Podcast | 21 minute read

Podcast Pit Stop: Rick Zullo on Vertical vs. Horizontal: One Size Doesn't Fit All

rick zullo
Posted by Adam Statti on April 4, 2023

Vertical vs. Horizontal: One Size Doesn't Fit All

In episode 67 of Pit Stops to Podium, Rick Zullo discusses the topic of vertical vs. horizontal solutions, and why there is no one-size-fits-all approach to growth.  We explore the need to combine industry networks with modern sales practices to scale vertical solutions, and looks at the differences between GTM strategies in vertical vs. horizontal markets. Additionally, we touch on the alternative monetization methods required for industries that have low digital adoption, budget, or willingness to pay.

Rick Zullo is the Co-Founder and General Partner at Equal Ventures, a venture capital firm focused on bridging the digital divide.  Rick is currently on the board of multiple companies including Threeflow, Smarthop, Leap Retail, Ghost Retail, MVMNT, Starday Foods, David Energy, Odyssey Energy Solutions and vQuip Insurance.

If you’re ready to learn from one of the best, then buckle up and hold on!


Pitstop Highlights

Recommendations For Vertical Marketing Approach

When dealing with a non-digitally native buyer base, it's important to understand that they usually have a lack of trust in traditional technology solutions.  Therefore, it's important to establish relationships and trust and combine it with best practices around SalesOps, sales efficiency, data-driven sales processes, and KPI tracking.  This isn't always easy as these aren't native tools in these industries as, for example, many of them don't use tools such as modern CRM systems.  The bottom line is that you need to bring together rigor (efficiency and optimization of SalesOps infrastructure) with relationships.

"If you're calling them up and saying, 'Hey we're a company...and we're here to disrupt the industry', you're going to hear a lot of clicks by those buyers putting the phone down." 


Driving Adoption in High Friction Industries

To reduce friction to first time buyers, focus less on the sale and more on the upsell or cross-sell.  Getting your foot in the door and finding ways that you can create value for a buyer (e.g. tool, product) is key because it can be used as a wedge to establish captivity over the customer.  Obtaining that critical mass of customers in an industry is important as the competition is no where near what it is in the horizonal market industry.

"We'll stop doing it (giving away software) when it stops working."


Scalable Value Creation and Monopolistic Growth Opportunities

In these industries, the total addressable market is so big, that if you're finding just 1% or 2% efficiency gains, you could be talking about tens of billions of dollars.  If you have a monopolistic strategy, a billion dollar AR is realistic; whereas in horizontal markets, it's exceedingly rare to see.  In vertical software categories there's a lot of room to run.

"If you drive a little wedge it's going to go a long way."

Connect with Rick

Website:   https://www.equal.vc/   

Substack:  https://equalventures.substack.com/

Email:  zullo@equal.vc

Twitter:  https://twitter.com/Rick_Zullo?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor

Full Transcript

Brendan:  Hey, everyone. Welcome to Pit Stops To Podium, the RevPartners podcast, where we talk to execs who compete and won in taking their companies from high growth to high scale. My name is Brendan Tolleson. I serve as the co-founder and CEO of RevPartners and I'm delighted to have with me today Rick Zullo for this episode of Pit Stops To Podium. Welcome, Rick.

Rick:  Glad to be here. Thanks for having me.

Brendan:  Yeah, we're excited to have you. For those that may not know who Rick is, Rick is a co-founder and general partner of Equal Ventures. Rick, so I'd love to give you the opportunity to share with our audience a little bit about who Equal Ventures is and ultimately the origin story of Equal. How did you get to where you're at today?

Rick:  Yeah, sure thing. So I've been investing in private technology companies for a little over ten years now. Formerly consulting and PE made the way to Venture about a decade ago. And along that route I realized that if you were a founder building a company for traditional It buyers in the Valley and selling to CIS and CTOs Venture was actually a fairly adequate product. You have venture investors who could come in with prepare mind. Maybe they built companies in that category selling to that base. They certainly knew a handful of customers, understood the market dynamics happening there. They could introduce you to recruits, they probably knew the M and A buyers and that created a good sense of partnership between the investors and founders in those companies. Now as we've entered this phase where software is eating in world or what we like to say is the technology deployment period where technology is starting to be adopted by a lot of these non technology industries selling to non digitally native buyers. I found that the product that Silicon Valley provided was wholly inadequate for companies in energy or supply chain insurance. The founders that I was dealing with were going to those same rooms, having to explain the one on one of the market, there weren't any customers that they knew to the buying. Founders of the buyers that they were selling to were very different. So often the advice that they got was very misguided and that also made it really difficult for investors to get conviction without seeing data in those companies. So what I really wanted to do was just create a product for those founders that was the same as what I had been for people selling to traditional enterprise It. And as someone who had come up in living in industries like industry, energy, insurance, logistics, we really wanted to create a firm from the bottoms up that could bring a prepared mind to those industries, help founders at the earliest stage get critical mass and get product market fit for the first couple of million dollars of sales. And that's what we set out to do when I left my last firm and started Equal back in 2019. So the firm has been around for about three, four years now. We've been fortunate to have some great companies with some early breakouts like Rap book and three flow and smart ops in the mix, but still early days. And we're a startup just like any other.

Brendan:  Well, love hearing a little bit more about the origin story and I think a fun fact for our loyal audience. You have a background with one of our past guests, right, with Bowery Capital?

Rick:  Yeah, I was Mike's first MBA intern at Bowery Capital. Nothing like leaving your old PE job to go to a fund that was the same size as literally the last check that we had written at my PE fund. So that was the second first time fund that I've been a part of and now I've been a part of three, which I'm not sure if I'm a glutton for pain or innovation.

Brendan:  Well, Rick, before we get into our big idea, which I think is well, I don't think I know it's informed based off of your investment thesis and what you're seeing with your portfolio companies, we do have a tradition here at Pit Stops to Podium, and that's to get to know our guests outside of work. So what are some fun facts or whatever you may want to call it, hobbies, interests, or passions that you have outside of investing in companies and watching them grow?

Rick:  It may seem hard for folks to believe, given this corporate haircut that I have nowadays, but once upon a time, I was definitely someone who played in a couple of bands and thought I was going to be a rock star someday. And fortunately, I played with some really awesome musicians along the way, including a couple who are on the pop charts, but didn't pick up a guitar for roughly ten years until COVID and COVID. I had two kids, had a kid just before COVID I've had another one since my daughter's four, my son just turned one. And over the course of COVID you got to find a way to keep kids entertained. Part of that meant picking up my guitar that I've had since high school. So a guitar that's north of 20 years old that I think I bought for $100 back then and started playing guitar for my kids every morning. And a four year old girl, a three year old girl, they're not into the same music that I was into back then or into now. So playing Yellow Lead better doesn't exactly light them up. And it's very much led to me rewriting every single Taylor Swift or Katy Perry or Whitney Houston song that I can just imagine this grizzled boy singing I Want to Dance With Somebody to my three year old daughter, which you got to have some fun out there.

Brendan:  When you did perform, what genre and what role did you have? Were you the singer?

Rick:  No, I was lead guitar. Did do some backup vocals, but this isn't a mug that you ever want.

Brendan:  That's great. Well, thanks for sharing a little bit more about you and it's fun. To your point, it seems like everyone picked I guess it wasn't either you pick up a hobby or you bring back something that you used to do. So thanks for sharing a little bit about your background.

Rick:  Now my team is trying to find me at open mic nights. I will not let them ever see that happen, especially me wearing a cowboy hat or anything else in a karaoke bar. They may have to record that for their own selfish purposes.

Brendan:  I'm sure it would help in compensation reviews for them. Well, Rick, just transition into the big idea here and I think you alluded to some of it in terms of the origin story of DC, there's some parallels there which you talked about what you saw with Silicon Valley in terms of the support they were giving us for a specific buyer. And I think one of the things you have talked about is there's not a one size fits all meaning. There are different ways for companies to grow. And I think you have a passion around, hey, there's a vertical, there's a horizontal way to approach your go to market strategy. And so let's talk a little bit about that in terms of how companies should think about their growth strategy. But maybe as we get started may a definer of how you think through vertical or horizontal and then we can talk through hey, what helps the companies understand which path to take.

Rick:  Yeah, I think this is non obvious but very intuitive thing to think through that when we've created 30 years of best practices on enterprise sales for a particular buyer set CIOs the GTOS of technology rich organizations that are used to buying these type of products and there's different ripples of that. But by and large that is what the kind of war chest that the encyclopedia sales has been built around certain types of buyer profiles and then as we look at the industries we invest in, we only spend our time in really four sectors. You can imagine the buyers in climate or what it takes to win in climate versus supply chain or childcare or insurance supply chain insurance. At the same time you have two extremely extremely different buyer bases which neither of which are terribly digitally native. So I think one of the things that along the way we've discovered is that you really need to understand and relearn a lot of what will work to sell and penetrate in these industry verticals. Which means that, yes, some of the existing best practices are great to learn and adopt and amend to what you but you have to do a tremendous amount of listening to the culture and make sure the approaches that you have your go to market and scaling are really nuanced and personalized to the complexity of that sector and the culture that it has, which is easier said than done.

Brendan:  Yeah, I think that makes a lot of sense to your point just in terms of how things are changing and making sure you adjust your approach based off the buyer that you're selling to in terms of how to approach that. So let's start with the vertical solution selling. And you talk a little bit about marrying industry networks and really the relationship component of that. So what have you learned or what are some recommendations you'd have for folks that are taking more of that approach to market?

Rick:  Well, I think the tricky thing with every one of the companies that we've worked with, we've seen a lot of we've been fortunate to see a couple of companies go from pre product to unicorn stage over the course of that time frame that we've invested in. And the reality is, when you're dealing with a non digitally native buyer base in one of these verticals, the lack of trust that they have in traditional technology solutions is extremely high. I think if you're calling them up and saying, hey, we're a company based in San Joseph Road and we're here to disrupt the industry, you're going to hear a lot of clicks by those buyers putting the phone down. And we've seen that. I've been in the cab with truck drivers and done that customer discovery, spent plenty of time with insurance guys, which is its own completely different culture, which I think one of the things that we've seen is hypercritical in those early days is making sure that they understand that you're native, not a tourist. And that often requires folks who bring relationships to the team. Now, you got to marry that at the same time with all those best practices and ways that you can scale a sales channel. If you look at something like insurance, extremely relationship driven business, not just at the agent level with consumers, but all the way up to the most executive levels in the company. You're talking about people do deals worth hundreds of millions of dollars based on trust and relationships. So yes, you got to bring some of those relationships and trust and be able to make that happen. But if you want to figure out how you're going to really scale that, you need to meld that with one of the best practices around sales Ops, sales efficiency, data driven sales processes, KPI tracking the entire way, which aren't exactly native tools to those industries. When you talk to those folks, many of them don't use modern CRM systems. Many of them don't have a lot of the best in class technology, sales Ops infrastructure that you would see at a $10 million Arm. I think the tricky thing as you're doing this is how can you get these two seemingly opposing ideals working together? How can you bring relationships together with rigor in terms of the best practices and processes and uplift them both? By making a sales driven process that also has all the efficiency and optimization of that Sales Ops infrastructure. And that's what we really think is a big part of finding new solutions and getting adoption in places that adoption hasn't happened before. It's bridging the divide between those two worlds.

Brendan:  Yeah, I think to your point, that's easier said than done. To your point of how do you I guess the question would be not necessarily who, but what are some steps that people can take to say, hey, I know I need to take that step, but I don't necessarily know how to drive that adoption where there's a high friction as it relates to modernization or digital kind of first type of approaches. Is there something you've seen be successful within your portfolio companies, whether it's how they sell or how they embrace technology or process internally?

Rick:  Yeah, I think one thing that we've done a lot of has been reducing the friction to first time buyers and really focusing on something that's less of a sale and more of an upsell or crosssell as part of that. So my wife gives me a hard time because she says, basically you guys give away software to everyone in there. I tell her we'll stop doing it when it stops working. Because if you look at a lot of these industries, the distrust of a traditional enterprise sale or where their lacks it budget, it can impede people from actually adopting the product in any way. So what we found is getting your foot in the door creating ways that you can create value for that buyer, whether it's a tool, a product or some type of data benchmarking solution. Risk Match was one of the first companies that I previously worked on that we tested out of giving away or really subsidizing lowering the price point of benchmarking analytics in the insurance industry and using that as a wedge to establish captivity over the customer. And you realize once you have that critical mass of customers in that industry, the reality is it's nowhere near as competitive way ecosystem as you'd see in the horizontal spectrum. You're trying to get into productivity or sales ops or some of these other marketing ops and selling to those works for that buyer base. They're looking at a loomiscape or a market map that has hundreds of logos. In most of the categories that we're looking at. They're owned by an oligopoly ERP system or system of record that hasn't been reinvented in the last 30 40 years. That is terrible. You actually have low NPS score. And if you can go and find a way to penetrate that by sitting on top or around it and use it as a way to get critical mass, you're competing against someone who's been crawling and you can be sprinting. So what we really encourage companies to do is look to freemium or counter position elements that can get that initial mass of customers and use that as a beachhead for actually scaling your sales approach. When you have that critical mass in these industries, you can fly very quickly. Where we've been fortunate to see a couple of companies take a pretty long time to get from zero to 1 million AR, but then rapidly ascend from one to 100 in a matter of just a couple of years with tremendous amounts of efficiency because they don't have that competition in the way. So I think that requires, again, real deep understanding. You got to listen to the customer, figure out what are the pain points that exist in their day that enable you to create a solution of value, that will enable you to actually have a competitive position in the long term software ecosystem that they have. I also think it really requires you to think strategically about, hey, is there a way that I can go and sell to this customer by not taking away from their It or adding to their It budget, but looking for other cost centers that company Risk Match, they sold to brokers. The primary means monetization was Carriage. Carriage were willing to pay to have better data integrity, better visibility over the brokers on the platform. We had a tremendous exit with that company sold in less than a year later to one of the oligopolistic agency management systems in that space. And we've executed that playbook several times over trying to find more network based or premium approaches by lowering the upfront bar on pricing, being more patient as investors, and then really, when that critical mass was achieved, accelerating forward. To more monetization, which certainly isn't easy. But often, if you can get to the other side of it, you're going to create some very big outcomes.

Brendan:  That's great. I think it's your point there's a high barrier to entry for that segment, but I don't think anyone would argue the opportunity is certainly there once you figure out how to crack it. I think that what you're describing is play to that trust element to allow yourself to actually get the value added product inside the organization to then expand. So I really like that feedback.

Rick:  For those that find the customer bases that are Gordon Moore added his book Crossing the Chasm, which has always been one of my favorites. But I think in all these new markets that you're looking for something like supply chain insurance, the markets that are as old as time, but the reality is the buyer base. You really need to look for those early innovators and advocates. We have a lot of those folks as LPs in our fund because in many ways we've found that they are folks who can help identify who are going to be those early adopters who can shift in behavior. And I do find that the word of mouth in these industries are incredibly high, which is the reason why we probably focus a lot on customer success and upsell ability and the ability to really make sure that our customers can become evangelists. Because in reality you can access CTOs or Chief Product Officers or executive level folks in very large companies in these industries, probably the greater ease than you'd be able to access many of the CTOs and customer bases in other industries they're more accessible, but they hop on the phone with us all the time. We're not that special, I think, for the other person reaching out to them from this venture capital world, which shows that there's an issue with venture capital. But the reality is if you listen and evangelize, they want to be part of the solution. So we find that the opportunity evangelize them. So we have lots of customer advisory boards. We're always finding ways to show the wins that our customers are having so that our solutions aren't cost centers to them, that they're actually really hitting on areas, that they can be strategically relevant. That really adding revenue to their organization, showing their differentiation market rather than just being a cheaper solution or a way to do more things more efficiently. And I think that evangelistic approach, but also hitting on the value drivers that they think will enable their careers, not just their companies, is something that's really important.

Brendan:  Yeah, I was going to be my next question, which was around to your point, the network effect is so valuable since it's so relationship oriented and the testimonials and how do you reward those first movers or those early adopters just because they're so critical. I think you mentioned the customer advisory board seeking their feedback. It's just how do you kind of enable or reward their behavior to make sure they feel valued? And so you're getting not only the feedback but also that megaphone to their networks.

Rick:  Yeah, I think the reality is if you have to compensate your customers beyond that, that's a really dangerous thing. You're setting precedent and you're also setting some potential misalignment along the way. Now, that's not to say that we haven't done it, but we don't think it's the most scalable way to grow your organization, which is one of the reasons why we have basically the same value creation approach that we look at as lens for all companies. Identify your wedge in the market to achieve critical mass. Ensure that it attaches to some type of flywheel ie. How are you getting increasing returns to scale? How does that enable your path up a mode or monetization above and beyond your peers and then expand from there? And I think as we Look at those early customers. They're taking advantage of whatever way we provide in the market. What is the software subsidy that we're giving them? That is something that they want today, they would have to pay for elsewhere that they can use as a strategic lever. And the fact that they're one of the very few folks using it, it's often more strategic. Now we try to make sure that's attached to a data network asset that grows stronger and stronger with each time that someone uses it. So it increases the value of that product, which incentivizes them to go push that product to other folks that they're friendly with, who they don't mind being strategically competitive with and they recognize that there's value in bringing those folks on. But if we keep on expanding the portfolio of products, over time, those folks will just get happier and happier and happier, because their reference point is man, I remember back five years ago, you guys gave me this little tool, and now you have this whole gigantic composite platform that I'm more than happy to be willing to pay for. And they've already sold you to a bunch of other customers along the way. So I think we have one of our other companies in adjacent segment three flow. Three flow follows a very similar approach to what Risk Match did. But in the employee benefits space. Our software is 100% free to benefits brokers. We're used by some of the largest benefit brokers in the country. But some of those benefits brokers are four, five $6 million arr clients to us because carriers are paying for it. And guess what? The carriers are now our biggest source of lead because everyone believes in the flywheel. Everyone's seen this go from what was once upon a time a very, very small tool into something that's a very, very powerful network and something that we believe will be a monopolistic platform in the industry. But we've seen that evolve because all those early evangelists in the industry have seen the product evolve and expand with that. And they've certainly informed that direction, but we've never had to go and try to compensate folks along the way. It's really about making sure that we can give them something that they need today, create an incentive for them to go and bring others into that mix that will make the product better and then expanding that product continuously that they can see the speed of. Our innovation is going to be enabler of the entire industry in their workflow rather than just a static product that they have today. Making sure that monetization increases, which our customers build every single year. The NDR of that business is simply amazing.

Brendan:  I like it. It's continue to focus on value creation, whether it's the beginning or as the engagement continues and that ultimately will drive that receptivity and the willingness to work alongside the company.

Rick:  In each one of these industries, the TAMs are so big that if you're finding 1, 2% efficiency gains, you're talking about tens of billions of dollars in the US. One is $400 billion of spend that just goes through employers. That's a tremendous amount of opportunity. You drive a little waves, it's going to go a long way. Supply chain, retail, energy, these are trillion dollar plus segments of GDP. So if you're a monopolistic in there, it's not path from zero to 10 million AR that matters. It's path from ten to a billion, which we have some companies that have line of sight to that billion of revenue mark from ideas at Light Bank. And it's exciting. And there's not that many horizontal software companies that are ever going to get to a billion of AR, snowflake and salesforce, and some of those guys are going to run straight past that. But that's the exciting part about these vertical software categories, that there's a lot of room to run if you can capture any part of the spend rather than just be an it solution.

Brendan:  I love it. Well, yeah, I like the find your wedge flywheel expand. Rick, if our final lap question, if our audience wants to engage with you to learn a little bit more about either your firm or about this idea of vertical go to market strategy, what's the next step they can take?

Rick:  Yeah, so we write very frequently, so I highly recommend people check out our substack that's available on our website. Or Medium is another way to get there. We probably post industry deep dives or additional content on new business models and tactics for these vertical software industries probably every two to three days. So I like to think that we've prepared some at least well researched content there. But folks can also our emails are on our website, but my email is just Zullo at Equal BC. And we also engage with folks pretty heavily on Twitter, where my twitter handles at rick underscore Zullo, where we'll definitely opine on a lot of these vertical concepts industry deep dives and the failings of venture in the start. Of the industry as well, which we're not afraid to ruffle some feathers since we think the game needs to be changed a little bit.

Brendan:  I love it. Well, and also if anyone sees Rick at a karaoke bar, feel free to put that on his Twitter handle. Well, Rick, thank you so much. Really appreciate your insights on this topic. Have a wonderful day and we'll talk soon.

Rick:  Thanks for having me.

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