The billion-dollar AI opportunity in Vertical SaaS

Boston-based restaurant management software Toast went public in 2021 at a valuation above $30 billion, just a decade after its founders initially launched the platform as a consumer-facing restaurant app. 

This was possible as the firm later decided to start selling restaurant point-of-sale (POS) solutions, ultimately becoming a multi-product software. It decided to switch its core product from solving a particular problem for restaurants, i.e., collecting customer payments, to pivoting to offering a back-of-house management system–serving as the finest example of the verticalisation of SaaS. 

By embedding payments, lending, payroll, and other related features, Toast is now at $1.5 billion ARR and drives 80% of its revenue from financial technology solutions. 

In simpler terms, Vertical SaaS (VSaaS) is software built specifically for certain industries, providing tools that meet the needs of sectors like healthcare, retail, fitness, or finance. Unlike broad SaaS platforms, VSaaS is built for specific businesses, helping them run more effectively with industry-focused features. 

The VSaaS industry has been scaling once again in recent years, but now it’s struck gold in a different avenue: artificial intelligence. 

The ‘Layer Cake Strategy’

Horizontal SaaS platforms like Zoho, Salesforce, or Slack provide general tools that can be used by many different industries. They focus on specific tasks but work across various types of businesses. In contrast, Vertical SaaS offers more specialised features–deeper integrations, and workflows that fit the industry’s needs. 

This approach is called a “layer cake” strategy,  which includes building additional products to sell into their core vertical market. Vertical-focused startups can further expand by going multi-product and creating additional revenue streams beyond their core offering. Toast has executed this strategy by adding payroll and workforce management capabilities. 

To put this in perspective, an example of a company putting its bet on a multi-product strategy is Whatfix. Since launching its insurance vertical in 2021 and expanding into pharma and life sciences in 2024, the digital adoption platform (DAP) has achieved significant results by working with several large global customers in these sectors. Today, Whatfixhas clocked a 4.5X increase in annual recurring revenue (ARR) since its latest funding round and is showing no signs of slowing. 

“In insurance, the company focuses on core applications like claims processing, policy management, underwriting, and agent portals, driving improved efficiency, enhanced compliance, reduced claims leakage and underwriting errors. We work with several large global customers such as Baldwin Risk Partners, Brown & Brown Insurance, EIS Group Inc, Florida Peninsula Insurance, Westfield Insurance, and more,” Vara Kumar, Co-founder of Whatfix tells YourStory.  

“Whatfix is unique in that it blends vertical SaaS and horizontal SaaS capabilities, enabling it to serve both specific industry needs while also being broadly applicable across various sectors. Our expertise in digital adoption ensures that customers achieve desired outcomes with speed, making Whatfix the go-to solution for vertical SaaS needs,” Vara adds. 

The company recently bagged $125 million in a Series E funding round led by Warburg Pincus, along with existing backer SoftBank Vision Fund 2 to scale AI efforts and enhance capabilities in areas such as "userisation" and DAP-adjacent offerings. 

The company's roadmap focuses on developing AI agents that interact with interfaces in a human-like manner and building smarter applications.

Indian unicorns Zenoti and Innovacer, which collectively attracted 25% of Indian SaaS funding in the past two years, also followed a multi-product strategy, targeting industry-specific needs while addressing operational challenges, data from Bain and Company shows. 

According to Chiratae Ventures, over 80% of India’s VSaaS unicorns are developing products for global markets. As the availability of vertical-specific data increases, VSaaS is expected to grow stronger with AI’s push.

“A multi-product strategy boosts growth by offering value-added services that increase customer lifetime value (LTV) and retention. The more services a company provides, the harder it is for customers to switch. This strategy expands the customer base, LTV, and retention, which are key to increasing growth, thereby driving the overall valuation. Investors can capitalise on this model by supporting companies with strong multi-product portfolios,”  Surabhi Sanyukta, Vice President - Investments, BlackSoil tells YourStory. 

The third wave of AI is here

VSaaS companies are now growing in a new way due to the surge of artificial intelligence, according to a16z’s Andreessen Horowitz. With AI, VSaaS platforms can handle complex tasks that used to require human effort, helping customers save on costs for areas like sales, customer service, and finance while increasing revenues per user.

The first wave of Vertical SaaS revolved around the cloud, bringing core services online for specific industries—for instance, Shopify for ecommerce. The second wave introduced fintech into the cloud mix, allowing Vertical SaaS companies such as Toast to generate more revenue by embedding financial services directly into their platforms. 

Horowitz now points out the onset of a third wave of vertical SaaS—which includes cloud + fintech + AI. Calling it the most impactful force in the category, it further expands the opportunity of VSaaS by turning ‘labour’ into ‘software’. 

“This convergence creates multiple revenue opportunities. For VSaaS companies, bundling services via the cloud improves scalability and accessibility, while fintech enhances financial operations, fraud prevention, and payments. AI drives smarter decision-making and workflow automation. Additionally, industries like data centres and fintech firms benefit by supporting these integrations, offering investors a diversified range of opportunities within SaaS and other dependent sectors,” Sanyukta explains. 

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By adopting the right solution, many businesses relying on VSaaS can significantly reduce both internal and external labour costs in areas like sales, marketing, customer service, operations, and finance. As a result, VSaaS providers could see their take rate grow by an additional 2–10x.

“Globally, the shift toward embedded fintech and AI-powered analytics is unlocking exponential monetisation opportunities. SaaS companies embedding fintech solutions such as payments or lending report customer lifetime value (CLTV) increases of 2-5x. This trend, coupled with a multi-product strategy, allows Vertical SaaS players to expand from a single solution to an entire ecosystem of offerings—driving higher net revenue retention (often exceeding 130%) and de-risking revenue streams for investors,” says Pratham Chadha, Senior Investment Analyst at BoldCap.

Bessemer Venture Partners predicts the emergence of at least five Vertical AI companies with $100M+ ARR within the next two to three years.

“AI is a significant driver of this growth. By leveraging AI, Vertical SaaS solutions can go beyond functionality to deliver predictive insights, automate tasks, and provide highly personalised user experiences. Vertical SaaS solutions excel in the two most critical dimensions that horizontal solutions don’t—access to proprietary datasets that are difficult to replicate, as well as from deep contextual and domain-specific expertise,” reveals Naveen Goyal, CEO of NoPaperForms. 

Opening newer markets

Investment analysts say Vertical SaaS companies have an aggressive growth outlook, challenging cross-industry platforms. Sectors like construction, hospitality, and healthcare remain under-digitised, opening opportunities for industry-specific solutions.

“Vertical SaaS is at the forefront of a paradigm shift in the software landscape, driven by a unique ability to deeply integrate AI, fintech, and cloud capabilities into sector-specific solutions. Unlike horizontal platforms, which aim for breadth, Vertical SaaS thrives on depth—offering tailored, high-value tools that directly impact operational efficiency and decision-making within underserved industries,” explains Chadha. 

The software replaces labour, making small markets bigger, such as dry cleaning, laundry services, or construction, which are also considered not cost-efficient enough to acquire customers. Hence, these traditional “small” markets with a small number of potential customers or limited software spending can make these markets bigger by increasing LTV per customer (by replacing labour with software) and reducing customer acquisition costs through leveraging AI-driven sales and marketing tools.

“Education’s complexity, spanning admissions, enrollment, fee management, academic performance tracking, and outcomes, requires platforms built to address its unique challenges. A typical institution, today, uses a mix of 12-15 horizontal and vertical software just to solve a single problem. These operate in silos making it difficult for them to scale,” Goyal adds. 

He added that vertical SaaS platforms like Meritto help educational institutions by creating unified systems that integrate across the student journey--from recruitment to lifecycle management to student success and outcomes so that the institution can focus on growth and student outcomes.

Moreover, EY has estimated that two-thirds of vertical SaaS companies are focused on showcasing hyper-growth, compared to just one-third of horizontal SaaS companies.

“Healthcare is a massive opportunity in our view- and not just because that is the space we are in. There is a lot of opportunity in solving a multitude of healthcare problem statements like documentation, claims management & adjudication, diagnostics etc. Each of these fields needs in-depth solutions and that is perfectly suited to AI-enabled vertical SaaS solutions,” explains Sabarinath Warrier, Co-founder, Healspan. 

“We see several startups coming up in this space. However other sectors like hospitality and fintech also have great opportunities for founders looking to build,” Warrier adds.