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Vertical AI Startups: Why You Aren’t Too Late

Edgescale AI
Written by

Meera Oak

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4 min

The AI SaaS revolution is here, driving innovation and shaping the future of the industry. Many assume they’ve missed the boat on AI, but the truth is that we’re still in the early innings of this once-in-a-lifetime technology. There’s a tremendous opportunity for new players to address unmet needs and underserved markets with AI-powered solutions.

Since its 2014 founding, Alumni Ventures has built an extensive portfolio of vertical SaaS startup companies. In the process, we’ve experienced firsthand how vertical software solutions can revolutionize industries and evolve into enduring, highly profitable businesses. Yet, just a decade ago, vertical software companies like Toast and Procore were dismissed as “niche” or “sleepy,” with many doubting their potential.

With the top 20 public vertical SaaS companies in the U.S. valued collectively at over $300 billion, the power of vertical software has become undeniable. Unlike horizontal SaaS giants like Salesforce and Slack that serve a broad range of businesses and sectors, vertical SaaS software is designed for specific industries, with in-depth customization and compliance with industry standards. Those solutions are now part of daily life for millions of businesses around the world, from construction firms and retail businesses to legal and healthcare practices.

Now, an equally compelling solution is emerging in the vertical software space: Vertical AI. Rather than just building on SaaS, this solution harnesses LLMs and generative AI to solve complex problems traditional software couldn’t tackle. As a result, we believe Vertical AI represents an even greater market opportunity than legacy vertical SaaS, opening opportunities in underserved markets.

Unlike their predecessors, these vertical AI applications are equipped to address high-cost, repetitive language-based tasks that dominate many industries (e.g., legal, healthcare, finance) — areas that were previously out of reach of traditional vertical software.

In the past several months, I’ve watched AI-first teams tackle industry-specific challenges using LLMs and generative AI. At the same time, I’ve seen leading vertical SaaS companies continue to provide essential software solutions. For those large incumbents, it is now time to consider integrating AI into their products if they haven’t already – drawing inspiration from pioneers like Intercom, Notion, Zapier, and Canva.

In this blog, we will explore the dynamics driving this promising and competitive category, including:

  • The evolution from Vertical SaaS to Vertical AI
  • The structure that makes this approach so compelling
  • Five underserved markets poised for disruption
“We believe Vertical AI represents an even greater market opportunity than legacy vertical SaaS, opening opportunities in underserved markets.”
Meera Oak
Partner at Alumni Ventures

Evolving From Vertical SaaS to Vertical AI

The SaaS revolution fundamentally changed software delivery, swapping costly, complex installations with efficient, cloud-based access. Early SaaS tools like Salesforce and Microsoft Office 365 offered broadly applicable solutions that suited a wide range of industries, making it easy for companies to scale software use without relying on heavy infrastructure. However, these horizontal tools often needed extensive customization to address specific industry needs, prompting a pivot toward vertical SaaS.

Vertical SaaS targeted the unique requirements of specific industries right out of the box, streamlining processes and reducing the need for customization. For example, Veeva Systems challenged Salesforce by offering a tailored approach for the life science sector, with built-in features for regulatory compliance and clinical trials. Similarly, Toast challenged Quickbooks by offering a product focused specifically for restaurants with features like online ordering, and inventory management.

Vertical SaaS revolutionized industry-specific tools, eliminating the need for unnecessary software upgrades and allowing companies to focus on business KPIs. In 2023, a new era emerged with LLM-native applications targeting roles and industries overlooked by prior vertical software solutions. This marked the rise of Vertical AI, a transformative leap that addresses complex, language-intensive tasks in critical sectors like legal, healthcare, and finance.

Unlike traditional vertical software, Vertical AI handles intricate processes — such as contract analysis in law and patient data review in healthcare — that were previously beyond software capabilities. This evolution not only adds value but unlocks new market opportunities. By automating specialized workflows, Vertical AI stands poised to capture massive markets across these industries, surpassing the potential of legacy vertical SaaS.

The Architecture of Vertical AI

AI advancements are driving the emergence of sophisticated SaaS tools, which can be understood through three layers: foundational, infrastructure, and application:

  • Foundational: This layer encompasses large-scale AI models (like OpenAI’s ChatGPT) that provide versatile, general-purpose AI capabilities, designed for versatile tasks.
  • Infrastructure Layer: This layer includes tools for building, deploying, and scaling AI models, such as ScaleAI and Databricks.
  • Application Layer: The application layer, where AI integrates into end-user products, is pivotal as it leverages foundational models and infrastructure to solve specialized, real-world problems. Unlike horizontal tools, vertical AI solutions address enterprise-specific needs with precision, offering significant potential.

In the world of enterprise SaaS, Vertical AI startups represent a seismic shift. These innovative companies are redefining industry standards and challenging well-entrenched vertical SaaS incumbents with AI-powered solutions that automate high-cost, complex workflows. It’s a David vs. Goliath battle — only this time, David’s slingshot is super-charged by AI.

Vertical AI Startups Addressing Underserved Industries

Below we describe several trailblazing companies leading this charge to disrupt their industries and take on the giants.

Billables AI automates billing, invoicing, and operational workflows for professional service providers such as lawyers, consultants, and accountants. By integrating with widely used platforms like Microsoft, Zoom, and Google Suite, it uses AI to generate detailed billable reports and centralize data. While many companies still rely on manual methods (even timers and handwritten logs!) and generic software — Billables completely automates these time-intensive and boring tasks. It challenges Clio and similar legal practice management tools by offering a more integrated, autonomous solution​.

RESTAURANTS

Loop AI empowers restaurants to manage finances and reputation by automating the reconciliation of transactions from delivery platforms like Uber Eats and DoorDash. Its real-time dashboards consolidate data, flagging issues like incorrect commissions or missing fees, while also scanning customer reviews to uncover operational weaknesses affecting reputation. Unlike broader tools like Toast or costly ERP systems like Oracle NetSuite, Loop focuses on solving the unique challenges of third-party delivery integrations.

HOME & COMMERCIAL SERVICES

Essential AI transforms operations for field service businesses and contractors, starting with the fire and life safety industries. Its AI-powered platform centralizes technician management, automates workflows, and integrates data from fragmented systems, streamlining processes and reducing administrative burdens. Incumbents like ServiceTitan and ServiceTrade have only digitized basic workflows, barely penetrating 1% of the market. In contrast, Essential goes beyond digitization, delivering much-needed automation for commercial service businesses still reliant on pen-and-paper tools or generic software.

FINANCIAL SERVICES

Onwish reimagines market and equity research for financial analysts with an AI-powered assistant. Leveraging LLMs, it automates data collection, filtering, and analysis, producing tailored investment theses, detailed data reviews, and actionable market insights. Unlike legacy platforms such as Bloomberg and SeekingAlpha, Onwish learns from repeated user interactions, personalizing outputs and improving over time. This creates high switching costs and a compelling edge in a field where accuracy, speed, and customization are paramount.

CONSTRUCTION

Trunk Tools leverages AI to revolutionize construction project management with a focus on real-time job-site operations. It provides instant access to critical information and actionable insights directly on-site, helping teams streamline workflows and minimize delays. Traditional solutions like Procore excel in centralized project documentation but lack the real-time, job-site-specific capabilities that Trunk Tools delivers. Many construction teams still rely on outdated methods such as paper documentation and spreadsheets, making Trunk Tools a game-changing solution tailored to on-site challenges.

Concluding Thoughts: Will David Triumph Again?

By automating high-cost workflows and unlocking insights hidden in data, vertical AI has the power to topple well-established giants and create entirely new market leaders in many underserved markets. More than just automation, it represents a fundamental redefinition of industry practices. The question isn’t whether Vertical AI players will dominate, but whether incumbents are able to adapt quickly enough to avoid obsolescence.

Finn Stäblein, a student at Stanford University and AV associate, contributed to this article.

Sources
Meera Oak
Meera Oak
Partner, Seed Fund

Meera’s background includes strategic, financial, and operational experience from her time at Yale University, where she managed a $1B budget (of a $4B organization), led M&A transactions, and secured business development relationships with corporate partners. Most recently, she worked with early-stage venture funds and incubators like Create Venture Studio and Polymath Capital Partners and was responsible for launching business ventures and sourcing investments in enterprise SaaS, infrastructure, and ecommerce. Meera has a BA in Economics from Swarthmore College and an MBA from the Tuck School of Business at Dartmouth.

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