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1 posts from December 2011

December 05, 2011

Go Vertical

Start ups are great barometers for the future.  Those of us who spend our time immersed in the world of young companies are priviledged to get a glimpse of what's coming around the corner by meeting with entrepreneurs who are trying to bring the future forward.

In that context, I enjoyed USV's Christina Cacioppo's blog post, What Comes Next, where she summarized a few trends that are coming out of some of the start up incubators.  I have also seen the componentization of software and the shift to independent work agents, the latter of which has interesting policy implications for a jobs-obsessed policymakers.

Yet, in my own work with various incubators, I am often struck by the lack of vertical focus.  Perhaps it is because incubators are full of young entreprenurs who have less domain knowledge and therefore are not as well-positioned to transform existing industries.  But if you believe software is eating the world, vertical industry by vertical industry, business process by business process, then we should start seeing more entrepreneurs pursuing vertically-centric strategies.  When I heard about this weekend's $3.4 billion acquisition by SAP of HR software company SuccessFactors (which barely got any coverage from the tech press), I was further struck by the opportunity.

Many mature, massive industries are ripe for innovation.  Here are a few obvious ones where we at Flybridge have been spending time:

  • Education.  The education industry is a massive one, growing quickly and full of outdated models.  Online learning, peer-to-peer learning and the redirection of student expenditures are all areas that we find interesting.  Companies like Open English, SimpleTuition and Skillshare are all gaining significant traction in this vertical and taking novel approaches that get around traditional gate-keepers.
  • Health care.  If the multi-trillion dollar health care industry isn't the perfect area for innovation, I don't know what is.  Whether it's in areas like cost containment, process automation or point of care diagnostics, there appear to be plenty of openings for entrepreneurs.  We see companies like Patient Keeper, T2 Biosystems and Athena Health leading the way in this vertical - avoiding FDA risk by simply delivering software or diagnostic devices that makes the entire system more efficient.
  • Financial Services.  With the financial markets upheavel, there are massive dislocations going on in the financial services industry.  Subprime lending has disappeared.  Payments are going digital and mobile.  And banks are under increasing pressure to stay focused on their core businesses.  As a result, companies that either focus on providing services where banks used to tred (ZestCash, GreenDot) or are working with banks to help enhance their revenue opportunities or efficiencies (Cartera Commerce, Convoke Systems) are finding significant growth. 

I could name others - advertising, manufacturing, insurance and human services - where we are seeing old hands coming to the "transformation table" as well as the young bucks, who are also asking "why not?"

The impact of horizontal technological advancements - such as cloud computing, big data, broadband penetration, smart phone penetration - takes time to be felt broadly in business.  Hopefully some of these start ups will make a dent in core business processes and therefore the all important metrics around productivity, which we need desperately as a country.  And hopefully we'll see more start-ups realizing that going vertical can be very rewarding.