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

Hey, everybody, it's Saster. Have a treat for you doing something fun. I've just done an investment in a breakout vertical SaaS leader called Manglement. We have the CEO Daniel Lang here. Daniel, thanks so much for joining us.

Thanks so much for having me.

So we're going to have some fun on this one. Maybe, maybe you can learn a little bit about the investing process. For folks that think it's fun, vertical SaaS 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 SaaS was too small and too niche. I think Viva went public and they're worth 35 billion. They are verticalized 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 SaaS IPOs. In the next 12 months, they are approaching a billion in ARR. The founders have spoken at SAS before. It is a great one. Service Titan there. SaaS for plumbers and H VAC units and others. And Manglement. Daniel's going to tell us a little about it. Is SaaS for salons and spas alike, typically seen as a smaller TAM and also one with a lot of vendors. In the old days there was a company called Mind Body which got, went public. Right. And got acquired for a billion or so. Right. And they went public. I think they're 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 and like, wow, maybe there's some money in this space and now it's being reinvented. So there's a lot I want to chat about vertical SaaS and why. But Daniel, tell us, like, what, why? What's changing in the space? Why? And to give folks context, 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 is salon software changing?

Yeah, no, and thanks, Jason, for having me. I'm really excited to be here. I think, as you said, vertical software has been around for a really long time and it's no different in our space. I think the first salon and spa software providers came around in the 80s even, right? So it's not a new thing. But what has changed 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 world's audience. And you know, that is one thing and then the other thing is you have this expectation from consumers to basically want to talk to their businesses through digital means, right? So they don't want to call at 9 in the morning to book their appointments, they want to do it at 10pm at night and do it from the iPad. Right. And so with, with the, the, the fintech stuff that's come into play, I think it has really changed 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, seven eight figure deals and then service titan. One I didn't talk about was Toast. Toast today is worth, let's look, $14 billion at a 1.5 billion AR. So that's, you know, a couple years ago a 10x 10x multiple when you're public was nothing. Today it's, it's pretty elite. And what I think is happening is these vertical sasses for SMBs. There's going to be multiple toasts and toast and tell me if I'm wrong, what you think. People go to a restaurant, they use toast, everyone sort of knows Toast. But it's this stack, right? It's back end software, front end point of sale, 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 built Payroll, you've built ERP, you're thinking about financials. Is that what SMBs want? Do they want the full stack today?

Yeah, I think so. I think a lot of people get this wrong, especially in investors where because everybody at some point read the Bessemer memo, right, and they're all thinking about those layout cakes and you can add more to it.

But the thing with Bessemer get wrong. Those guys at Bessemer get wrong.

No, they didn't get it wrong. I think a lot of people that read that memo, a lot of people.

Misread it because I think there's this.

Misconception that you can just like, oh, you have the ERP software, right? So you can just layer on all of these services, and just because they're integrated, people are going to use it. And I think that's a fallacy. That's wrong. I think when you add 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 Paychex, that have 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 Gusto 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 in order of magnitude better in order for someone to switch from their QuickBooks to you. And I think that's the thing that people often misunderstand, where it's not enough just to put in an iframe. You really have to go deep and think about the workflows 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. It's a legal practice management platform. Jack Newton's a great. I guess we can call legal vertical SaaS 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, two and a half, two years or something, and just raised it 3 billion. Right. And Renee Lacerda, Bill, who's at Sasran, 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 bowl payments onto any SaaS platform, I think is your point. Like, it, it's not that simple. So what did it take to add payments to mangomin, to make it click? Right. To get you to eight figures in revenue?

Yeah, I mean, we've been through a journey with payments. We started early and we used to partner with like external 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 the background doing like, you know, the money movement and stuff. They just like, for them it's like part of the Megamin 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 $1 billion in transactions annually and you're going to have to deal with 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 SaaS company. Like not just the product, but also the operational complexity that comes with just managing it at scale.

So yeah, it has to be. I mean, for folks that haven't tried it, Mango made it is. 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. But that's probably, that's probably the reason to do it. Like the Bill and Cleo stories. It probably has to. If you can't get to effortlessness, probably bolting payments or fintech on SaaS isn't going to work. If it's not effortless. Right. I'll just stick with. Yeah. Or payroll. Stick with gusto. Right. It's not effortless.

You also want to do something that's actually meaningful. Right. Like, you know, when you have, 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?

Yeah.

Like a 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% TAM, 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. We think we see Toast everywhere. It's in about 13% of the market. So getting all, getting that, that majority. It's a, it's, it could be existential. The nrr. 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 SMB in some ways is easier than enterprise and that there's more of them, but the deal size is harder. 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 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. Canvas hard enough, right? Squarespace is hard enough. But folks like Toast or Owner that I've invested in or Gorgeous I've invested in, or Mango Mint, they doing it even harder. There is business process change for a tiny business. What did 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 a four second onboarding. So what, how do you, how do you make onboarding work for SMBs 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 purchase, but we are all in on, on product quality. We're like fully product led 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 mindbody with like 10 years of data and includes things 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 switching software, right. So that adds an extra wrinkle to it. The other thing is, as you said, you know, employee training. A lot of these folks have like 10, 15, 20 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 has to happen in a very coordinated way, which is why it's hard. What we found works well is really going deep on the product experience. Mangament does not have any contracts so anyone can sign up, put in their credit card after 30 days and that's it. So our 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 dotted 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. 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 nuanced, right? How do you do that? Because otherwise the hurdle to switching is so high, isn't it?

I mean it depends obviously on a lot of things, right? 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. And so there really is no one answer. But you have to get really good at it because switching software is such a big scary thing for them. If you don't take them by their hand and guide them through that process, it's definitely not going to work. Like you will see a lot of churn in those first three months. So it's very nuanced.

One thing I've noticed over the years, when you have SMB focused vertical SaaS and there is on 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. If you customer success onboarding support, there's often more people than in sales itself.

We have about one onboarding manager for every two sales reps.

Okay.

But I think part of that is also because remember, we don't do contracts and we have a 30 day free trial and we actually start onboarding during the trial. So you literally can get started, no barriers. And so the salespeople 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. I mean, even if you had contracts, right. If you can't get the business to adopt your platform successfully, you've already lost. Right. So you really got to 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 SMBs are shocked when they see the actual number of pay customers that go live is in the 80s. They're often CEOs. We think, oh God, it must be 96%. And they're often shocked when they look at the data 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.

We actually found that there's an inverse relationship to the speed and the success rate of it. Like a lot of times inversely correlate. Meaning sometimes you think that, oh, more momentum is a good thing and let's 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 you want to bring everybody on board, you want to get them comfortable. There's so much 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 three weeks, four weeks, five weeks, whatever it takes. Right. So if we take off the pressure, it actually oftentimes has better results and we stopped being so pushy about the timeline.

That's a good insight. And the 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 onboarded and immediately go on to the next deal. So does your sales team not hate it or what are 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. If you pay your sales rep 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 invested into success rate 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 this 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. 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 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 follow up, 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.

So related to that, 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? HubSpot famously Brian and Dharmesh came to Saster Annual a couple years ago and there's a great deep dive on it on YouTube. But you know, HubSpot's NRR was like less than 80% up until 25 or 30 million in ARR. Right. So you're at 110 NRR which from SMBs. Right. Which is a gift. So what's the learning? Is it being multi product besides having great software? But a lot of us what how do you get to 110% NRR? What's the learning?

Yeah, well it's interesting right because when you think about NRR 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'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 a product that people can even buy. Otherwise there is no chance for expansion. So I think that's just the mechanical piece. But the thing that really important to get that is to have trust. And people forget how much our customers depend on our software. Like literally it's their operating system. If mangament 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, quality of product is so important. But once you have it 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 rip offs 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? 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 quintupled 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. 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. Where 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, 20, 25, 20, they're just going to say no. They're just going to say no. Right.

It happens to us all the time. You know, we sign up to a random bi tool or whatever and then like YouTube comes up and it's 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.

So, and last one on this NRR, because it is so structurally important and we're seeing so many public SaaS and cloud companies see a decline in NRR over 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 forget maybe, maybe that's the wrong question. Although still the equator is your grr. Higher is your retention higher? The, Your logo retention, the higher the more products they buy.

Yeah, I mean, certainly. Right. You know, you just. As I said, you know, we don't have contracts, so anybody can leave anytime they want and we even like refund them like mid month, no questions asked. So we intentionally want to make it easy to leave Mangomin 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 what happens is 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 their 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.

Yeah. Okay. Two last things I want to chat about that I think are interesting for folks. 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 Altman. Hey, one person can build a billion dollar startup. I'm not going to share my opinion. You probably know what it is. But 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 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 Mango 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 and AI for SMBs? It's just the fact, forget about, forget about saving money, we just can't find people.

Yeah.

Are there enough Americans to do the work for all of, for all of us six figure knowledge workers or enough people to do the actual work so we can live our REM lives?

Yeah, I think you hit the nail on the head. Right. Like it's not necessarily just the 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 COVID and 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 people make 22, 23 dollars 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 the growth that you see in vertical SaaS right now. That yeah, those forces. Right. But I think that as it relates to AI, it's interesting because a lot of what these people were doing before is very unstructured communication. Right. Where it's like, you know, hey, I'm going to call 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 SaaS 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 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 SaaS is blowing, is going to blow up because there just aren't anyone to do the work. There's just no, 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 gonna the amount whether you can directly charge for that. Right. Which maybe you can't with SMBs. You can't charge per interaction like Zendesk 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. Okay, one last fun one and then we'll break and I may have gotten this wrong, but last question because I think it'll be interesting 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? 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 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 right, Like I talk to at least five, maybe ten a week.

That's the right number. Five to ten a week, right.

But I think so because how can you develop intuition as a CEO? So much of what you do is you judge things, you make decisions on should we go this way or that way? And if you don't have intuition, if you don't have instinct 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. I'LL travel all over the country. And I walk in and I just sit there with them and listen. So I think that's super important. There's no substitute for that. To your second point about sales. I haven't talked to any sales prospect of the last, let's say 1,500 customers that we onboarded. 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 gotta find the systems to make it scale. And it can't be that, oh, you know, we need someone to help close this deal. Let's bring in the CEO. When the deal size is only like, you know, 6, 7, 8K ACV like you have to have something that's a bit.

Bringing in the big guns on this one. Yeah, yeah, no, a fair point. I think, you know, maybe we'll break. 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 Sasser. 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. 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 to 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 at 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, listening. Be honest. How many do you talk to to week and do you travel? And especially with SMB and, and a product LED motion like you have it. I mean 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 plt. Why don't need to go visit customers in person? Because it's work. Yeah. You go. 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 right. 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 a fire hydrant of complaints, yes.

But what you miss out on, I feel like, is all 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 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 a phone call. So I think it's really important to do it in person and to do it as much as possible. So. Yeah. So I plan to do that for definitely.

Yeah. All right. Oh, man. Three thumbs up on that one. All right, Daniel, this was terrific. We will. We're double digits. We're at eight figures in ARR. Growing triple digits. We will check back in around 50 to 100 million. ARR. See what's changed on this list. We'll update it. I may have 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.