Startups: When and how to go vertical

In their early days, many software companies find themselves asking which customers to target. That may mean choosing between small businesses and large enterprises; it may mean choosing if and when to focus on specific verticals.

Going vertical is a big decision that is often made accidentally with dire consequences — the product roadmap can be compromised, competitors can gain traction in bigger segments, or, in the worst case, the company is pigeonholed into a market subsegment that isn’t big enough for a good exit.

This is why the sequence of operations is critical when verticalizing. Companies can minimize risks by trying this sequential, gradual approach.

1. Confirm the market is sending a signal. Sales success is the best indicator. Track industry verticals in your CRM. Is there a concentration of buyers from a specific vertical in your customer base? Where is your sales cycle repeatedly the shortest? Where are your biggest average deals? Are reps focusing on particular industries? What’s happening in that market to create outsized demand?

2. Create vertical content. Before you actually commit resources, create content in that discovery pathway: 71 percent of B2B searches start with a generic query to find a product that solves their problem. The signal of whether or not that content is discovered and viewed will test engagement and repeatability. It also says whether or not your horizontal solution can simply be applied in a more specific use case without having to verticalize anything else. Do this before you start committing product and sales resources.

3. Empower a vertical go-to-market specialist. This is ideally someone in the sales or product marketing org because they have to have some vertical expertise. More than half of research is done online before a prospect engages with a rep, so if a prospect gets to you, they want to go deep on how the product can be used for their business. Conversational fluency around an industry is what makes someone credible, so make sure the person showing up (or giving the demo, getting on the phone) knows the vertical well. Figure out whether or not you have a repeatable formula that is worth the cost of specializing in the vertical before committing more deeply to it. Vertical sales specialists are often overlays and don’t pay for themselves as quickly as generalist reps. You want the average deal size to either be higher than your standard deals or the average sales cycle to be faster. But in most cases, verticalization means bigger deals, not faster ones.

4. Add vertical specialization to the product. If there is only one thing you take away from this post, it’s this: Vertical product specialization comes last, and maybe never. It may be the right decision, but make it strategically. Don’t get dragged in by one or two promising deals that require just a few more features. Move through steps 1-3 first. Test the waters with templates or a few simple modifications done in post-sales customization paid for by the customer. Be sure the vertical is big enough to justify investing in the product. Once you offer a vertical product, the expectations from that market only grow. Also, you’ll be supporting those features for a long time. Be ready.

Unlike many product decisions, the decision to go vertical can be made incrementally. Invest over time. Don’t be afraid to be patient. It can be a great way to grow a product’s reach, but most companies should do product verticalization later than they think and tend to underestimate the long-term cost to being in verticals. So when you do decide to verticalize, tread carefully and never do it without data.

Neill Occhiogrosso is a partner at Costanoa Ventures.