In the late B2B SaaS era (2018-2022), major opportunities were gone. Startups were forced to build 'nice-to-have' solutions for narrow verticals, like a CRM for recruiters, offering only marginal improvements over existing horizontal tools.
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The founder predicts that hyper-specific vertical AI solutions are too easy to replicate. While they may find initial traction, they lack a durable moat. The stronger, long-term business is building horizontal tools that empower users to solve their own complex problems.
Startups often fail to displace incumbents because they become successful 'point solutions' and get acquired. The harder path to a much larger outcome is to build the entire integrated stack from the start, but initially serve a simpler, down-market customer segment before moving up.
Horizontal SaaS companies fracture their customer knowledge across diverse industries, forcing generic messaging. Vertical SaaS companies build compounding knowledge with each customer within a niche. This leads to deeper insights, stronger competitive secrets, and more effective, specific messaging over time.
The slow growth of public SaaS isn't just an execution failure; it's a structural problem. We created so many VC-backed companies that markets became saturated, blocking adjacent expansion opportunities and creating a 'Total Addressable Market (TAM) trap'.
In the previous SaaS era, emulating giants like Salesforce was a common but flawed strategy for startups. In the new AI era, there is no playbook at all, forcing founders to rethink go-to-market strategies from first principles rather than copying incumbents.
Most successful SaaS companies weren't built on new core tech, but by packaging existing tech (like databases or CRMs) into solutions for specific industries. AI is no different. The opportunity lies in unbundling a general tool like ChatGPT and rebundling its capabilities into vertical-specific products.
Analyzing over 200 investments, TinySeed observed that vertical SaaS companies consistently achieve stronger exits, grow further, and have lower churn than horizontal SaaS. This data-driven insight has shifted their investment thesis toward more defensible, niche-focused companies, as they have proven to have distinct advantages.
YC Partner Harsh Taggar suggests a durable competitive moat for startups exists in niche, B2B verticals like auditing or insurance. The top engineering talent at large labs like OpenAI or Anthropic are unlikely to be passionate about building these specific applications, leaving the market open for focused startups.
Many founders fail not from a lack of market opportunity, but from trying to serve too many customer types with too many offerings. This creates overwhelming complexity in marketing, sales, and product. Picking a narrow niche simplifies operations and creates a clearer path to traction and profitability.
A 'tale of two cities' exists in SaaS. Traditional software budgets are frozen, with spending eaten by price hikes from incumbents. Simultaneously, new, separate AI budgets are creating massive opportunities, making the market feel dead for classic SaaS but booming for AI-native solutions.
