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The Five Hallmarks of an Industry Cloud Company

Over the last six months we have seen a dramatic uptick in the number of start-ups that self identify as an “industry cloud” company. The rapid rise of vertically-focused companies reminds me of the early days of enterprise SaaS, when horizontally-focused companies followed in the wake of CRM's success. While some of these industry cloud companies might be rebranding after Veeva System’s $4 billion IPO late last year (I chair the board at Veeva), nearly all represent an emerging approach to building cloud companies: focus on an industry and go deep.

Given the new interest in the sector, we thought it might be helpful to identify the five hallmarks of an industry cloud company.

  1. “Talent Trifecta” – Unlike horizontal companies that can scale effectively with a powerful blend of technical and sales acumen, industry cloud companies require a third skill set on the executive team:  domain expertise.   Successful industry cloud companies require a co-founder or senior executive with extensive experience in a specific industry vertical.  At Veeva, President Matt Wallach previously ran Seibel’s Life Science division and serves as a perfect complement to CEO Peter Gassner’s product and technology expertise.
  2. Deep Data” – A key advantage of the industry cloud model is the ability to create customer value from user data -- both through user entry and from behavioral analysis.  While all cloud companies have this potential, an industry focus makes it far more likely that cloud companies can turn data into meaningful insights for their customers.  Why? These data come from a more consistent customer use pattern, with similar terminology and ability to compare across functional areas (sales, marketing, finance, etc.) For example, Opower works with utilities to collect customer energy usage data that can help individual customers modify energy consumption.   The company’s four interconnected product lines leverage this data (representing 37% of U.S. residences!) to generate reports and alerts that drive behavioral modifications, thereby helping utilities interface with customers and optimize utilities’ infrastructure with demand response programs.
  3. Referral Revenues” – One of the most compelling elements of the industry cloud model is that most buyers in a given industry know each other and run their businesses in many of the same ways.  They attend the same conferences, travel in similar circles and may even have worked together at some point.  As a result, industry cloud companies can build a reputation in an industry within a year or two of launch, resulting in a high percentage of reference selling.   In fact, customer acquisition costs at industry cloud companies are often 50% lower than horizontal cloud solutions. Companies can become the de facto standard such as Real Page, the leading cloud software for real estate property management in the rental industry.  Of course, the corollary is also true.  There is little margin for error when rolling out solutions for industry cloud companies, as the concentration means that news travels fast about poorly designed software or ineffective customer success teams.
  4. “Massive Market Share” - With a horizontal solution, there’s so much ground to cover, in both geography and business sizes, even the market leader achieves little more than 5 to 10 percent share. However, companies that focus on a specific vertical can achieve much greater penetration, often leading to a winner-takes-all environment. For example, Doximity offers a secure, social platform for physicians and other health care professionals to engage with each other. Within five years of launch, over 40% of U.S. physicians have signed up, making it the primary social network for this important industry group. Another example is Bloomberg in the financial services industry, where it has over 30% market share in market data and electronic trading platforms.
  5. “Layer Cake Product Strategy” –  Traditionally, industry focused companies were perceived as “niche plays” because they tended to only offer a single application, often built on top of an existing horizontal platform, in a single vertical.  The new breed of industry cloud companies can leverage cloud infrastructure to offer several layers of value, such as CRM solutions, marketing automation, content management and data analytics.  We refer to this multi-layered product strategy as the layer cake approach.   Guidewire, the leading industry cloud company in the insurance vertical, offers a range of products that help insurers with underwriting, policy management, billing and claims management, all built on a common platform.  After achieving deep penetration with its core suite, the company is adding new layers of functionality such as business intelligence, data management and mobile solutions. Between the broader penetration in each product line and the potential for far greater market share (mentioned above), industry cloud companies can grow much larger in the cloud era than during the preceding client-server period.

Industry Cloud Landscape

Based on these five criteria, at Emergence we have identified more than 200 companies that are part of this new industry cloud sector. Below is a first cut at a landscape of these companies, which we will continue to update (click to enlarge).

Industry Cloud Landscape
Industry Cloud Landscape

Seven industries have spawned over a dozen industry cloud companies, with healthcare, education and real estate emerging as the verticals with the highest concentration. These industries are particularly “cloud-friendly” due to their size, data opportunity and regulatory elements. Industries such as financial technology, energy, transportation and legal are just starting to break out with a couple of early leaders and new industry cloud companies emerging every month.

The landscape includes 14 public companies as well, seven of which went public in the last two years. The public markets have come to understand and appreciate the efficiency of the industry cloud model, as a dollar invested in an industry cloud index at the beginning of 2013 would have performed 20% better than a dollar invested in a horizontal cloud index.

Horizontal vs Industry Clouds
Horizontal vs Industry Clouds

Looking ahead

At Emergence, we are excited about the rise of this new wave of cloud companies. The breakout success of companies such as Veeva Systems, Guidewire, and Opower highlight the potential of a focused approach, and we anticipate that this landscape will explode in the coming years. With the ever-increasing amount of “sensor data” available from new advances in mobile and consumer technology, industry-focused cloud companies will be an invaluable partner for their customers in the years ahead. Looking ahead a decade, we will inevitably see consolidation. With the potential for a single company to achieve market shares over 50%, it often doesn’t pay to be the #2 in a sector.  As a result, we anticipate fierce competition as new ventures jockey for dominance in each industry sector, ultimately resulting in 5-10 large public companies in each industry vertical.  We see tremendous potential in domain focus, and we are excited to help build the industry cloud leaders of tomorrow.