Vertical operating systems are some of the most interesting early stage investment opportunities in 2024. According to the folks at Andreessen, a vertical operating system is the “single source of truth and the base layer for company-wide ecosystems of tools”.

As investors in emergent points of growth inflection, we like companies that have the potential to become the single source of truth for customers because these are the companies that can disrupt and dominate entire industries and even sectors in relatively short order. By homogenizing data from disparate systems to a single location, analytics can be applied to entire enterprise data sets allowing AI and machine learning to be more effectively applied.

There are many opportunities in this category on the horizon. So let’s unpack exactly what a vertical operating system is and what it isn’t.

Horizontal vs. Vertical Operating Systems

In a nutshell, horizontal operating systems are typically adopted across many different industries by many different types of customers and include companies like: Apple, Microsoft and Salesforce. Vertical operating systems tend to be specific to a given industry or a specific group of customers within in an industry, such as companies like Toast, Procore and Shopify.

Source of Truth vs. System of Record

A source of truth is like a finished puzzle. It provides a complete picture of your business so key decision makers can unlock insights hiding in plain sight and make decisions based on the same up-to-date information.

A single source of truth is data from your different systems of record, and not every data source will be included based on predetermined guidelines. Examples of sources of truth are software development systems, data warehouses, and regulatory compliance data management.

Think of a system of record like a single puzzle piece. It is an authoritative data source and a useful functional tool, but lacks the perspective of the entire picture. Data integrity is at a premium — typically this data is protected against intentional or unintentional changes or edits. Examples of systems of record are customer relationship management, enterprise resource planning, and transport management software.

Most SaaS companies provide system of record solutions. Over time they strive to organically expand their offerings to achieve coveted source of truth status as the vertical operating system of choice for their clients. Think of Toast expanding from a POS system into a company-wide ecosystem of tools including FinTech to capture a percentage of every transaction and multiple recurring monthly subscription fees as customers add functionality. Success is not guaranteed, though, and conceiving a platform from the start with this type of modular evolution up front is crucial, otherwise the platform can become disjointed and unwieldy.

For the most part, vertical operating systems are the final frontier for software disruption. Today, opportunities to disrupt horizontal operating systems players are rare. With decades of growth and massive scale and resources, Apple, Microsoft or Salesforce aren’t going anywhere soon. On the other hand, there are boundless opportunities for SaaS companies to use their system of record solutions to wedge their way into vertical operating system status and dominate entire industries and sectors. In fact, they may already be there but don’t know it. These are the growth inflections we are looking for and so should you.

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The Validus Rising Dividend Strategy and the Destra Multi-Alternative Fund (DMAF) that is sub-advised by Validus invest in Microsoft (MSFT); the Validus Global Growth Strategy and Inflection Universe invest in Salesforce (CRM); the DMAF and Inflection Universe invest in Toast (TOST.) Securities highlighted or discussed in this blog have been selected to illustrate Validus’s investment approach and/or market outlook and are not intended to represent any strategy or portfolio performance or be an indicator for how strategy or portfolio have performed or may perform in the future. Each security discussed in this blog has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. The securities discussed herein do not represent an entire portfolio and, in aggregate, may only represent a small percentage of a strategy or portfolio holdings. The strategies and portfolios are actively managed, and securities discussed in this blog may or may not be held in such strategies or portfolios at any given time. These individual securities do not represent all the securities purchased, sold, or recommended and the reader should not assume that investments in the securities identified and discussed were or will be profitable. Nothing in this blog shall constitute a recommendation or endorsement to buy or sell any security or other financial instrument referenced in this letter.

Validus Growth Investors, LLC seeks to invest in companies at every stage of their growth. From startups to publicly traded companies, our research identifies inflection points that have the potential to produce meaningful growth and income for the clients we serve.

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