#135: Vertical SaaS Investor Shares Proven Paths to Scale Up Big – Dave Yuan
Mar 14, 2025
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Dave Yuan, founder of Tidemark Capital and investor in successful vertical SaaS companies like Toast and ServiceTitan, shares invaluable insights on scaling strategies. He discusses the significance of control points in thriving markets and the evolving landscape shaped by AI. Dave emphasizes the importance of community among founders, innovative growth frameworks, and adapting to challenges posed by new technologies. He urges vertical SaaS entrepreneurs to harness AI thoughtfully to enhance their offerings and stay competitive.
Tidemark Capital distinguishes itself by prioritizing sustainable growth in vertical SaaS through unique distribution models and operational strategies.
The concept of 'control points' is essential for vertical SaaS companies, allowing them to command greater engagement and expand their offerings effectively.
Integrating AI into existing vertical SaaS solutions is crucial for enhancing customer experiences and avoiding being outpaced by innovative competitors.
Deep dives
Growth Equity Investment Focus
The discussion centers on growth equity investment in vertical SaaS companies, highlighting the strategic approach of Tidemark Capital, led by Dave Yuan. Unlike traditional venture capital, which often pursues rapid growth without a strong consideration for sustainability, Tidemark prioritizes companies that have a unique distribution model and a solid product, even if they operate in smaller markets. This perspective allows them to support companies scaling from $5 to $10 million in annual recurring revenue (ARR) to significantly larger figures, focusing on building category-leading products. The investment approach emphasizes capital efficiency and leveraging operational strategies rather than simply infusing large sums of investment.
Understanding Control Points in SaaS
Yuan elaborates on the concept of 'control points' within vertical SaaS offerings, defining them as the crucial systems where significant data and workflows are concentrated. Achieving status as a control point means that a company can command higher engagement and potentially offer multiple products to its clients. This control point strategy permits companies to expand their offerings and build robust product ecosystems. The frameworks provided by Tidemark support founders in identifying how they can either become control points or surround existing ones, creating added value for their customers and enhancing their market position.
Navigating AI Opportunities and Threats
The conversation addresses the dual nature of artificial intelligence (AI) as both an opportunity and a threat for vertical SaaS companies. Founders who engage with AI can leverage its capabilities to enhance customer experiences and optimize operational efficiencies. However, those who overlook AI risk being outpaced by innovative competitors offering AI-enhanced solutions. Tidemark advocates for integrating AI within existing software frameworks to maintain engagement and customer loyalty, thereby addressing the potential disruption caused by third-party AI tools.
Building a SaaS Community
Dave Yuan emphasizes the importance of community among vertical SaaS founders, promoting the idea of shared learning and resource exchange through events like the Vertical SaaS Collective. These platforms provide networking opportunities for founders to learn from one another and access best practices in their respective fields. Tidemark's commitment to building this community aims to foster knowledge sharing that can help smaller businesses navigate challenges together. The collective environment supports entrepreneurs in benchmarking their performance and gaining insights essential for making informed strategic decisions.
Strategic Growth vs. Traditional Ventures
The differences between strategic growth equity firms like Tidemark and traditional venture capital are highlighted, particularly in terms of understanding the various stages of a company's growth. Yuan points out that each stage, from inception to scaling, requires a nuanced approach that informs operational decisions and funding needs. Rather than simply aiming for rapid scalability, Tidemark focuses on sustainability and long-term viability. This method encourages companies to maintain a balance between revenue generation and product development to ensure they can scale effectively over time.
Dave Yuan is the founder of Tidemark, an active growth equity investor focusing on vertical SaaS companies with outsized advantages that can become “control points” in their markets and grow very big. Dave and Tidemark have invested in successful companies like Toast, ServiceTitan, Karbon and Dutchie.
In this episode, Dave shares some of the most useful strategic growth frameworks for vertical SaaS companies to grow through winning market share, expanding with additional products, and even extending through an industry ecosystem serving new markets. We also talk about the impact of AI on established vertical SaaS players and how it’s both an opportunity and a thre
“Vertical SaaS founders should not be asleep with AI. You can wave it off, view it as a toy, and say that no one’s going to trust that outcome or use it. That may have been the case, but things are changing really quickly.
“Lots of smart people are making it better every month, and you have a massive opportunity to improve it with your data and workflow.
“Jump into it to control your destiny. Don’t get caught sleeping without AI in your product in a useful way.”
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