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.
Company name: Guidewire Software, Inc.
Founders: Marcus Ryu, Ken Branson, John Raguin, James Kwak, Mark Shaw
Year founded: 2001
Company vertical: Insurance
Market dominance: End-to-end insurance carrier system
What do they actually do: Guidewire is the most popular core software system for property and casual (P&C) insurance carriers. These are insurance carriers that serve areas such as auto, home, and casual insurance, rather than life or health insurance. Insurance carriers have three key functions that are covered by Guidewire’s software: billing customers, tracking existing policies and their details, and managing insurance claims. In order to sit in this role, Guidewire has hundreds of critical integrations into CRM, payments, customer engagement, document management, and other production systems.
Product innovation: Guidewire was founded in 2001, not as a cloud SaaS solution, but as a vertical, insurance-dedicated, alternative to the unwieldy, mainframe-based, horizontal, industry-generic systems that insurers previously built on, often with the help of Systems Integrator (SI) partners. The mainframe-based systems required extensive development and customization even to handle simple tasks for a common line of business such as homeowners. The initial build cost and ongoing total cost of ownership were extreme, with insurers frequently paying Systems Integrators $20-40M/year to expand and maintain their systems, on top of heavy software licensing fees. In comparison, Guidewire’s products were purpose-built for P&C insurance and provided extensive capabilities out-of-the-box for a majority of insurance product lines, with the additional ability to further configure and customize. Guidewire’s products were superior to the mainframe-based systems that they replaced precisely because they were verticalized explicitly for the P&C insurance market.
Guidewire also had a modular product strategy, starting with claims, expanding into policy administration, and becoming an end-to-end solution with the launch of billing in 2006. Instead of starting in policy administration, which is the most competitive segment to enter, and hardest to replace, Guidewire launched with claims and continues to have the biggest lead there with hundreds of customers using its ClaimCenter.
Scaling magic moment: Guidewire entered an industry served by very legacy vendors (think COBOL) and horizontal solutions such as Oracle and SAP. These systems trained existing insurance carrier on receiving a large amount of customization and professional services. This presented Guidewire with a predicament, as the modern school of software thinking suggests when customers request extensive customization, it is best practice to hold ground and not submit. Rather than resisting custom work as competitors did, Guidewire embraced it and willingly provided bespoke capabilities to each insurer. They did so through an army of System Integrator partners who conducted the lions’ share of the customization service work so that Guidewire could focus on software. This contrarian approach is Guidewire’s magic moment that allowed it to acquire customers far faster than its competitors.
The rationale underpinning this approach was that insurance core systems are so central and deeply integrated across hundreds of other internal systems that it is extremely difficult to switch them out. Once you win a customer coming off a mainframe-based system, you have them for the next ten years, if not indefinitely. When your goal is to become and stay #1 in the insurance core system market, you prioritize onboarding the most customers first and wait more than a decade to push product standardization in a cloud offering.
As Guidewire moved its products to the cloud in the late 2010s, the trick became replacing the need for customization by enabling feature variation through robust configurability of a standardized product. This is the modern SaaS that we know. Guidewire became the largest insurance core system provider by meeting its clients where they were, delivering the customization that they desired, and waiting to standardize until the market was ready.
Where are they now: Guidewire (NYSE: GWRE) continues to be the largest P&C insurance core system provider with $1B+ in revenue, $17B+ market capitalization, and 25% of the global insurance premium flowing through its systems from over 500 customers. It continues to offer a premium product, at a premium price, for large insurance companies. These customers continue to present a significant opportunity for revenue and margin expansion driven by migrating their existing on-premises solutions to Guidewire’s superior cloud products.