16 Aug 2023

Are you your customers’ foundation? How Generative AI accelerates the vSaaS flywheel

For the last six months, the world has been flooded with “How GenAI will change your world” articles. The sheer volume of content on the matter today seems to be more impressive than ChatGPT’s actual record pace of adoption (>100mn users within 2 months after launch, in case you haven’t heard). Some of the world’s largest technology platforms are ambitiously working to integrate GenAI across their entire platforms, evidenced by Salesforce’s release of EinsteinGPT and the roll out of Microsoft’s Office 365 and GitHub Copilots.

These investments have triggered a wave of innovation, which we are seeing across both incumbent and start-up horizontal providers that are capitalizing on early conviction in GenAI’s ability to formulate the next platform shift. While the opportunity for these horizontal platforms is truly riveting and limited only by imagination, our team is spending considerable time thinking about how this new technology can be uniquely leveraged by market-leading vertical-focused software (“vSaaS”) platforms.

The vSaaS Flywheel

Before GenAI disrupted the marketing materials of your favorite software vendors, vSaaS companies have been quietly building behind another buzz word that we believe should be in everyone’s vernacular – the vSaaS flywheel.


This flywheel demonstrates the accelerating and market defending effect that vSaaS companies generate from their dedicated focus and knowledge of a particular customer profile. This can lead to a best-in-class product, which drives customer satisfaction and creates a trusted brand, enabling the company to grow larger, invest more in its products, and build out its category leadership position.

This flywheel effect is well known amongst vSaaS aficionados like us. However, one of the most frequent oversights when evaluating businesses in the vSaaS category is concluding that TAMs are too small and growth will therefore be short-lived. From what we have seen, market-leading vSaaS companies have continuously disproven this assumption.

In fact, these markets are big enough where we are seeing leaders develop within certain swimlanes. Housecall Pro, a company we recently partnered with, has built a very attractive platform in the small to mid-sized business segment of the home services market. They’ve expanded from a software vendor into a true business partner for clients as they have broadened their offering from a core operating platform to now include everything a home services company needs to run its business. This includes software, fintech solutions, and business services, and is evidenced by an ever-expanding ACV that is representative of the ever-increasing value that Housecall Pro is providing to its customers. Similarly, other markets have bifurcated – for example, within health and wellness, Vagaro and Zenoti have both established strong platforms at either end of the market. The same is true in childcare with Brightwheel and Procare.

This is all enabled by the vSaaS flywheel. Not only does it allow a software provider to win more customers, but it also provides them with a license to do more for each customer, which ultimately leads to increasing average revenue per customer and therefore a larger embedded revenue opportunity and TAM. Vertical depth leads to differentiated product breadth as these solutions become the foundational platform on which their end customers build their businesses.

We have also seen a number of scaled vSaaS category leaders successfully go through this journey: CCC, a provider of software solutions for the automotive industry, has seen the number of customers using 4+ solutions grow by +20% since 2020, which has helped translate into +30% growth in revenue per repair facility since that year. Procore, a construction management platform, has 44% of its total customer base using 4+ products which drives 70% of total ARR.

This natural platform expansion has most recently manifested itself in embedded fintech solutions. vSaaS companies can monetize transaction volume by capitalizing on the benefits of integrated payments or offer tailored lending products where underlying access to customer data creates unique underwriting capabilities.



“Another benefit of the vSaaS flywheel is that it creates a fully integrated solution that allows customers to adopt multiple, vertical-specific products from a single vendor. The vSaaS companies we support have incredibly high net-promoter scores with their customers which leads to a pull motion where their customers want to buy more products and services from them. At Mollie, we are increasingly leaning into providing vSaaS companies with a variety of products that they can offer to their end customers – payments was the first chapter and we are intensely adding lending, payroll, bank accounts and cards – all of which support them in seizing the opportunity to serve as their customers foundation.”

– Koen Köppen, Permira Senior Adviser and CEO of Mollie.

This foundational ethos also reveals itself in high mission criticality and ROI. Within the legal practice management landscape, our proprietary research has shown that ~70% of law firms rate their vendor to be at least a 4/5 in terms of mission criticality. We see similar results when measuring ROI as customers of market leaders like Clio and Affinipay rate their return on investment from these platforms to be a 4/5 on average.

As vSaaS companies serve more products to their vertical, their access to and ownership of data continuously compounds to create proprietary data sets that are proving increasingly valuable in the dawn of GenAI.

How GenAI Serves as an Accelerant

We believe vSaaS companies will be uniquely advantaged from instrumenting GenAI by:

  1. Enabling the Creation of GenAI-Powered Products: Discovering where GenAI can augment or enhance the customer value proposition is one of the main challenges facing companies trying to launch GenAI products. The depth of understanding that many vSaaS companies have built over time enables them to more efficiently and creatively ideate on products that customers need (or may not even know they need). Clearwater Analytics, a company within the Permira Funds’ portfolio and provider of software solutions for investment managers, recently announced the upcoming launch of Clearwater-GPT to empower its customers to access their data through interactive prompts and leverage insightful AI-generated content to grow their assets under management.

    The existing customer relationships and distribution that market-leading vSaaS companies enjoy enables them to quickly kickstart customer feedback loops, and tailor product offerings to even narrower customer segmentations.

  2. Leveraging Entrenched Relationships and Market Share Leadership: Market share is incredibly difficult to build in vertical software, which is what makes it so valuable once a company has ignited the flywheel. vSaaS companies with established customer bases can leverage this distribution to partner with the increasing number of vertical, AI-native solutions to quickly deploy AI-powered products.

  3. Unlocking the Potential of Proprietary Data Assets: The value of proprietary data assets in the age of GenAI is well appreciated. We believe that vSaaS companies are particularly well positioned to benefit from the data they have aggregated from their expansive customer bases and multiple product touchpoints given the difficulty in aggregating critical mass within these hard-to-reach verticals. GenAI helps businesses better understand and analyze unstructured data, making datasets that were once obsolete increasingly more valuable. As pre-trained foundation models become the bedrock for the majority of GenAI-powered solutions, the ability to fine-tune on specific domain data is the ultimate key in creating differentiated value.

What Does This All Mean?

It is impossible to predict what the next decade with GenAI holds, but we believe the future is bright and the opportunities are expansive for vSaaS companies.

If you are thinking about these questions as well, here are some of the actions we are seeing companies take to realize the full potential of GenAI:


If you are interested in having a further discussion, please don’t hesitate to reach out to any of the team members below.