For vertical SaaS businesses, it’s easy — and attractive — to look at unicorn companies like Mindbody and Toast and believe your product can become the ubiquitous solution for your industry. But one question you’ll have to answer first, for both yourself and for your investors: Is your market segment big enough to justify a billion-dollar valuation?
In a Forbes article, venture capitalist Adeyemi Ajao argues that, when you add in integrated payments processing, the answer to that question is much more likely to be yes. So why do venture capitalists like integrated payments so much?
Horizontal vs. Vertical
For SaaS companies, there are first and foremost two types: horizontal and vertical. Horizontal solutions, like Salesforce for instance, can be applied across any industry and, as a result, have massive market opportunities. For vertical SaaS products that are specifically designed for a certain industry, their Total Addressable Market (TAM) may be significantly smaller. For investors looking to generate venture-sized returns, the potential to increase your TAM can be a major factor in deciding whether or not to invest.
Adding Integrated Payments
By simply adding payments to your vertical Saas products, you can easily capture significant new revenue and increase your TAM instantly. In the case of Toast for instance, Ajao calculated their TAM increased by 3.5 TIMES when they added payment processing to their software. This means that Toast was able to generate 3.5 times the revenue from payment processing than they were able to justify through their core POS offering.
We’ve discussed before how adding payments can add revenue to your business, but this is about more than just your bottom line. This is how you make your company more attractive to potential investors and also increase your competitive edge with your customers. With Tilled, the infrastructure already exists to empower your vertical software solution to take advantage of integrated payment processing and increase your TAM, and it can all happen with minimal extra energy, time or money invested.
Attracting Investors with Integrated Payments
From an investor perspective, increasing TAMs using integrated payments — sometimes by as much as three or four times — greatly increases the chances your company will be able to provide the venture returns they require in order to invest. For many vertical SaaS companies, their TAM without payments is simply too small to attract the attention of venture capital investors.
Another reason integrated payments processing is so attractive to potential investors is it’s not only a new revenue stream, but also a high-margin revenue stream. If you record it correctly, recurring payments revenue is nearly 100% pure margin for your business, especially if you’re working with Tilled where we take on the liability for chargebacks. This creates a high-margin monthly recurring revenue stream that investors will look at incredibly favorably when evaluating your business.
More than just increasing your TAM, integrated payments also increase your Average Revenue Per Unit (ARPU) or how much revenue you can generate per customer, per year. With payments, each customer will be worth that much more to your company, making your market potential that much higher and/or making it that much easier to break even and start turning a profit. For investors, anything you can do to increase your ARPU is a good thing.
That extra cash can also help you push out your next fundraise. Which means less dilution for you and your investors. If you can add $500K per year of cashflow into your business, that is $500K per year that you don’t necessarily need to raise from investors. Your cap table will thank you.
Finally, adding integrated payments to your software solution allows you to compete with other, larger players in your market which investors will obviously evaluate before investing. With the additional payments revenue, there are several ways your company can have an edge over your competition.
One of the most obvious ways adding revenue to your business can give you an edge over your competition is by allowing you to reduce the cost of your solution to your customers. Once you’ve added integrated payments and doubled, tripled, or even quadrupled your average annual contract value, you now have new choices to make: keep your software costs the same and pocket or re-invest the additional margin, discount the cost of payment processing, or discount the cost of your primary software solution.
Many small businesses accepted long ago that there are costs to process credit cards, but they may not feel the same about your software solution. By adding integrated payments revenue, you can now offer customers your solution at a lower — or even no — cost. Take Toast for example: if they are able to generate 3.5 times more revenue from payments than from SaaS fees, they could give their software away and still generate more revenue than they ever could without payments. If you’re the only software solution in your vertical that offers integrated payments processing, and because of that you now offer your software for free, it’s easy to see how you could quickly dominate the other competitors in your industry. Conversely, if you’re the only solution that isn’t offering integrated payments, you’re a lot more likely to be fighting an uphill battle against your competitors.
In addition to competing on costs, adding payments also adds value to your software solution. Many vertical software companies have integrations into popular CRM systems, accounting systems, or health record systems. This additional integration layer means more value and likely more margin. Customers also no longer have to do the extra work of finding a payments processor, and have a seamless solution available to them with just a few clicks. Those customers are also much more likely to stay with your solution for the long term, rather than risk having to spend the enormous time and effort of switching both software and payment solutions.
Infrastructure to Empower
As you scale up as a vertical SaaS company, once you hit a certain threshold you are not only risking valuable revenue and margins by not integrating a payments solution, you are also risking your market share and ability to compete in your industry.
With Tilled, we have the infrastructure in place to empower your business to implement a seamless integrated payments solution in less than a week. Thanks to our technology and partnerships, your margin on payments with Tilled is essentially 100 percent. We take on the liability, and there’s no need to hire additional staff or add any overhead costs to your business. And with our easy-to-integrate APIs and SDKs, we offer a turnkey solution that can be up-and-running in a matter of days, with no upfront costs or monthly software subscription required.
There’s no doubt there are markets existing today that have yet to be penetrated by vertical software solutions. Many of them, on first look, appear too small to justify the work and investment. But what if you could increase their TAM by three or four times? With Tilled, you can make those new margins right out of the gate. Suddenly, new business opportunities that didn’t pencil out work better than ever expected.
Get Started with Tilled Today!