Vertical Integration
Bundling or unbundling of services is a common strategy in the tech industry.
Vertical integration is a strategy where a company expands its operations to control multiple stages of the supply chain, from production to distribution.
The Model
Why integrate vertically? Control creates compounding advantages.
| What You Control | Advantage |
|---|---|
| Data source | Proprietary insights |
| Workflow | Switching costs |
| Payments | Revenue per customer 10x |
| Distribution | Customer acquisition |
The thesis: Vertical integration from sensor to workflow creates compounding moats.
Three Expressions
Vertical integration appears in different forms:
| Expression | What It Is | Go Deeper |
|---|---|---|
| Vertical AI | AI trained on industry-specific data | Below |
| Vertical SaaS | Software tailored to industry workflows | VSaaS Playbook |
| Full-Stack Startups | Own the entire value chain | a16z |
Vertical AI
Tremendous disruptive potential as language models cross capability thresholds for products that solve customer problems end-to-end.
Building successful vertical AI requires:
- Deep iteration on prompts and workflows
- Deep integration of business domain expertise
- Rigorous testing for 100% reliability
Data sources:
- Domain-specific integrations
- Proprietary datasets
- Customer-specific connections
Impact: CoCounsel
AI legal assistant that can:
- Engage in dialogue
- Analyze millions of documents for evidence
- Produce well-researched memos
Tasks that took lawyers days now take minutes. Customers had existential crises seeing demos—this fundamentally changes legal work.
The Insight
The future of prompting is not just about examples of good outputs, but teaching models expert domain-specific reasoning processes.
Vertical SaaS
The playbook for building industry-specific software lives at VSaaS.
Quick reference:
| Component | What To Learn | Link |
|---|---|---|
| Strategy | 9 Keys to Monopolizing | Principles |
| Tech Stack | DePIN + Embedded Finance | Platform |
| Implementation | Development Playbook | Protocols |
| Metrics | ACV Tiers, Focus Matrix | Performance |
| Team | Industry Engineers | Players |
Full-Stack Verticals
Industries where vertical integration matters most:
| Vertical | Why | Link |
|---|---|---|
| Construction | Fragmented, physical + digital | High opportunity |
| Real Estate | High transaction value, data-rich | High opportunity |
| Healthcare | Compliance, integration complexity | Medium opportunity |
| Manufacturing | Supply chain, automation | Medium opportunity |
| Education | Fragmented, outcome measurement | Growing opportunity |
See Full-Stack Startups for more verticals.
Market Examples
Who's winning through vertical integration:
| Category | Dominant Players | Market Share |
|---|---|---|
| Restaurant Management | Toast, Square | ~70% combined |
| Construction Management | Procore, Autodesk | ~80% combined |
| Real Estate Brokerage | CoStar Group | ~80% in CRE data |
| Auto Dealership | CDK Global, Reynolds | ~90% combined |
| Legal Practice | Clio, MyCase | ~75% combined |
| Dental Practice | Dentrix, Eaglesoft | ~80% combined |
| Fitness/Spa | Mindbody | ~70% (post-Booker acquisition) |
The pattern: In every vertical, 2-3 players capture 70-90% of the market.
Context
- VSaaS Playbook — The 5P framework for building vertical software
- Products — The V × R framing (VSaaS × RaaS)
- DePIN — Physical infrastructure layer
- Business Models — Other model patterns
Links
- lukesophinos.com — VSaaS research
- Vertical SaaS Bible
- a16z Services Led Growth