Via Forbes : For many startups, the focus is often on developing a product that is applicable for just about any industry (known as a “horizontal” strategy). The allure is that the market opportunity is enormous.
Yet what about going after a particular industry instead — that is, to take a “vertical” strategy? Well, this generally gets scant attention. After all, is the opportunity big enough? Or might the business get too specialized?
While these are legitimate concerns, the fact is that the vertical approach can be a great way to build a billion-dollar business.
Hey, just take a look at the case of Guidewire Software (GWRE). The company, which got its start 14 years ago, has had the singular goal of building enterprise software for the property & casualty (P&C) insurance market.
And yes, the strategy has been tremendously successful. As of now, Guidewire sports a market cap of $4 billion and expects to post annual revenues of $406 million to $416 million.
OK, so to get some insight on how the company pulled this off, I recently talked to the CEO and co-founder, Marcus Ryu. Here’s what he had to say:
Size, Diversity and Pain: When Marcus started the company, he already had a good understanding of the P&C industry because of his prior work at McKinsey. During his various engagements, he learned that the industry was massive (over $1 trillion on a global basis) and involved many diverse subcategories, like auto, home, travel, earthquake, ocean marine, workers’ comp and so on.
Marcus also quickly realized that the industry was still using old-fashioned and expensive technologies. “I saw lots of green screens,” he said. “So it was clear that there was an opportunity to leverage current technologies to solve problems.”
However, before building the software, he carried out even more research by talking to numerous insurance firms. “Based on the findings, we focused on first building a claims system,” he said, “which would be based on the most modern software.”
Focus on Tier-1 Customers: Granted, this may seem daunting. But if your technology is focused on a vertical, there is likely to be much greater value-add for customers. This actually provides an edge against large operators, which usually have horizontal solutions. Besides, tier-1 customers have complex pain points and issues – so there will be lots of interest if the software is developed for specific needs.
Something else: These types of customers have large budgets. In other words, it does not take too many wins to start putting together a nice revenue stream as well as build a trusted brand within the industry.
Innovation At The Right Pace: Even though your engineering team can build cutting-edge technology, this does not mean you should do it. The reason is that the industry may be far from ready for the changes. Part of this may be cultural but there will also likely be restraints in terms of rooting out the legacy systems.
“Change does not happen overnight,” said Marcus. “We learned this soon in the P&C industry.”
Interestingly enough, his educational background was helpful with this process. Keep in mind that – before entering the business world – he was a philosophy scholar at Oxford. Admittedly, this may seem kind of an odd advantage for a tech entrepreneur. But then again, philosophy is about understanding the objective facts and drawing rational conclusions. Oh, and it is also about questioning the conventional wisdom, which can be a great attribute for any entrepreneur.