[Music] welcome everybody I'm Mark Peter Davis managing partner of interplay I'm on a mission to help entrepreneurs Advance society and this podcast is definitively part of that effort all right today we're going to play a segment from our annual meeting now as a venture capitalist we do an annual meeting annually to update our investors our limited partners uh and typically when VCS do these meetings they weave in some content usually CEOs will portfolio companies will come in and speak to help educate and share information that the VCS are seeing on the front lines of the market so to that end we had a panel where Mike and I talked to two really strong Founders from our portfolio Todd the co-founder and CEO of broadloom and Chad the co-founder and CTO of pepper about how they think about vertical SAS B2B vertical SAS is actually a really interesting segment of the market that we interplace a lot of time looking at and have a lot of investments in and around that space so um I think it's a pretty well-informed group conversation uh and very candid so I hope you enjoy welcome guys uh excited today to have two of our favorite portfolio company Founders here to discuss their business and uh vertical sass in today's market with that I will turn it over for quick introductions from the two of you and we'll jump into a friendly conversation you want to take it sure my name's Jan Orion I'm co-founder and CTO of pepper pepper started about four years ago to build software for the trillion dollar food distribution market so food distribution is something that we all interact with every day of Our Lives everyone's got to eat but we tend to interact with the food supply chain at the retail layer and what we learned during our our our previous role at Uber Eats where we met lots and lots and lots of restaurants is that the process of getting food to that point of retail whether it's a restaurant a grocery store a convenience store is actually super complicated so we hopped in around four years ago to start to work with food distribution and build technology and and Digital Services to help the food supply chain operate a lot more efficiently awesome and I'm Todd Saunders I'm the CEO of a company called broadloom uh we are a vertical SAS company for the flooring industry so just like everyone needs to eat I think everyone also needs to walk on floor or you know I don't know what you would do if you weren't um we do full vertical software so website CRM Erp and payment processing we kind of refer to ourselves as like a business in a box for a local flooring retailer uh we have about 4,000 local flooring stores that we work with today um and if you're asking yourself how I got into flooring that's a much longer uh question but um to make a long story short I started my career at Google um was there for a few years we launched an adtec company which I think you guys invested when you were an attec company or right afterwards we met when you were an atte company met when you were an adtec company pivoted into pivoted into a vertical SAS company for the flooring industry through interplay came in and and the rest is history I'm pretty sure the term vertical SAS hadn't really been coined when you had made this pivot but you were an early adopter of it so yeah early adopter I guess of that and uh making the flooring industry uh cool I guess cool again yeah exactly I wasn't going to go there but you got it yeah I think that's that kind of begs a question right I don't think most entrepreneurs wake up and say hey I'm going to do vertical SAS they see an industry that they feel is defective and stumble into a vertical SAS model and approach what got you guys thinking hey this is something I want to kind of lean into what's your individual stories you want to go first sure how you landed here absolutely so I in my previous role was the first product manager on Uber Eats and I joined at a point in time where it wasn't even called Uber Eats and there were five of us kind of driving around in cars with sandwiches trying to figure out how to sell the things and I was there all the way up through you know became a multi-billion Dollar business eventually spent a lot of time with restaurants and restaurants they used to just talk to us about hey like these are the problems that I'm seeing and my business they always used to talk about problems on the demand side and that's what Uber Eats was for but they also used to talk about all of the difficulties and challenges that they had working with their wholesalers and Distributors and that kind of opened our eyes to the other side of the food supply chain where you know there's all of the stuff that happens in the background so in New York every day up in Hunts Point there are thousands of people that wake up at 300 in the morning moving around boxes of tomatoes and cucumbers and everything you can imagine and truck them to all the restaurants and convenience stores and grocery stores before we all wake up and it's that whole industry that for a long time has just been underserved with technology and you know we were exposed to that and the things that we learned through restaurants is that the way that they interact with these wholesalers is still through text message phone call email and you go talk to Distributors they're equally annoyed by people calling them up at 300 in the morning and screaming about spinach and you look at that from the perspective of someone in the tech industry and you're like okay there's clearly things that technology can do to help but then the more time you spend with food distributors the more you appreciate the scale of the industry and you learn that there's a trillion dollars a year in sales between Food Distributors and retailers you learn that for a lot of Distributors everything from finding their next set of customers to figuring out how to nurture and upsell existing customers to figuring out the right inventory levels so they're not wasting a bunch of food to figuring out pricing to figuring out logistics they still run off pen and paper and you realize that there's an opportunity for someone to come in and build a lot of the same Technologies data Insight that have helped a lot of other Industries flourish over the last couple decades as they've embraced e-commerce and bring it to this world that's one of the themes as we see vertical SAS companies is this General concept that there someone's turning over a rock and finding out the internet kind of hadn't made its way underneath that rock yet and there's an opportunity to kind of tech enable in a place where maybe it's 10 20 years too late right so it's kind of these phow uh underdeveloped Tech worlds that you've have these Tech you know you have Tech entrepreneurs bumping into seeing it shocked and then they see an opportunity do things in a better way yeah I think when I hear stories of vertical SAS companies they're all how we got into it is very different um you know he had experience at Uber Eats I did not have experience in flooring um our story is we were an attec company and one of our customers was a website company for the flooring industry and they were just a channel partner and for the first time we like looked at our data and we're like this cohort of customers has like a 90% logo retention and this cohort has got we were horizontal adte was like 70% retention but when we were partnered with this website company it was like 90% retention and that opened our eyes and then a similar experience I think to most vertical sass companies you open up the hood and you realize like the process is painful they're in the stone ages on everything and to your point like a lot of our customers feel like we're telling the future and the truth is we already know how this plays out because you can just look at other Industries and apply it to your archaic industry I mean I think one of the hardest challenges we we have as vertical SAS companies it's not necessarily the Innovation because all of our Industries are 10 years behind where everyone else is so we have a road map of where we kind of have to go I think the hard part is how do you get adoption and how do you get scale and how do you make the Tam large enough to you know keep that compounding but every vertical SAS story I hear like I could have taken out Distributors and put in flooring distributors and flooring stores and I could have given you the same exact answer I think that uh thought process of going down the supply chain and the painful experience is like every single vertical task company and what gets you going every morning and macro that that's very different than a lot of other companies we see in the tech landscape right where people are building the next CRM the next newsletter tool and it's this they're competing with other tech people the kind of the the substory of vertical SAS is upgrading old Industries to modern tech practices and it's a process of discovery of like these Pioneers who stumble into an area like wait internet hasn't got here yet and then they figure out they're going to just go do it yeah so that that's a fascinating kind of way to look at this particular Market segment yeah I think there's another thing to look at there which is like every vertical SAS company I think we used to look at vertical SAS companies as what is the Tam of flooring software right The Tam for flooring software we've estimated to be like 800 million right and you would first look at that like that's not big enough but if then you look at what vertical software is doing they're all eventually going after the GDP or you know for us the $76 billion of flooring that's bought and sold and that's actually where you get through and if you look at how all these vertical SAS companies toast slice all these big guys how they got this big is fintech or taking a percent of the total GDP ends up being actually their addressable Market they just use software to get into that bigger Market um and that's what I found really intriguing about the difference of how people used to look at vertical SAS whereas what is the software market and now I think people are looking at it is like what is the total actual Market of um you know food Logistics or flooring and at some point they're going to take a basis point of every transaction that happens yeah what do you guys so as Mark alluded to you turn the rock over you realize hey these guys are pen and paper or maybe there are some of them are using an Excel sheet why build software specifically for them versus pece mealing things together that already exist there's already email marketing out there there's already CRM products out there why does it make sense to build specifically for a vertical I think there's this natural cycle in technology of bundling and unbundling which is like I mean it's a common theme across a lot of different things and I think that's what's going on here as well with a lot of vertical SAS where over the last decade or two like you did have email took over and Salesforce took over and there were all these general purpose tools for how or you know horizontal Tools in a sense for how people can upgrade Communication in general upgrade your Salesforce in general and it kind of sets a new standard for how the world works and what emerges out of that is all of these horizontal companies are solving for the general use case and no one sends letters to anyone anymore we send emails but what that leaves opportunity for is someone to think about the problem from an industry specific place and build all of the stuff that will make email for example really really really mesh with the specific use cases of an industry and I think that's where we are in the tech cycle where you know again talked about how the internet is you know 10 or 20 years old at this point and it's ubiquitous in all of our lives and there's already this Baseline of like okay like here's technology and so the opportunities with vertical SAS are okay like there's all of this technology that exists so how do we adapt it and how do we mold it to the specifics of any individual industry which is hard for someone to do if you're solving for that General use case yeah can I take that from a I look at it a little bit differently and it's probably our backgrounds being he's on the tech side and I'm you know kind of sales and marketing background because for me realistically our software every our website CRM and our Erp each have one feature that make it unique to flooring like realistically could you use this for any industry like the answer is yes could they get a website from Squarespace the way we've looked at it though is if you want to show inventory on your website and get real inventory from manufacturers you have to work with a flooring specific software company because we have access to all the data there's no aggregate API where you can just tap into and get access to thousands of manufacturers of data you really would have to go to a flooring specific company to get that who has the relationships to actually get those things so where I'm going with this is I actually think being vertical SAS makes the um customer service and the customer acquisition easier I am constantly thinking about One customer which makes my marketing much easier which makes our sales much easier which makes training people internally much easier which means customer service easier so I think from a business standpoint from a CAC standpoint from a retention standpoint um vertical SAS is very um what's the right word I'm looking for is is interesting Less on the product because I think all the products could be ubiquitously used across multiple Industries but more on how you operate efficiently to go after just one Target customer versus multiple Target customers can I pull on a thread you got on earlier you said um you know you're looking at software sales the initial market and then you think about GDP and I know you mean GDP in that in that market segment exactly can you give um a sense of what the basic Playbook is for vertical SAS like what's a software play how does it expand to participate in the GDP as you described sure so I'll give our example and I think everyone has a slightly different variation of this but I do believe every vertical SAS company ends up being some sort of percent of the transaction company whether that's fintech I think most people think of that through Payment Processing right that's like the obvious way so my view of the Playbook is you start with soft Ware you get a big enough Network that then you get into fintech right that's the most bread and butter thing that most people think of because then you get a percent for us we make about uh $600 a month per retailer in software but then if I'm getting 60 basis points or a full point on their credit card processing well that Tam is the $7 billion of flooring that's bought and sold every year so I think that's bread and butter for most companies I think what's interesting about our company and actually saw this recently with slice is they took it a step further where they now started offering their own brand of pizza boxes right because all of their pizza restaurants need pizza boxes they can bulk buy it they can then brand it and they can make money on the supplies around uh the pizza restaurant not just the credit card processing for us it's similar in flooring flooring is a commodity so now what's happening is manufacturers who are making flooring are coming to us and saying we want to launch our flooring product through you to your customers so we can offer this unique digital experience so we're wedging our way in there we couldn't do that if we were vertical ass for cars right because cars each have their own brand it's not a commodity we wouldn't really be value so for us again it's payments and then we actually are able to get into the the widget and the actual thing but I think in other markets that's not possible like it's not like in food distribution they're going to launch a um you know someone's going to go live with a new brand of tomatoes through them but everyone has their own you know spit on that yeah so we actually do have have your own brand of tomatoes we do not have a pepper brand of tomatoes but one of the interesting things that's happened sort of to your point and to your point around you know every vertical SAS company sort of has a wedge into the market and then once you build a network of customers and distribution and so forth there's a lot of other people that want to participate in that Network and one of the Dynamics that we're seeing is because we have a bunch of restaurants and grocery stores and convenience stores ordering digitally from wholesalers for basically the first time ever what's happened is there's this very high intent digital surface that's super interesting to a bunch of food manufacturers and food brands out there and these are all the brands I mean nestly and ConAgra and Unilever that you know we all see on the shelves and they have these huge consumer marketing arms that want to sell more stuff to more people and they've always had a hard time replicating what they're doing on the consumer side and the B2B side because like this digital medium has an existed and so one of the things that's been interesting recently is we've started to engage with these big Brands and a lot of them actually do want to launch you know hey I've got this new brand of chicken wing that I want to push out to restaurants or you know I have a new drizzle that I want to sell to you know a bunch of restaurants and we're seeing that emerge as one of these interesting new use cases that to your point like just doesn't exist in a world before vertical SAS and so there's a you know that's just an example of of sort of what you're saying around you're creating additional value beyond the existing Tam yeah I think it's going after it's like payments or distribution right like we look at as every software we every website or Erp we sell is a new customer as part of our distribution Channel and then who's interested in that distribution channel for them it could be a new you know uh uh whatever I said tomato or new chicken wing and for us it's a new flooring product but in the day like having distribution in one industry outside of just payment processing is a really interesting opportunity to go after the GDP of that industry specifically yeah and to your point that's what makes the network so valuable right and what could potentially make you guys so valuable to an acquire one day I think the term we' use on our side of the table is ass sass enabled Marketplace I think it's really interesting because I know in in Pepper history and some of your competitors took different approaches to this Market some said hey we're going to build a Marketplace for goods and we're going to let people buyers and sellers come on there and try to fix this Market this way you guys determined pretty early on that that wasn't the right way to go and I think the more we've seen companies build the more I think we that most markets actually require or should be built as SAS first Marketplace or distribution layer second instead of marketplace first SAS second I think just it gives such a unique Moe to the business to really own that customer relationship have the embedded software own their website right own their distribution to then bring in things like advertising to bring in things like flooring to bring in things like your own tomato brand uh and I think that's what's really exciting about the vertical sass industry too because these are Monster Tams like tier Point flooring is100 billion dollar a year or whatever it is and you're in a trillion dollar market which is a number that most people can't even comprehend well it's like if I had 4,000 flooring retailers that's really really interesting to a flooring manufacturer if I had 4,000 customers across multiple Industries that's essentially interesting to nobody right 4,000 flooring retailers your point if you in the old days the big flooring manufacturers would have to hire an army of salespeople to get access to they would drive around in four touristes door too trying to sell flooring to all them across Nebraska it would take weeks months years steak dinner Etc now you own their website yeah so we can digitally do distribution in you know overnight right one thing I think is so interesting about this is if you look at it from up the supply chain of venture capital from like an LP perspective they might have looked at the world before and said hey I want in exposure to an industry who's the big player in the industry I'm going to buy some of their stock on the public markets vertical SAS represents a way to kind of get exposure to a broad industry across a lot of companies within you're really indexing the industry so from kind of like this diversification uh Financial exposure concept a little bit abstracted from the day-to-day operations it's very fascinating it's a way to kind of Buy in and ride a broader wave not just an idiosyncratic company yeah it's good and bad in that way like our transactional Revenue listen we're 90% recurring software Revenue so our balance is still we're still in the recurring software Revenue side of the business where we believe long-term transactional Revenue will get us to hundreds of millions of Revenue much higher margin but we're not there yet but we are on the path and we're seeing the right traction um I will say that's good and bad right for us when we're in in 2020 and 2021 flooring retailers couldn't keep up with how much flooring they were selling and for us to be in the transactional side that was amazing right every graph we showed up and to the right up and to the right up and to the right now consumers are pulling back I mean I see it every single day with our flooring retailers but our transactional side is then hit and what's hard for investors is they're used to like if your software set of the business it's growing at whatever 30% year-over year and like it just compounds but then they have to grab their minds around this like transactional side of the business that I think if you look over a 10-year period goes up and to the right but in a one year or six month or two-year period is um impacted by economics impacts or the the vertical that you're in so the exposure is good as long as you know what you're getting yourselves into and you have a broader look at it yeah totally um Switching gears for a second here everyone's favorite topic toj Mark and I talked a little about this before but uh what's the the AI read in your industries now I think we you know you read the news now and the the overwhelming consensus that AI is going to be everywhere it's going to steal your job it's going to kidnap your kids it's going to be it's game over right you guys work in huge Tams right the the majority of Americans work at places and en roles that you guys are servicing right or companies like yours what's the read from your customers on on AI do they expect it from you are you building it in a way that they'll never know it's there and increases productivity how are you guys thinking about this one of the things that was actually interesting and surprising to me in our industry is we talked about before food distribution in general has been underpenetrated by technology and you know it's taken a while for the internet to get there and so forth and I was actually surprised that at an industry conference last year this is one of the trade groups that exists in the food distribution industry they have a committee that talks about tech related things and one of the topics at that Tech committee meeting was actually Ai and what does AI mean for food distribution so I I was genuinely surprised by how quickly this AI thing has made its way like into uh our customer base and I think it's playing out in a couple ways so first things first I think when people in our industry say AI I think it's a broad term that just means like a computer is going to do something that I don't have to think about and there are a lot of things that will fall into this AI category that a year or two ago we would have just thought of as like hey this is a push notification that happens when an event is triggered or like hey here's like a customer alert when someone hasn't ordered in a while and just the idea or people thinking about that it as AI I think is a reality right and so there's all this reframing of some some of the stuff that was just happening before that's more interesting because it can be framed in the AI late the second thing that's happening is I think um in general that a lot of the llm stuff is a pretty good replacement for a lot of the e-commerce uis that we have out there and if you think about e-commerce there are two major reasons why you're going to go to an e-commerce site one is to browse and you're not sure what you want and you know for for that I think all a lot of the UI experiences that we have like continue to make a lot of sense and the second is you kind of know what you want and you just want to place your order and for that like there's no real reason to like fire up your Uber Eats app and find the restaurant you want tap on it go find the dish you want and tap on it and it's much simpler to just be like hey I want like you know two tacos and what compounds that in our industry is because it's historically been underpenetrated there are a lot of customers that still Place their orders in this way right the email their order to the sales rep or text dat or leave a voicemail and so the transition from that to an app is much bigger than the transition from that to you know okay like now you're just texting a different number and like the AI will do it so I I think there's actually a huge opportunity to get greater penetration in the industry by enabling some of these AI forms of ordering the third thing that I think is going to happen is um you know there's a lot of ways that AI can just drive efficiency throughout the industry right and uh you know food distribution in general I think is an area where there are like hundreds and hundreds of manual tasks right you have someone that's in charge of figuring out whether or not payments have been processed you have someone that's in charge of like answering random customer support questions you have sales reps who have to go out there and like okay what are all the restaurants in the world what do I say to them when I walk in and I think there are a lot of things that Ai and you know the llm sense of the word can do to help make a lot of those decision that decision- making easier so one of the things that we're investing in right now is a set of tools to help distributor sales representatives transition from a world where primarily they're just taking orders as they come in via text and email to a world where they're actually out there like building business and so you know if you're out standing in the middle of New York City like what are the restaurants around you that don't buy from you what are their menus and how can we map their menus to items in your catalog and give you a playable for what to say to that restaurant when you walk in so that you can make a compelling pitch so those are some of the ways that I think AI is going to help our customers and then internally for us I think you know we're already experimenting with AI in terms of efficiency in a number of ways one of the things that we do a lot of is Integrations between pepper and various Erp systems and if you think about what those are it's really a mapping of one data structure to another and that's something that you know llms as a stand are actually pretty good at and so we've seen some success where you know llms can help our Integrations be written faster and help us debug things when things are going wrong yeah I would totally agree with all of that I think for us listen our customer biggest pain point today is they can't find um people to install the floors that they sell so most of what they're thinking about is like how do I get get blue collar people to trades people to install the flooring now our version of AI at this point is like we offer an email marketing solution and there's some AI but again it's like predicted on what day and time that email should be sent that I think that's been around for a while we're using AI mostly internally like a good example I think you just mentioned on like data mapping we have an Erp system onboarding on an Erp is painful well how can I take that process from 9 months to 4 months or 3 months and that gets your customer satisfaction up that gets you launched higher it reduces our churn um I'll put this in real numbers I mean we've adopted a lot of AI internally and over the last we were just talking about two years we went from burning 12 million a year to last year six and this year will be less than one and a lot of that is attributed to AI tools internally that are just making us more efficient and we need less people and our current people can do a lot more so that's where we're focused on it and by obviously losing less money and still growing we can then invest in other thing so I think our customers are getting benefits from AI even more than they realize without them seeing an AI tool it's because we're using internally becoming more efficient and better of a business we can invest in other products that are like right now necessary I think all of us will have to at some point have an AI product for our customers to offer I'm not we're not going to jump into the gun right now in our industry when there's a long list of things that are that are a problem um but eventually I could see us getting into something customer facing an AI just not we don't need to do that right now it's more internal for us yeah I think that's a really interesting point though that maybe some people haven't thought about it or failed to realize which is as companies get more productive leveraging tools for AI the net beneficiary of that is a the shareholders the investors like us and others but also the customer base they're going to win by by effect of Companies shipping products faster shipping products better shipping products more efficiently bringing cost down so that they can have cheaper products which again is a huge value po at vertical sass to take things fully full circle here I've actually seen this a little bit I've we were just having this conversation but I think we went through this like Outsourcing wave when P everyone went um remote that opened up like Outsourcing and remote work and now what I'm seeing with a lot of these vertical sass companies um because listen in vertical SAS you only have a finite number of customers I only have 20,000 flooring retailers and even as part of our pitch when we sell product we say you know someone says I have a website and a CRM with local agency X and I say that's awesome if you don't work successfully with them they're going to go find a pizza shop or a barber shop or anyone else that they're going to sell to to me there's only 20,000 flooring retailers so I need to be unbelievably successful with you and make sure that like if we burn a bridge with you now we have 19,999 customers there's not like another billion customers we can go after and in vertical SAS like the numbers we look at are net retention right a very important metric for vertical SAS especially because vertical SAS companies don't grow at 300% year-over year you start at a point where it just compounds 30% you know every single year and where I'm going with this is I think a lot of these horizontal companies have outsourced a lot of support and other functions because they don't have to maintain that customer base so well and keep that NPS score so high so like for us we've never outsourced any support any of that type of stuff instead what we've done is been able to keep that inous and use AI to make our current account management teams CX teams more efficient which is very important in vertical ass any chance you have a ratio an operating metric you track where you're thinking like number of customers per customer service person that you've seen that number shift like it's that they can go from supporting 25 to 50 now I don't even know the number I just know that we um we each of our customer success managers used to manage about 125 people now they're managing about 200 but I think this sky is and the same level of service is there to be clear I'm not like degrading service the service the service is everything for us because I only have 20,000 customers they're bionic we have to we over serve our customers like if you were to look at our CX team it's still too it's still too much to service our customers but being in vertical SAS I only have 20,000 so my best bet and I think everyone's bet in vertical sass is once you open up the wallet the net retention grows year over year over year but you can't lose those customers because if you lose them they're never coming back and they're finite so we've been able to double it at this point uh but I I think the sky is the limit there awesome gentlemen thank you so much for the time super insightful we're so appreciative that you let us invest in your companies and support you guys and excited to uh keep doing it thank you thank you thanks guys appreciate it all right I thought that was a great session pretty raw candid characterizations of how they're thinking about the market and their businesses um hopefully it was instructive and we'll catch you again next [Music] week