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Scale Verticals

The future of AI is vertical

Verticals have historically been seen as too small or too risky for venture investment. With AI, that’s changed. The “too small” markets are now in play, and the inherent characteristics that made verticals risky during the cloud migration days—regulatory constraints, large volumes of domain-specific data, heavily entrenched incumbents—become value drivers for AI solutions. Read more on why verticals will win and what it takes to build a successful vertical AI company.

The most successful companies in vertical markets pair product innovation with go-to-market disruption. In this series we explore that marriage, how companies many have never heard of came to dominate their markets, and how they scaled with distinct tactics. These history lessons inform what we look for when investing in vertical markets at Scale Venture Partners, and hopefully provide blueprints for the next generation of vertical market winners.

CCC connects all of the constituencies in a car insurance claim to provide a seamless experience by selling software to P&C insurance carriers as well as repair garages.

Founded in 1980, CCC generates over $900M in revenue and has a market capitalization of $6B. CCC capitalizes on two common vertical software innovations: a multi-product offering, and closed-network-effects. Today they are heavily investing in providing artificial intelligence solutions to their customers to further automate the car insurance claims experience.

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Checkfree (now part of Fiserv) powers  online bank bill payment for 4000 financial institutions in the US.

Checkfree recognized that few billers were ready to accept ACH payments, but that consumers liked the convenience of paying online. They improved the process incrementally over time, and were able to meet the moment when Bank of America decided to offer online bill payment services free to consumers, leading to its broader adoption.

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Epic is the dominant Electronic Health Records (EHR) service for enterprise healthcare.

Epic’s EHR is built for health systems that offer a variety of tightly integrated services. As Integrated Delivery Networks (IDNs) became more common in the nineties and early 2000s, Epic was the only product on the market ready to meet the growing demand. In the US, ~2,400 hospitals and ~45,000 clinics use Epic.

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ESRI is a geographic information system (GIS) provider for enterprises and governments.

ESRI took the largely manual process of spatial analysis and mapping and digitized it. Their software allowed their enterprise and government users to not only view geographical features but overlap them with datasets. ESRI is the dominant market player with a ~50% market share.

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Fair Isaac provides the near ubiquitous FICO consumer credit score to financial institutions to help them effectively underwrite all types of loans.

Fair Isaac is the clear market leader in credit scoring, with the FICO score used in 90% of US consumer credit lending decisions today. Their ubiquity has been driven by decades of product innovation and been supported by regulatory tailwinds, their channel distribution strategy, and M&A.

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Jack Henry sells software to manage almost all banking functions, from keeping track of customer balances to lending and website management.

Jack Henry (JKHY) maintains leading market share among credit unions and small banks, with over $2B in annual revenue and trading at 5-6x sales. They have been selling software to support banking since the late seventies, with much of their “scaling magic” via M&A happening post-IPO.

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RMS is the world’s leading provider of catastrophe risk modeling solutions.

RMS led the productization and commercialization of previously academic methods to predict the likelihood and financial cost of potential future catastrophes so that insurance and related industries can manage and transfer risk. Ultimately, this work helps companies better prepare for and mitigate the financial effects of catastrophic events.

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Textura is the network used by general contractors in commercial construction to manage and pay all of the subcontractors on a construction project.

Texture digitized the payment workflow for commercial construction. To do this, Textura innovated on the sales and monetization model. Rather than treating general contractors as their primary customer, they went after subcontractors, who had more value to gain out of a consolidated workflow. Textura IPO’d in 2013 and subsequently acquired by Oracle for just under $700M.

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Our Latest Thinking

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Our Investments

Other great thinking

Areas of Focus

AEC and Proptech

Designing, building, and managing the process of construction from start to finish is a sector that is famously underpenetrated with technology. The opportunity in the broader architecture, engineering and construction (AEC) industry to bring efficiencies to one of the largest industries in the world is still largely untapped and we believe new technologies helping to digitize both the jobsite and the back office represent significant opportunities.

Healthcare

At twenty-percent of GDP and still rapidly growing, healthcare means many things to many people. At Scale we are particularly focused on the things we understand best, software and systems that enable the patient journey in the background. We invest in software underlying the healthcare ecosystem and are particularly interested in platforms supporting payment flows, data connectivity, and care delivery.

InsurTech

The insurance industry is currently grappling with the challenges of inflation and rising interest rates, resulting in carrier losses, quickly escalating policy costs, and carriers exiting markets. End consumers are more challenged than ever at finding the right policy at an affordable price. We invest in software underlying the insurance ecosystem and are particularly interested in solutions empowering or disrupting the ecosystem of brokers and carriers.

Supply Chain and Logistics

Supply chain and logistics have been at the heart of the physical economy, but global events continue to remind us that there remain significant vulnerabilities in our infrastructure. We believe that software can and will play a large part in ensuring future resilience in the face of global disruptions, with an eye toward long-term sustainability and efficiency.

Accounting

Millions of SMBs use a combination of accounting software and third-party bookkeepers to manage their finances. Intuit’s QuickBooks dominates the market for small business finance software, claiming 8 million small business customers. And, there are nearly 2 million bookkeepers and accounting clerks maintaining those books.

A small business might pay $500 annually for QuickBooks but $5,000 to the bookkeeper who keeps it running. Right off the bat, one thing is clear: the big opportunity here is to automate the rote manual work done to make QuickBooks work. (More here.)

We’re excited by the opportunity available to do just this that is presented by LLMs, which can help solve tasks like GL categorization, better data extraction from PDFs, and automating FP&A analysis.

Finance

A few precious “aha!” moments of insight drive enormous value in the finance industry. Getting to these moments is often the result of gathering mountains of unstructured data drawn from a variety of siloed data sources, both public and proprietary, and then distilling these down to key insights points as inputs for deeper thinking. In the status quo, this distillation is a fully manual process, driven by armies of highly-paid junior staff who summarize 10-Ks and earnings calls, build excel models, and equip their teams for decision-making.

AI holds substantial promise for getting to these moments of insight more quickly and cheaply. Examples include: LLMs for crunching textual data and performing reasoning tasks, agents that can “own the excel” (structure numerical data and build models), and knowledge graphs for representing market data on key deal terms.

Education

Historically, educational content has been static, relatively one-size-fits-all, and offered limited interactivity. School teachers face a substantial burden in identifying which students are struggling where and in keeping these students on pace with the curriculum, while also completing the rote manual labor of grading assignments and managing the classroom. For those who seek ongoing learning, these same limitations leave would-be students stuck between the challenges of self-guided education and inconvenience of in-person learning.

New AI-enabled products address these challenges for learners with new abilities to (1) identify errors and gaps in understanding and (2) generate personalized explanations and course materials, all while making the learning experience more engaging. Meanwhile, for teachers, a handful of new products offer to automate the more rote parts of the job (content creation, grading, and even identifying where knowledge gaps exist), enabling educators to devote more time to student interaction.

Law

Though the legal profession has historically been slow to adopt technology, we believe LLMs enable a huge step in the value lawyers can draw from legal tech.

Few fields are as text-based as the law. Common sources of information include a firm’s document management system, an e-discovery system, or a case law database. Work output is almost always in the form of a Word document, or occasionally a text-based spreadsheet, and often is the result of synthesizing various research sources, identifying text relevant to a particular fact/issue, or revising relevant clauses to be more in-line with the desired position.

We are excited to explore new solutions for litigators, transactional lawyers, and specialists in tax and immigration, as well as in-house counsel.

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