

Moreover, it remains unclear how Vertical AI software will disrupt the GTM economics, since S&M are typically the largest expenses for SaaS companies. While AI is expected to reduce R&D costs and accelerate product development, the broader unit economics implications remain uncertain.

Conclusion

At the end, Bessemer predicts that: “The first Vertical AI IPO will occur within the next three years”.

We also believe so. But in verticals, such as legal, where AI technology is making it possible to serve as a SaaS.