Vertical Software Niches

Andrew discusses how vertical market software businesses have been highly profitable due to limited competition, but warns this advantage may diminish as software development becomes more accessible. He uses Constellation Software's business model as a prime example.

Key Points:

• Vertical Market Software Success:

  • Target niche industries (funeral homes, golf courses, infrastructure)
  • Limited competition due to lack of developer interest
  • Can charge premium prices with little resistance
  • High customer retention due to being "only game in town"

• Constellation Software Model:

  • Acquires ~100 vertical software companies per year
  • Target companies making $3-10M annually
  • Simple strategy:
    • Buy companies
    • Increase prices on schedule
    • Minimal improvements to product
    • Hold long-term

• Future Threats:

  • Tools like Replit making software development accessible
  • Basic software can be replicated in minutes
  • Increased competition expected
  • 2-year timeline for market disruption

• Defensive Strategies:

  • Focus on businesses with unique competitive advantages
  • Look for hardware components or strong lock-in effects
  • Prioritize communities and social networks
  • Ensure quick payback periods on acquisitions