Why Vertical SaaS is Booming, And How to Get 110% NRR from SMBs, with Jason Lemkin Mangomint's CEO

hey everybody it's saster um have a treat for you doing something fun uh I've just done an investment in a breakout vertical SAS leader called mango Min we have the co Daniel Lang here Daniel thanks so much for joining us and so much for having me so we're gonna have some fun um on this one maybe maybe you can learn a little bit about the investing process for folks that think it's fun um vertical SAS somehow has become hot we're going to talk about this I've been doing SAS for a few years and I don't

know how it got hot although I have a few theories I actually think it used to be Niche and in fact I in the old days everyone thought everything in vertical sass was too small and too Niche um I think Viva went public and they're worth 35 billion they are verticalized um CRM and vaulting service for Pharma that changed a lot of people's mind adjacent to manglement which we'll chat about service Titan should be one of the best SMB vertical SAS IPOs in the next 12 months they're approaching a billion in ARR um the founders

have spoken at SAS before it is a great one service Titan they SAS for plumbers and HVAC units and others and mango mint Daniel's gonna tell us a little about it is SAS for salons and spas alike um to typically seen as a smaller Tam and also one with a lot of vendors um in the old old days there was a company called mindbody which got went public right and got acquired for a billion or so right and they went public I think they were only worth a couple hundred million bucks when they went public

I may have the narrative wrong and then everyone turned around they're like worth a billion dollars they like wow maybe there's some money in this space um and now it's being reinvented so there's a lot I want to chat about vertical SAS and why but Daniel tell us like what why what's changing in the space why and and for give folks contexts uh mango mints at double- digit Millions growing triple digits okay growing over 100% at double- digit Millions that's pretty good especially today which we're going to chat about but why what's changed what's changed

in software in automation that makes why why is Salon software changing yeah no and thanks Jason for having me I'm really excited to be here um I think as you said right like vertical software has been around for a really long time and it's no different in our space like I think the first Salon and Spa software providers came around in the 80s even right so so it's not a new thing um but what has changed uh probably the last five years or so maybe a little bit longer now is that you have all of

these like embedded financial services that are now available that just didn't exist before the stripes of the worlds the audience and um you know that is one thing and then the other thing is you have this expectation from consumers to um basically want to uh talk to their businesses through digital means right so they don't want to call uh at 9: in the morning to book their appointment they want to do it at 10:00 p.m. at night uh and do it from the iPad right and so with with the the the fintech stuff that's uh

come into play I think it has really changed um what these companies can be whereas before like 10 15 years ago you know if you did like Salon and Spa software it was basically a calendar calendar with some bells and whistles around it but now it's like you know there's payments in it payroll processing in it you can do payments online in person recurring billing all of that stuff that's like coming together in these platforms and I think that just makes the market that much bigger yeah one I I briefly when we when I kicked

this off I talked about Viva very very very Enterprise 78 figure deals and then service Titan one I didn't talk about was toast toast today is worth let's look 14 billion dollars at a 1.5 billion AR so that's you know a couple years ago 10x 10x mult when your public was nothing today it's it's pretty Elite and what I think is happening is these vertical sasses for SBS there's going to be multiple toasts and toast and tell me if I'm wrong what you think people go to a restaurant and they use toast everyone sort of

knows toast but it's this stack right it's backend software front end point of sale I payroll Erp workforce management wfm I think it's like 10 or 12 products to make toast work and I think that's what you've built a lot of you've built payroll you've built Erp you're thinking about financials is that what SBS want do they want the full stack today yeah I think so um I think a lot of people get this wrong especially in investors where because everybody at some point read the best memo right and they're all thinking about those layer

cakes and you can add more more to it yeah but thing best get those guys at bmer get wrong no they didn't get it wrong I think a lot of people that read the memo are a lot of people misread it because because I think you know there's this misconception that you can just like oh you have like the Erp software right so you can just layer on all of these services and just because they integrated people are going to use it and I think that's a fallacy that's wrong um I think when you add

um a product like payroll for example or payments for example it's not enough just to integrate it that's not good enough because you're going up against players like Gusto ADP paychecks that have do been doing this for decades right so they're going to be Gusto is great we use it all the time it's great software right and it is and we actually use we use gusta for a long time as well and you can't compete with them on just payroll right so when you bring them in you really have to think about okay how do

you integrate them in a way where you can cut out 70 80% of the time that people take to use these tools right and you really have to be an order of magnitude better in order for someone to switch from their QuickBooks to you yeah and I think that's the thing that people often misunderstand where it's not enough just to put in an eye frame you really have to go deep and and think about the workflows and and and solve them and that's from what I understand toast has done as well right where they didn't

just add payroll processing they didn't just add all of these Services they really thought about okay when we bring them together what's possible now that's not possible when these are like separate tools yeah it's interesting you know a few um is a legal practice management platform Jack Newton's a great I guess we can call Legal vertical house now now that it's hot right I think he was around for 15 years getting to 100 million in Revenue and then they finally got payments right and they went from 100 I think to 200 or 100 to 200

and two and a half two years or something and just raised at three billion right and uh Renee ler at Bill who's at sast is you're one of my favorite founders of all time I think it took Bill like 10 years to add payments to their platform to do it right and for both of them it was not that it wasn't part of the vision but the idea that you can just randomly Bol payments onto any SAS platform I think is your point like it it not that simple so what did it take to add

payments to manglement to make it click right to get you dat figures and revenue yeah I mean we've been through a journey um with payments we started early and we used to partner with like external um payment providers before and we eventually settled on like you know deeply embedding it and completely white labeling it as well so our customers they don't even know that there's somebody else in in the background doing like you know the the money movement and stuff they is like for them it's like part of the mement product it's not even a

thing that they think actively about but to get to that place you know when you we're coming up on like processing almost a billion dollars in transactions annually and you're going to have to deal with like compliance and risk and underwriting there's fraud and despite you know the stripes and all of these providers helping a lot it's still really hard to do it at scale and to do it well so I think that's something that you just have to learn as a vertical size company like not just the product but also the operational complexity that

comes with just managing it at skill so yeah it has to be I mean for folks that haven't tried it mango made it is um one of the impressive things for me is that it is effortless right which we'll talk about in a minute I think maybe it has to be in 2024 but everything from the booking to the interaction to moving things around to payments to click to Apple pay or to put in your details or everything it is effortless um but that's probably that's probably the reason to do it like the bill and

Cleo stories it probably asked to if you can't get to effortlessness probably Bing payments or fintech on isn't going to work if it's not effortless right just sck yeah or payroll stick with gusto right it's not effortless you also want to do something that's actually meaningful right like um you know when you have it it takes so much to get somebody to switch to an Erp system to like you know switch out everything move over all the data train all the employees right it's like really big move for them right and so once you have

them it's it's it's powerful right and assuming that the product is good and they you know you have to trust and NPS is high and all of that stuff you can sell them more stuff but you want to go after products that have potentially 100% H right where it's 100% of your installed base and turns out there's not that many of these right because like you know if you go down the stack of like what a small business uses today there's like you know five or six things that you can go after but it's not

like 50 so yeah yeah yeah it is interesting you we think we see toast everywhere it's in about 133% of the market so getting all getting that that majority it's a it's it it it could be existential um the nrr um actually before we get there I want to talk about your nrr but you you hit a point onboarding okay so when folks think about SM SMB in some ways is easier than Enterprise and that there's more of them but the deal size is harder they they often don't have a person to screen a vendor

they don't have an IT team there's challenges what I've learned and I it took me a while to figure that out the hardest not only is that hard the hardest corner of SMB the hardest corner is when you have to do onboarding s canvas is hard enough right Squarespace is hard enough but folks like toast or owner that I've invested in or gorgeous that I've invested in or mango M they doing it even harder there is business process change for a tiny business what if you learn how do you do this because because they're just

going to leave if it's not hard but yet you can't it's not at 4 second onboarding so what do how do you how do you make onboarding work for SDS when there isn't $100,000 or $200,000 of money to work with yeah it's well I you know at least I can speak about how we do it other companies approaches but we are all in on on product quality we're like fully product Le uh with our onboarding as well so we do have onboarding managers that are there to manage the complexity of what you just described right

yeah and usually if you think about it you know some of our customers when they switch over they have a system like mind with like 10 years of data and it includes everything from like you know purchase histories products inventory gift cards packages memberships all of that data has to be transferred and in a lot of cases these businesses are open seven days a week so you have to do it on the Fly they are not going to just close the business because they're switching software right so that that's an extra wrinkle to it um

the other thing is um as you said you know employee training a lot of these folks have like 10 15 20 uh people who use the platform every day on their phone on their computer on their iPads right so everybody needs to switch at once it's not a land and expand yeah it's like it has to happen in a very coordinated way which is why it's hard um what we found works well is really going deep on the product experience um mangamint does not have any contracts so anyone can sign up um put in their

credit card after 30 days and that's it so our uh sales reps and our onboarding managers are really motivated to basically help our customers just like figure out okay would this work in the business right what we don't do is we're not going to talk someone like hey you know sign on the doted line now we got your money good luck right that doesn't work at all like you really have to be invested in the success of the onboarding process and the product has to lead the way and so we have tons of like you

know in product help guides and all of that stuff so we went really deep on those things and it's worked really well for us so you've got you've got a customer that's been on an old platform like mindbody for years they want to switch right um and you've got this massive amount of sort of semi-structured data in this system there's no there's no it team how do you do that it's it's nuanced right how do you do that because otherwise the hurdle to switching is so high isn't it yeah I mean it depends obviously on

a lot of things right um it depends on how much of the data do they even want to bring right A lot of times it's an opportunity to say Hey you know let's make some bigger changes in the business as well but the onboarding process can be as quick as like one day when somebody's like starting fresh they don't have a lot of stuff or it can take three months yeah and so there really is no one answer but you have to get really good at it because um switching software is such a big scary

thing for them if you don't take them by their hand and and guide them through that process it's definitely not going to work like you will see a lot of turn in those first three months um so it's very nuanced one thing I've noticed over the years when you have a SMB focused vertical SAS and there is onboarding oftentimes the size of the post sales team is larger than the sales team do you have that or there's actually more folks post sales and than sales um if you customer success onboarding support there's often more people

than in sales itself we have about uh one onboarding manager for every two sales reps okay but I think part of that is also because um remember we don't do contracts and we have a 30-day free Troll and we actually start onboarding during the troll so you literally can't get started no no barriers and so the sales people themselves are almost like mini onboarding managers that handle a lot of work already so I think that's why in our case that's the balance but I totally see what you mean um I mean you know even if

you had contracts right if you can't get the business to adopt your platform successfully you you've already lost right so you really gotta do whatever it takes to get them to the other side yeah I find many folks that don't that have a lot of customer SBS are shocked when they see the actual number of paid customers that go live is in the 80s they're often as cosos we think oh God it must be 96% and and they're often shocked when they look at the data um and they're like oh my God it's 81% of

our customers go live right they're almost instantly gone even if they're paying right if they don't go live right yeah we actually found there's a an inverse relationship to the speed and the success rate of it like a lot of times or not inverse inverse corly meaning sometimes you know you think that oh like more momentum is a good thing and let's you know onboard you really quick let's go live next week but actually the success rate drops quite a bit when you push that hard for it because um you know you you want to

bring everybody on board you want to get them comfortable right like there's so much um risk from their perspective so if you give them just a little bit more time right like if you don't compress it so much but like you know give them 3 weeks four weeks five weeks whatever it takes right so if we take off the pressure it actually often times has better results and and we stopped being so pushy about the timeline that's a good insight and the um I find in my my limited experience of this the sales reps actually

hate doing this they hate helping for deployment all they want to do is get the customer onboard and immediately go on to the next deal so your does your sales team not hate it or what do the learn how do you get your sales team especially these days when sales wants to do the least possible how do you get them to do more well I think it's how you set up the incentive structure right um if you pay your sales rep uh commission the day the deal closes and then there's no clawback or none of

that stuff then of course that's what they're going to do right but we've worked really hard to have a incentive structure that that makes it attractive for sales reps to be in invested in the success right where we pay well on expansion over time as well and we expansion is a good one too right like we have three four products now that someone can buy payroll is the latest one we don't actually want you to buy payroll on day one like we will actively discourage you we incentivize our sales reps to keep the deal sizes

lower at the time it closes because the chance of success is that much higher and we know that hey once they are successfully activated now they trust us they had a great experience it's so much easier to talk to them about like product two three and four yeah well I guess the rep can look forward to doubling their commission if it goes well over the course of the Year and that you buy the other three products right that's exactly yeah yeah um it's a good Insight I find that these days that still works but sometimes

in this distributed world that reps would still rather do less and make a little bit less but it is a good learning it is I I do find sometimes it's like okay if I do nothing after the deal closes and I make 70% as much as if I have to do the onboarding the followup the deployment maybe maybe since I'm working from the beach from Bali or my van maybe I'll take 70% but it's a good point it is a good point yeah um so related to that um you know the the other one of

the biggest issues with SMB in general and it's actually one reason why vertical SMB is a little bit more attractive this is a good example is nrr right um HubSpot famously Brian and dares came to saster annual couple years ago and there's a great Deep dive on it on YouTube but you know HubSpot nrr was like less than 80% up until 25 or 30 million in AR right so you're at 110 nrr uh which from smbs right which is a gift so what's the learning is it being multiproduct besides having great software but a lot

of us what how do how do you get to 110% NR what's the learning yeah well it's interesting right because when you think about n with most Enterprise software a lot of it comes from seat expansion where you just get more folks to use your tool we don't have that right like there's there there's none of that going on so the expansion can only come from selling them new products that you didn't have before so you definitely need to make sure that you're investing in like in know products that people can even buy otherwise there

is no chance for expansion um so I think that's just the mechanical piece but the thing that's really important to um get that is to have trust and uh people forget how uh much our customers depend on our software like literally it's their operating system if mang doesn't work these businesses can can close there's nothing they can do they don't know who their clients are they can't access the medical records they can't take notes they can't take payments like they might as well close and so we invest a crazy amount almost like a bank in

making sure that our systems don't go down and so reliability and quality of product is so important but once you have it you you get the trust from customers and that is the trust that you need so that when you show up and say hey guess what we just launched marketing automation let's say you get a really high adoption rate on that one because people have that trust relationship where they know it's going to be a good quality product yeah I worry that we have a whole Generation Now where for the stress to hit the

number they are burning these relationships with these ripoffs because who wants to buy payroll processing or email marketing or something else from a vendor when I just got ripped off on my renewal yeah who wants to right um I mean canva is the greatest one of the greatest products I've ever used right and I don't know really what happened but it lit up the internet this week when some of their Enterprise plans they quadrupled the Quint tiple the pricing just saying we earned it our product does more and maybe they earned it and maybe it's

not a fair Shake but all of a sudden when you break these relationships I can't imagine what it's like to make that call to see if you want to buy more from us I wor we have a whole generation where we've we've we've Twisted the knife so deeply in our base to hit the plan that when we go to sell them that next product in 20 2025 20 they're just gonna say no they're just gonna say no right happens to us all the time you know we sign up to a random bi tool or whatever

and then like year two comes up and they're just they're like just kidding it's now 50% more and like what we just bought it last year like how can it be 50% more like product's not 50% better um so and on last one on this NR because it is so structurally important um and we're seeing so many public sassin Cloud companies see a decline in nrr of the last 18 24 months do you find that the more products they buy the higher the nrr is I mean I guess mathematically it's the case so for maybe

maybe that's the wrong question although still question is your grr higher is your retention higher the your logo retention the higher the more products they buy yeah I mean certainly right um you know you just as I said you know we don't have contracts so anybody can leave any time they want and we even like refund them like mid-mon no questions asked so we intentionally want to make it easy to leave mangaman because that way we know that the customers that use us and pay us they really want it and they're really actively using it

and so um what happens is um when you set it up that way you have no choice but to help hopefully get them more products right and so if somebody signs up with payroll processing let's say and they get 15 workers to connect their bank accounts and fill out the W2s and all of that stuff I mean it's a pretty high bar now to switch away and you know we're not perfect right like you know sometimes we mess up and like there's something that's annoying in the product and customers will let us know but because

now they would have to switch the marketing tool the payroll tool like yeah calendar like it's such a big thing for the same reason that it's sometimes hard for us to get in it's equally hard to get out because you're so deeply integrated in their businesses is yeah okay two last things I want to chat about that I think are interesting for folks um I want to talk about Automation and to some extent Ai and how it impacts labor and I think the internet is all excited about Sam Alman hey one person can build a

billion dollar startup I'm not going to share my opinion you probably know what it is but um I think there's a different issue on Automation and AI which I've seen especially for Investments is that you can't hire anybody there's no one out there not only can we not hire anyone in Tech to do our campaigns or to do our sales there is no retail people there's no one out there to do the work so I I I when I got to know mangle mint and talked to some folks in the industry and some customers this

was a theme which is like we can't even find someone to manage front of house to the desk we can't find enough people to follow up to do the phone calls and do others so is this the next wave of Automation in AI for SBS is just the fact forget about forget about saving money we just can't find people yeah are there enough Americans are there enough Americans to do the work for all of for all of us sixf figed knowledge workers are enough people to do the actual work so we can live our remote

lives yeah I think you hit the nail on the head right like it's not necessarily just a cost of Labor although that is a big issue as well where those like front desk workers you know you think about a spa with 10 15 providers they would normally have three four providers that is before Co yeah each of them get paid like 13 14 bucks an hour now that same business has to make it work with like one or two providers so half of them and those same people make 22 $23 an hour so cost of

Labor is up supply of labor is down and retention is really low as well so there's this natural demand for these small businesses to invest more in technology and I think that's also driving a lot of that growth that you see in vertical sass right now that yeah those forces right but I think that as it relates to AI um it's interesting because a lot of what these people were doing before is very unstructured uh communication right where it's like you know hey I'm going to call and like I'm not really sure what I want

that sort of thing yeah and you could you couldn't automate these things even you know with the best software you just couldn't do it right so I think what AI unlocks for vertical SS is that you can now deal with all of that unstructured data and automate a lot of things that you just couldn't before so I think that will be a driver of growth over the next few years where a lot of these like you know processes of you know how clients uh communicate with businesses will just be handled by automated systems rather than

people yeah those are good insights I think in the Enterprise Ai and automation are about cutting headcount let's cut half of the Thousand agents we have doing support my thesis is vertical sass is blowing is going to blow up because there just aren't anyone to do the work yeah there just no what first of all it's 22 bucks an hour instead of 13 but I just can't find anyone at my salon right I think we're going to the amount whether you can directly charge for that right which maybe you can't with smbs you can't charge

per per per interaction like zenes does but I think it's going to blow up all these categories when there's no people we need software because there's no humans to do the work right um okay one last fun one and then we'll break um and I may have gotten this wrong but last question because I think it'll be inter to folks when you have a high velocity SMB motion like you have that's still sales driven you have a VP of sales you have a small sales team how much time should the co be involved in sales

and what do you do in sales um you challenged me a bit on that and that's good I do love to be challenged by the best of the best so what have you learned how much time do you spend with customers as CEO with thousands and thousands of high velocity customers what what do you do to be involved in sales yeah well I think there's two separate things right like there's how much time do I spend with customers the answer is lot right like I talk to at least five maybe 10 a week number five

to 10 a week right but I I think so because um you know how can you develop intuition right like you know you as a CEO so much of what you do is like you judge things you make decisions on like you know should we go this way or that way and if you don't have intuition if you don't have Instinct right and you're just not going to have it unless you spend a lot of time talking to folks and being out there and I do it in person as much as I can as well

like I I'll travel all all over the country and I walk in and I just sit there with them and and listen so I think that's super important there's no substitute for that but to your second point about sales I haven't been talked to any sales Prospect of the last let's say 1,500 customers that we uh onboarded um so I've been out of this for a couple of years at least now completely and I think that's also important right because when you build like a high velocity sales motion you got to you got to find

the systems to make it scale and it can't be that oh you know we need someone to help close to steal let bringing in the CEO when the deal size is only like you know six seven 8K ACV like you have to have something that's a bit bringing in the big guns on this one yeah yeah no fair point I think um you know maybe we'll break um I think my favorite thing that you said since it was unscripted was 10 to 15 a week right I've written I've written this so many times over the

years in sasra I think it's true and I think that just like many Founders think they they do a lot of work interviewing but they don't really interview 30 candidates at least for every executive position you got to talk to 10 to 15 customers a week it's too easy to fall away from that especially with in the Enterprise sometimes you get tortured to do it right because you got to go visit the seven figure deal it's too easy when you have SMB or High Velocity to not talk to think you're talking a 10 to 15

a week but you're too busy working on all the other stuff you got you got to right or you just your knowledge decays you can't especially scale you can't shoot from the hip so I I love that you said that that point and I'm going to kick everyone's rear that might be watching and listening be honest how many customers do you talk to the week and do you travel and especially withb and and a product Le motion like you have it I mean and and your motion is 100% inbound one way or the other right

it's very easy to not travel too why would you travel when they're on where yeah the salons are out in the real world outside the office but but they all come through inbound and plg why don't need to go visit customers in person because it's work yeah you got if you want to win you got to do both right you got to do 10 to 15 and meet as many in person as you can you know what the problem is when you do it over Zoom or on a phone call people show up with like

a spread like they're like hey I'm going to talk to the CEO of this company I'm going to tell them my 10 things that I hate about the software and I want them to change you get you get you get a you get a fire hydrant of complaints yes but what you miss out on I feel like is all the the nuances like the subtleties you don't get the same Fidelity as when you're there in person you can just see things happening right you don't get to speak to like the front desk worker that actually

is the person and using it for 10 hours a day right and they might tell you something different than the owner but they're not going to be on the phone if you schedule up uh schedule a phone call so I think it's really important to do it in person and to do it as much as possible um so yeah so I plan to do that for definitely yeah all right a man three thumbs up on that one all right Daniel this was terrific um we will we're double digits we're at eight figures and AR growing

triple digits we will check back in around 50 to 100 million ER see what's changed on this list we'll update it um I I uh I may have a little a few more gray hairs you may have a few on your beard we'll be mostly the same when we do this at 100 million but thanks for all the time man sounds great thanks so much Jason take care