At Polymath, we built a Latam-specific framework for evaluating an industry's likelihood of adopting Vertical Software solutions. This framework is broken into six categories: 1) Fragmentation, 2) Margins, 3) Revenue mix, 4) Value-add of software, 5) Range of intervention, 6) Monetization beyond a SaaS fee, and 7) Incumbency. We are sharing an overview of the framework as well as a deep dive on two of the categories: Fragmentation and Monetization.

Framework Overview

Framework Deep Dive

• Fragmentation: Conventional wisdom says that the more fragmented the industry, the more attractive it is for Vertical Software solutions. Latam is more nuanced and requires a deeper understanding of an industry's fragmentation dynamics. Willingness to pay ("WTP") for software by MSMEs is limited, and virtually non-existent for Micro and Small enterprises. Therefore, industries with high fragmentation on both the supply and demand sides are highly unlikely to adopt software. We identified two fragmentation archetypes that we believe are more likely to adopt Vertical Software solutions in Latam:
• Fragmented supply with consolidated, enterprise demand. This fragmentation dynamic is attractive because the large enterprise buyers are willing to adopt technology and then force their smaller suppliers to adopt it. The Auto Repair industry is a great example of this. In Mexico, enterprise vehicle fleets typically work with hundreds of micro and small independent auto repair shops for their vehicle maintenance. These fleets are willing to pay for software that helps them manage, automate, and control the vehicle maintenance process, and can make software adoption by the shops a condition of working with them. Autolab, a Polymath portfolio company, has built a Vertical Software solution for this industry in Mexico and Colombia.
• Fragmented, but with lots of medium-sized players. Medium-sized companies in the right industries, such as Manufacturing and Education, tend to exhibit a reasonably high WTP for software. Vertical Software companies such as Mattilda and Cometa are serving K-12 and Universities in the Education space in Mexico, and Pulsar and Allie are building Vertical Software solutions for the Manufacturing space.

• Monetization beyond a SaaS fee. In Latam, the ability to monetize beyond a SaaS fee is critical to a Vertical Software solution's ability to succeed because of the limited WTP for software in the region. We will go as far as to say that it would be impossible for a Vertical Software solution to become a unicorn in Latam without having multiple monetization pathways. Examples of these monetization strategies are embedded finance, advertising, transaction fees, charging a commission for demand generation, and payment fees, among others. Vertical Software unicorns in the US have employed embedded finance (Toast & Shopify), advertising (Pepper & Provi), and commission for demand generation (Faire & Novi) to increase ACVs and improve customer retention. Manufacturing is a great example of an industry in Mexico that fits this bill. A Vertical Software solution can monetize via embedded finance, materials supply, and demand generation, among others.

Industries

We applied this framework to many different industries in Mexico to identify verticals and sub-verticals that we believe could benefit from and vigorously adopt Vertical Software solutions. Based on our research, we found that the Manufacturing, Trucking, Construction, Private Security, and Pharmacy industries in Mexico have the right characteristics to adopt Vertical Software solutions. In the following posts, we will share our research and insights into these massive, foundational industries in Mexico.

We want to build with you!

If you are a founder who is building or thinking about building a Vertical Software solution for the LatAm market, we would love to hear from you. Please reach out via email at [email protected] or via LinkedIn by writing our Investment Director Drew Hallman.