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: Jack Henry & Associates
Founders: Jack Henry and Jerry Hall
Year founded: 1976
Company vertical: Banking Software
Market dominance: Core processing software for small banks and credit unions
What do they actually do: Jack Henry sells software to smaller banks and credit unions. The “core” system keeps track of all customer balances, including deposits and withdrawals. They also sell software to help manage almost every other banking function, such as lending, payment processing, the bank’s website, etc.
Product innovation: In the late 1970s, small banks couldn’t afford to buy mainframe systems and develop the software required to support banking, so they used “SaaS”, which back then was a dumb terminal hooked into somebody else’s mainframe running their software system. When midrange computers (dominated by the IBM AS/400) became available, the economics for small banks changed. The early adopters wanted to be less dependent on their computing providers, who in many cases were larger banks. Jack Henry seized this opportunity and provided bundled software, hardware (as resellers of the AS/400), and services to support the core computing needs of small banks.
Scaling magic moment: The company grew well in its early years, from $12M in revenues at the time of its 1985 IPO (it was a bit easier to go public back then) to $46M in 1994, a CAGR of 15%. Then Jack (the founder) stepped down as CEO, and his son Mike Henry took the helm. Mike realized that the company had high trust with clients, and that as their software needs grew, the banks wanted well-integrated systems and one stop shopping. But Jack Henry couldn’t develop solutions fast enough, especially given the growing demands of the internet – Netscape launched the browser in 1994.
Mike’s solution was to buy other banking software suppliers and integrate their functions with the Jack Henry core system, and then selling the bundle to banks and credit unions under one trusted umbrella. This strategy worked very well. Growth accelerated, with revenues growing from $46M in 1994 to about $400M in 2001, a CAGR of 36%. During this period, JKHY acquired 15 companies, including Symitar to expand relationships with credit unions and Peerless Group to expand the offering of back office solutions. The resulting broader bundle of software solutions also increased retention, allowing price increases to augment growth.
Where are they now: Today 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. The company provides a broad suite of banking software to its 1700 core customers, and it provides point solutions to another 6000 banks and credit unions.