David Yuan, the founder of growth equity firm Tidemark, is a prominent investor and thought leader in the software-as-a-service (SaaS) industry, with a particular focus on vertical SaaS. Through numerous interviews, podcasts, and essays, he has shared his frameworks for identifying promising companies, building enduring businesses, and navigating the evolving technological landscape.

On Investment Philosophy and Strategy

  1. On Identifying "Control Points": "A 'control point' [is] the mission-critical systems that small businesses would turn off last before going bankrupt."[1] This is a cornerstone of Tidemark's investment thesis, focusing on software that is indispensable to its customers' operations.
  2. On "Workflow Gravity" and "Data Gravity": Yuan emphasizes two key moats for vertical SaaS companies: "Workflow gravity – the system that all other systems integrate to – it's where the most users spend the most time," and "Data gravity – the system that creates and holds the most critical information and is the hardest to migrate."
  3. On the Attractiveness of Vertical SaaS: "Vertical SaaS founders should not be asleep with AI. You can wave it off, view it as a toy, and say that no one's going to trust that outcome or use it. That may have been the case, but things are changing really quickly."[2][3]
  4. On the Multi-Product Nature of Vertical SaaS: "Vertical SAS companies inherently are multi-product companies and so for most end markets... you need to oftentimes think about your second product as you're building your first."[4]
  5. On Evaluating Vertical SaaS Markets: "Every vertical is different right every every vertical is different size fragmentation profitability and turnover."[4] Tidemark assesses markets based on these core attributes to understand the potential for software to thrive.
  6. On His Investment in Toast: Yuan's investment in Toast, a restaurant management software company, is a prime example of his "control point" philosophy in action, as it provides a critical operating system for its clients.
  7. On the Importance of Community: "Tidemark was founded on a simple premise: if we build an incredible community around ourselves and do right by them, we'll earn the right to invest in the handful of companies that raise each year and (hopefully) create one hell of an investment firm along the way."[5][6]
  8. On the Future of Software Investing: "Particularly I think about the buyout investors I work with, man, the progressive ones that do value the product, that do think about the secular tailwinds that do think about how you balance growth with margin, they're going to clean up."[1]
  9. On the "Fast Waters" and "Slow Waters" of AI Adoption: Yuan uses this framework to describe how AI will be adopted at different paces across various industries and functions.[1]
  10. On Growth Equity's Role: "Growth equity sits between venture risk and PE efficiency, funding SaaS founders scaling 5-20M ARR companies."[7]

On Founder Mindset and Company Building

  1. On Admiring Bootstrapped Founders: "It may sound funny coming from a professional investor, but I have a deep admiration for entrepreneurs who build great businesses without outside capital. They don't need my money, but they have my respect."[8]
  2. On the Strengths of Bootstrapped Companies: "With limited outside capital, they must finance themselves the old-fashioned way: selling products to customers. Growing means serving a need that is acutely felt by customers yet overlooked by other vendors."[8]
  3. On the Freedom of Bootstrapping: "That freedom from outside investors also gives them a chance to avoid conventional wisdom. This manifests itself in the product but can even mean reinventing the value proposition, business model, and organizational structure."[8]
  4. On When to Raise Capital: Yuan provides a framework for founders to determine whether to raise more capital or pursue a more capital-efficient path, emphasizing that it's not always the right decision to take on venture funding.[4][9]
  5. On Ideal Qualities for Vertical SaaS Founders: A key characteristic is a deep understanding of the industry they are serving, often having been a customer themselves.[4][9]
  6. On the Importance of a Clear Product Roadmap: He advises founders to think about their product roadmap in varying horizons and to be able to synthesize them into actionable steps.[10]
  7. On Building a Strong Ecosystem: Yuan highlights the mindset shift required to move from a product-focused company to building a strong and valuable ecosystem around it.[10]
  8. On the Journey of Building a Firm: Reflecting on starting Tidemark, Yuan speaks to the challenges and learnings of going from investor to founder.
  9. On Giving Back: Tidemark donates 10% of its profits to the community, a commitment Yuan made at the firm's inception.[4]
  10. On the Unconventional Path: "So much of the narrative of tech is in the raising of huge gobs of funding. It feels like raising capital is almost forced down your throat by the media. By our estimation, the bootstrapped path is undercovered (and underestimated). We want to change that."[8]

On AI and the Future of Software

  1. On AI as a Threat and Opportunity: "The risk if they're asleep at the wheel though is if AI companies essentially integrate into these control points... you can't be asleep at the wheel as a vertical SAS company you have to take not only the opportunity seriously but the threat seriously."[4]
  2. On How Vertical SaaS Companies Can Leverage AI: "If you can parse out the tasks that are most suited for Gen AI bring it back in the workflow well that's a really seamless way to get the work done the way you always have been doing it but then infuse software and automation into that workflow for more efficiency."[4]
  3. On the "Integrate and Surround" Strategy of AI Challengers: "You can start to see these native AI companies landing wedges and starting to surround a control point or a system of record and over time take away more and more of the functionality."[1][4]
  4. On the Shift from "Running the Business" to "Doing the Work": Yuan predicts that the next wave of software, powered by AI, will move beyond simply managing a business to actively performing core tasks.[11]
  5. On the System of Action: "A system of action is the next step beyond the system of record, where humans, AI... Pull in or replicate core functionality from the system of record into your own product."[11]
  6. On Outcome-Based Pricing with AI: “There are a handful of examples where software companies with AI-powered solutions are getting two to five times what they got on a software seat with new outcome-based pricing. They are providing real hard to ROI that's measurable, oftentimes associated with revenue.”[7]
  7. On AI's Impact on Competition: "To capture that value, it depends on competition. Because you can add a lot of value to your customers, but you can only charge for that value unless there's not a lot of competition vying for the same thing."
  8. On the Urgency of Adopting AI: “Jump into it to control your destiny. Don't get caught sleeping without AI in your product in a useful way.”[2][3]
  9. On AI's Potential to Displace Incumbents: Yuan warns that AI-native competitors can use "hero users" and tackle overlooked "Cousin Richie" tasks to gain a foothold and challenge established players.[7]
  10. On the Rapid Evolution of AI: "Lots of smart people are making AI technologies better every month, and you have a massive opportunity to improve it with your data and workflow."[3]

On Go-to-Market and Product Strategy

  1. On Product-Market Fit in Vertical SaaS: "In vertical SAS there there tends to be higher product market fit because you're not solving for multiple personas you're not selling for multiple industries you're solving for a specific industry."[4]
  2. On the Delicate Art of Sequencing: Yuan speaks to the challenge of balancing the development of the first product while already planning for the second and third.[4]
  3. On Avoiding Overspending in R&D: He cautions against the general idea of overspending, particularly in the early stages of a vertical SaaS company.[4]
  4. On Building a Multi-Product Company: A core tenet of his vertical SaaS strategy is the necessity of building a suite of products to fully serve a specific industry.
  5. On Pricing and Packaging: He believes creativity in pricing, product strategy, and go-to-market execution is crucial for VMS companies.
  6. On Efficient Growth: He advocates for well-timed product, channel, and regional expansion as a means of achieving efficient growth for practical software companies.[7]
  7. On the Importance of a Strong Go-to-Market Flywheel: Yuan often discusses the need for a self-reinforcing go-to-market motion to achieve scalable and sustainable growth.
  8. On "Land and Expand": While not a direct quote, his philosophy supports the "land and expand" model where a company first wins a customer with a core product and then sells additional products and services over time.
  9. On the Power of Niche Focus: "Bootstrappers are willing to see a narrow opportunity and tackle it with focus, because almost every market is big enough to sustain a $10 million company."
  10. On Starting with a Narrow Focus and Expanding: "Most VC-funded founders don't focus as well, which creates problems. But the founders who truly understand positioning and the idea that it can evolve over time, whether they're venture backed or not, they start with a very narrow practice to start and succeed as a leader."
  1. On the Supply/Demand Imbalance in Vertical SaaS: Yuan has noted the imbalance between the number of private investors and the number of scaled vertical SaaS companies.[4][9]
  2. On the Future of Venture Capital: He believes that investors who genuinely understand product and long-term value creation will be the most successful in the future.[1]
  3. On the Importance of Long-Term Thinking: His investment philosophy is rooted in building enduring companies, not just achieving quick exits.
  4. On the Value of a Strong Network: The Tidemark community is a testament to his belief in the power of connecting founders, operators, and investors.[5][6]
  5. On the SaaS Company He Admires Most: This is a recurring question in his interviews, and his answers often highlight companies with strong product-market fit and a clear path to market leadership.[4][9]
  6. On Learning from Other Founders: He encourages founders to learn from the "war stories" and "unconventional views" of those who have successfully bootstrapped their companies.[8]
  7. On the Tidemark 10 Foundation: His commitment to donating 10% of carried interest reflects a belief in the responsibility of successful businesses to contribute to society.[6]
  8. On the Name "Tidemark": "The tidemark is in actually the intertidal zone, which is the most rich and prolific part of the ocean, so all that stuff came together and it felt like a good name."[1] This symbolizes the firm's focus on the fertile ground of emerging category leaders.
  9. On Personal Motivation: Yuan has shared that his background and upbringing have been a significant source of motivation for his career and his drive to build something lasting.[1]
  10. On the Enduring Value of Vertical SaaS: "Deeply specialized SaaS companies with strong customer fit become sticky platforms that expand into durable multi-product businesses."[7] This statement encapsulates his core belief in the long-term potential of the vertical SaaS model.

Sources

  1. hgcapital.com
  2. practicalfounders.com
  3. practicalfounders.com
  4. youtube.com
  5. tidemarkcap.com
  6. tidemarkcap.com
  7. practicalfounders.com
  8. tidemarkcap.com
  9. tidemarkcap.com
  10. apple.com
  11. substack.com