How Founder Backgrounds Correlate with vSaaS Success (Part II)
Why Do Industry Insiders Outperform?
Last week, we shared Part 1 of this essay, which showed that Industry Insiders drive outsized vertical SaaS outcomes—or at least that similar founder backgrounds correlate with exit success—looking at the last several years of data.
While our initial findings warrant a deeper historical dive, the quantitative evidence in support of our Industry Insider thesis is very strong. By raw deal count, teams with an Industry Insider (or “Vertical Founder” in the chart below) represent 73% of all exits. By gross exit dollars, however, teams with a Vertical Founder capture 84% of dollars.
Today, we’ll dig deeper into why those backgrounds lead to superior outcomes.
Why Do Industry Insiders Outperform?
Reflecting on our own experience investing in the space for years—as well as lessons drawn from some of our favorite vertical software success stories over the last decade—we distilled four leading factors behind the Industry Insider advantage:
1. Singular Insight Into Market
Our analysis demonstrated a correlation between founding vertical software teams with industry connectivity and significant venture-backed outcomes. While we can’t prove causation, we can make an educated guess as to the link: the ability to zero in quickly on the unique issues, dynamics, and solution paths within a vertical has become increasingly difficult without first-hand experience, while building powerful software experiences has never been more accessible.
Industry connectivity has proved more important over time because the use cases of SaaS–as software has consumed more of the economy–have become steadily more complex. Put another way, 2024 knowledge workers aren’t impressed by a digitized spreadsheet anymore–they want a digitized workflow that goes beyond what much of vSaaS 1.0 was able to offer. Workflows, and the human interactions that compose them, are domain-specific and dependent on tribal knowledge. Building software for industries that rely on large groups of skilled, “deskless” workforces is especially tricky. This is likely also why “real economy” sectors generally weren’t seen as “low-hanging fruit” for SaaS entrepreneurs of the early 2000s and remain comparatively greenfield today.
A software startup attacking these markets is no longer an unthinkable undertaking for an industry expert without a development background–at least for those with the networks to attract quality technical co-founders. Innovations, from cloud infrastructure to LLMs, have decimated startup barriers to entry. Equally important, those advancements enable software to solve more complex problems in greenfield market segments.
As vertical SaaS cannibalizes spend traditionally allocated to headcount, goods, and services, nearly every sub-vertical of the economy over $20B in revenue has become capable of supporting an IPO-able startup. We believe these qualitative factors support our data-driven conclusion: insiders with singular insights are entering the startup world armed with a competitive advantage.
This doesn’t mean, of course, that we believe industry outsiders can’t achieve vertical software success—from Faire to Toast, there are plenty of exceptions to the norm. Even in the case of winning teams that seem new to the industry, however, a closer look over uncovers deeper ties. Alex Kates of VetCove, for example, was formerly a marketer and financial analyst–but grew up working in a large family-run veterinary practice. Veeva Systems, a favorite case study on vSaaS success, outwardly seems the product of a Salesforce executive turned outsider startup CEO. Peter Gassner, however, was supported by co-founder Matt Wallach, who formerly ran HealthMarketScience—a data provider to the healthcare and life sciences industries that sold to Oracle.
CEOs don’t have to come directly from a non-tech strategic to be an Industry Insider, in other words. The Industry Insider profile we reference in these essays, rather, speaks to a holistic level of domain expertise across a founding team. As mentioned in our last essay, this expertise can take many forms—one reason we at Euclid spend significant time understanding the backgrounds and experiences that drive founder conviction.
2. Industry Access
Perhaps the most critical early-stage advantage of industry-insider founders is their strong credibility with relevant stakeholders. Credence often stems from brand name recognition (e.g., working at a leading strategic or startup in the space) and/or specific prior work experience (e.g., previous projects or products launched). It gives founders a baseline level of trust with buyers, partners, and prospective employees that helps set up the foundations for success.
Beyond credibility, these founders bring essential ties to industry stakeholders. Actionable relationships are crucial in identifying early adopters and high-value reference-able customers. We have found that driving behavior change in an industry requires trust and buy-in–especially in more traditional sectors. These founders are selling a digital-first vision of their industry's future to historically tech-averse businesses. At our investment stage, many are attempting to sell that vision pre-product or with a very basic MVP. Without the ability to call on friends or even speak the vertical “language” fluently, even market discovery can turn prohibitively time-intensive.
As we touched on above, there is sometimes no substitute for lived experience when it comes to strategic industry transformation. Industry insiders can leverage credibility and strong relationships to drive early wins in ways others can’t. The same principles hold in the path to product-market fit and market-wide adoption.
3. Recruiting
Recruiting for vertical software can be quite different from traditional software. We see two key areas that set industry insiders apart. First, we find that strong vertical founders can attract high-quality technical and startup talent to join the founding team for a few key reasons: (1) the credibility they bring from day zero of access and understanding of the target market as we touched on above; (2) the gravity of an ambitious vision of industry transformation vs. the tedium of competitive horizontal markets; and (3) advantage with distributed talent in non-coastal tech hubs, where vSaaS companies more often form.
Second, vertical startups often take different approaches to building out the individual contributor layer of an org. For example, vertical SaaS companies frequently leverage high-performing industry talent to fill sales and customer success roles (folks that “speak the language”). Many of Toast’s best AEs are former chefs or food distribution reps. Mike Powers (CEO of our portfolio company, BuildVision) was previously a sales leader at BuildingConnected (BC)—he joined after BC’s CEO Dustin Devan tried to sell him on using their software, while Mike was at Turner Construction. Recruiting intelligent, young, and ambitious people with crucial industry knowledge is a superpower and growth accelerator for vertical software startups.
4. M&A
The credibility, knowledge, and networks industry insiders bring can directly accelerate a successful M&A outcome. We’ve seen three paradigms in the vertical software world:
A founder’s former employer is a natural strategic acquirer. Such founders generally build something new because they encounter a big problem that needs to be solved in their former seat. In some cases, they oversaw the procurement or sponsored the acquisition of startups, but when it was clear no proper solution existed, they left to build it. It follows that this same former employer is likely to benefit from the solution and see clear benefits to the reintegration of proven innovation talent. One example in the Euclid portfolio comes from Frontier Risk Group. Co-founder Jeff Richardson led Specialty Insurance at Travelers and Intact, where he focused on new risk products for underserved markets and influenced M&A considerations.
In their former industry role, a founder built relationships with major vendors who later became buyer candidates. Often, they directly managed internal adoption and usage of the vendor’s product, getting to know their strengths and weaknesses intimately. One example is Shashank Saxena, founder of VNDLY. As an SVP at Kroger, Shashank was responsible for adopting HRMS systems like those offered by Workday—the company that would acquire VNDLY for $500M following their Series B. For founders who emerge from the industry, deep experience with market-leading vendors serving the space can pave the way for M&A.
A serial vertical software operator-turned-founder leverages past partnerships or exit experiences. CEOs with this background have worked at vSaaS startups selling into, or peripheral to, their vertical of focus. They built close ties with strategics through partnerships or remained with the business through a strategic exit (perhaps even learning more in a post-acquisition role). As we actively target founder profiles with such combined industry and startup aptitude, this path to exit is one we expect to feature prominently in the Euclid portfolio.
Impact on Euclid’s Strategy
A. Sourcing
Industry Insiders, on average, tend to emanate from different networks and geographies—effective VC sourcing strategies should evolve accordingly. Adding to our particular challenge is that, at the pre-seed stage, most of the best investments have no pre-existing external presence or venture funding. At Euclid, therefore, we re-imagined sourcing as an exercise in nurturing “influencer” relationships across emerging tech hubs and the vertical innovation world at large. We have found that successful founders in a particular space or region act as gatekeepers to the next generation of vertical software startups, serving as the mentors and sounding boards that vertical founders turn to first at the moment of inspiration. These touch-points occur prior to mainstream venture conversations, at the pure ideation stage, which is when we aim to meet founders, if not beforehand.
One interesting output of our focus on Industry Insiders over the years is the wider geographic footprint of our portfolio. Today, about half of our companies are headquartered outside the Top 5 startup metros (San Francisco, Boston, New York City, Seattle, and Los Angeles).
B. Founder Needs
If top vertical software entrepreneurs are generally industry insiders, it follows that most don’t need industry experience, customer introductions, or generic advice and support services from a VC. They need a lead-quality partner who understands how vertical platforms succeed and the roadmap for leveraging a discrete Industry Insider insight to build a category-winning software company.
This insight crystallized our conviction in building Euclid from the ground-up for the best entrepreneurs in vertical software—at the risk of cliche, a different kind of fund, built for a different kind of founder.