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Interviews with world-class startup founders about their unique paths to uncover tactical insights they've learned about how to fundraise, grow, validate, hire, scale, and lead teams while building your startup.
Get full access to detailed takeaways on each episode, additional case studies, and more at join.foundingjourney.com
My mom thought I was a drug dealer because I was coming home with tens of 1,000 of dollars.
Michael Houck:That's Luke Saffinos. At 19 years old, Peter Thiel gave him a $100,000 to drop out of college.
Luke Sophinos:But it was great because I I got a Silicon Valley network overnight.
Michael Houck:But his startup wasn't what VCs were expecting.
Luke Sophinos:I used to get laughed out of the room. Like, how did you even get this meeting?
Michael Houck:Eventually, they caught up to what he'd realized.
Luke Sophinos:You have to get beyond the the open Internet to build something really effective.
Michael Houck:He's the most knowledgeable founder I know about vertical SaaS. So naturally, we we talked about why opportunities in SaaS have moved from horizontal solutions to verticalized ones and why you have to own the transaction layer to build a venture scale vertical SaaS business. Along with his tactical frameworks to identify, build, and grow a vertical SaaS product, all of which he's compiled in the vertical SaaS bible. This is Luke Sefino's founding journey.
Michael Houck:Alright, Luke. Great to have you on, man. Thanks for joining.
Luke Sophinos:Yeah. Thanks for having me, Michael. Appreciate it, man. Man.
Michael Houck:Yeah. We've known each other a while, but I appreciate you coming on the pod. I wanna go back to start with your first startup. So tell me about this, like, classic tar pit idea that you went after in events, but you actually made work and sort of scaled it up into a meaningful business for thousands of people.
Luke Sophinos:Yeah. For sure. So I, you know, like others probably that you've had on the pod, I had my my lemonade stand esque business. When I was in high school, my I, you know, we had this prom kind of situation, right? Your high school dances and they were not, they were not fun to go to.
Luke Sophinos:They had a, kind of the ruler of room between you and who you're dancing with kinda rule. And so I had the brilliant idea to actually compete with the high school dances and the high school prom. I just realized that they were charging, you know, a couple $100 to to do it, and and, you know, people weren't having a a good time. So I created a business plan. I pitched my dad to basically borrow a couple $1,000 to rent out a venue.
Luke Sophinos:And then, I I went to all the low I was in a suburban area, so I went to all the local high schools and tried to find the cool kids and incentivize them as basically commission sales reps to to funnel people to the event. And and then, you know, did some media stuff. It was very early, like, social media days, like Myspace days. And so so push people, you know, to go. And before I knew it, we had a little bit of a kind of an events empire in high school.
Luke Sophinos:We my I think my mom thought I was a drug dealer because I was coming home with tens of 1,000 of dollars and hanging out in, like, the green room and, you know, these venue halls with friends and it, it beat working at the car wash, say it that way.
Michael Houck:And you were in high school yourself at the time. I was. Yeah. Yeah. Yeah.
Michael Houck:What ended up happening in that business?
Luke Sophinos:I went to college and it went away, basically, you know, I, I tried to do some stuff while I was in college. I, I went to, California for school, tried to do some stuff while I was in college. I I went to, California for school. And so, you know, I grew up in Colorado, so it just wasn't it it was more of a lesson of entrepreneurship is for me. I like this.
Luke Sophinos:I can do this. I don't need to make, you know, 7, $8 an hour at the car wash. Like, I I I'm capable. That that was kind of a defining moment for me.
Michael Houck:And then when you were in college, you did, I think, an unexpected thing, I think, that not a lot of kids in college do, which is you actually said, hey. Maybe I won't be a founder right now. I'm gonna go be a VC first. Right? And I think that, you know, you talk to founders these days and they're saying, what if a founder becomes a VC, that sort of means they're retiring from being a founder, but that wasn't that wasn't the case.
Michael Houck:Right?
Luke Sophinos:Yeah. I mean, I wasn't necessarily I'd I'd like to I probably called myself a VC at the time, but, you know, really, I I had an opportunity. I joined the kind of the college entrepreneurship program, and I was fortunate to, one of the speakers that came through was a a venture capitalist and had a fund. And, you know, he, it was inspiring me because I, I, you know, I was like 17 or 18 years old and I didn't even know what venture capital was at that time. And he talked about it and, you know, he talked about the how it worked and and these companies, and I was just like, this sounds amazing.
Luke Sophinos:I need to figure out how to get involved with him. And so, you know, I just I think I just annoyed the hell out of him, banged on banged on the door enough times, and he kinda took me on as as basically a an intern, and then that kinda grew into more of, like, an analyst type of role. And and my job was it was not complex by any stretch of the imagination. It was but it taught me a lot. I learn I, you know, I I helped them kinda take their pitch decks and and and write, you know, memos and and do market research on different verticals and and, you know, reach out to customers and see what their experience was and and kinda come back with with investment briefs and memos on the industry, on the company.
Luke Sophinos:And so it was just it was just great kinda experience to to learn a lot about this incredible universe that I was really intrigued by. That really, you know, didn't know anything about going into it. So another, you know, as you talk about kinda now looking backwards, you had the Vince Vince business got me into entrepreneurship that showed me how big kinda entrepreneurship could be and and how it's it's much bigger than, competing with the high school dances. And then that led me to my kinda next stop, which I'm sure sure we'll get into.
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Michael Houck:Yeah. I mean, I'm curious about how then you take that experience and you jump back onto the founder side, you drop out of school, get the 100 k from a Thiel Fellowship. Like, how did that come about? How did you stand out to become a Thiel Fellow?
Luke Sophinos:Yeah. So I, you know, so I was working at that, that VC fund and, it, it, it enabled me to kind of look at things very differently. And, and I started realizing, like, I can do, I could do this. I could start something, you know? And, at the time I just, you know, it was all about finding a big problem and, and I, by the way, I had started business very differently than I did back then now, but I was what's what problem am I experiencing?
Luke Sophinos:And, you know, the first the thing I was experiencing is I was sitting in these large lecture hall, kind of college style classrooms, and I was being forced to pay 50 to $60 to buy this remote control called a clicker. You know, the teacher would send out, like, a poll to the class, and everybody would hit a b, c, or d on their clicker, and I thought it was the stupidest thing because it was, like, the first time everybody had a smartphone. This is, like, 2014. Right? 2013.
Luke Sophinos:So, the whole concept was really simple at the time. It was, well, if we're paying a $100 for this remote, and every campus, every college in the country has the same thing, why don't we just create an app? Right? And so that, that's, that's how we did it. We, we, we started with an app.
Luke Sophinos:The professors at the, the college basically said real quickly, hey, the app concept doesn't work because I don't know if they're actually in the lecture hall. Right? Because you could be at home in your dorm room replying to the polls. And so we then actually created a kind of a geolocation. We use, you know, geolocation to ensure that the student was in the classroom classroom or at least in the building.
Luke Sophinos:Right? It wasn't perfect. But and then from there, we had this big unlock and it kinda spread like wildfire. It was a really fun experience when I was in a lecture hall with 300 people and sitting to my buddies and everybody had to pull out their credit card and pay $20 for this mandatory classroom tool, and that was gonna go to my bank account. That was a fun a fun experience.
Luke Sophinos:And then you asked the the Thiel Fellowship piece. So what ended up happening is one of our our first investor happened to be an incredible guy, incredible human being, amazing businessman. He's the president, vice chairman of Qualcomm. He he just retired, but his, daughter actually went to my university and it was spreading like wildfire at the university, like, tens of thousands of students are using this thing and he had heard about it, and one thing led to another and, and basically, you know, he offered to kind of be the first check into the business to help us scale this to every college in the country, and so, you know, we dove in, we we we did kind of a pre seed esque type round with him, he brought in, you know, some other heavy hitters, and then that that specifically got the attention. I, you know, I was, like, I think I was 19 at this time.
Luke Sophinos:That got the attention of the Thiel Fellowship folks because we you know, there's this company in Southern California that had just raised a, you know, a round of of venture funding from some some, you know, heavy hitters. And and so I flew out to San Francisco. I, you know, I did the interview with them, and I was fortunate enough to to dive into it. I I think people ask me, how do you do the, you know, what does it take to kinda get into the Thiel Fellowship? And I don't know if this has changed because I'm a decade roughly out from when I joined the Thiel Fellowship, so I'm sure it's changed.
Luke Sophinos:But at the time, the the my belief was you either had to have a business with funding that was scaling, you know, and there's not a lot of people at 19 or 20 that that have that, or you have to have and that was like 80% of folks that joined. The other 20% is you had to be this, like, you know, incredibly smart person from some crazy Ivy League school that was working on some enormous, like, you know, asteroid mining type of concept. And even if you didn't have funding, like, they were betting on kind of sheer intelligence. And and I definitely fit into the the the former, not the latter, by the way.
Michael Houck:Yeah. I mean, the the ocean cleanup is probably the most famous one.
Luke Sophinos:Yeah. And and Boyan was in my class, and I remember going up there and just meeting, you know, Vitalik who created Ethereum. I was they, they were talking about cryptocurrency in 2015 and I had created like a classroom app and I was just like, these kids are on another level. But it was great because I, I got a Silicon Valley network overnight and I, I gotta learn and become, you know, peers and friends with, with a lot of these folks that would go on and have gone on to just do absolutely
Michael Houck:incredible, incredible things. What was it like when they told you that, you know, they're gonna give you a $100,000 and all they ask is drop out of college.
Luke Sophinos:Yeah. Yeah. You know, honestly, at that time, I was so we were so the only way that we, you know, everything looks simple in hindsight, but it we worked so hard because we didn't know anything. We had no experience. We were working 80 hour weeks.
Luke Sophinos:You know, I had recruited kind of a a rag tag team of folks that would stop at nothing that had no plan b. You know, we all had chips on our shoulders in some way or fashion to to do this thing with me. And and so, we were, like, locked in. We were in it. But but the Thiel Fellowship was, like, gravy because we had already raised funding.
Luke Sophinos:We were basically full time. I mean, I was going to class, but realistically, I, like, switched to a very simple major just so I could focus on the business and show up and take tests when I needed to, to not flunk out. And then the 2 of when the 2 fellowship thing came, like, I I think I had, like, 6 units or 2 classes left in college. And so, you know, I I jumped into it, and it it was awesome. It was a great ex you know, and still to this day, like, it's it's really a program of of of mentorship and network and supporting one another.
Luke Sophinos:It's there's no, like, defined curriculum or, like, required events. It's all, you know, they want you to build your business and support you and and, you know, not get it get get in your way. So it doesn't look at all like a college or education experience.
Michael Houck:Yeah. I mean, you know, I dropped out of
Michael Houck:college twice, so I know the,
Michael Houck:I know how broken the traditional system is. I guess, what gave you the confidence so so young though that you did have it figured out to the degree that you'd be able to drop out, not had that safety net, and sort of jump into the Silicon Valley Teal Fellowship startup, arena.
Luke Sophinos:Yeah. I mean, you know, I was fortunate in the the aspect that my company was funded. I was already going all I was already all in. I was I was going for it. You know, I wasn't dropping out without a salary and, you know, a company that I already kind of built up.
Luke Sophinos:And so I think I was I was fortunate in that regard.
Michael Houck:May maybe phrase differently. How should other founders who have a business evaluate whether they're at that point or or not?
Luke Sophinos:I think college has changed a lot in the last, I mean, the last couple decades. Right? But more specifically, it's, like, changing very drastically more than ever today in the last few years. I mean, I think you have to you have to have a conversation with yourself if you're actually really getting value out of what you're paying. Because, you know, if the answer is, like and and by the way, the value doesn't have to be, like, the classroom value.
Luke Sophinos:It could just be, hey, I'm around incredibly smart people. I'm hanging out in the entrepreneurship center, whatever, and and I'm getting the value through that. That that's fine. It's probably not worth whatever people are paying these days, but I think you have to look in the mirror and say, am I getting the value out of this, or is there a way to go get that value without spending this amount of money or this amount of time or or those things? So I think it's a much different conversation, and I think it's a a conversation that, like, parents need to have with their kids and kids need to have with their parents with, like, real raw intellectual honesty because, you know, we'll get into it, but, like, we've built kind of the market leader for software and trade schools and trade schools are like this incredible alternative.
Luke Sophinos:They're a path to small business ownership at, you know, a quarter of the cost in, oh, you know, in 12 months. And I see way more millionaires getting printed from trade schools than I do from traditional education today. So it's it's a tough thing, but, like, you gotta kinda zig when everybody zags, and and you gotta have a deep intellectual honesty when you make that call.
Michael Houck:I remember when I was in high school, I worked as a bank teller, and all the people who came in and had the biggest amounts in their accounts were blue collar, trade school, or small business owners, construction, things like that. So I I learned that lesson pretty early on. You know, a lot of people say that the traditional college education system is broken, but I'm curious, someone who's super deep in the space who's built software in this space, why do you think it's broken?
Luke Sophinos:Yeah. I mean, I think the incentives are all screwed up in traditional education. So, what do I mean by that? What traditional education is so I'll give you a parallel, and I'll give you a kind of a peek into, like, the trade school universe that I don't think a lot of people actually know or understand, but trade schools are unique in the fact that they get bucketed under for profit education. And so for profit education, if, if I just told you that on the street, you'd just immediately think like, oh, degree mill online, crooks, like, whatever, University of Phoenix, like, not that they are, but just that's what comes to your mind.
Luke Sophinos:Right? But what's happened with trade schools is no traditional education route has solved the need to go get a credential as a electrician, plumber, mechanic, cosmetologist, etcetera. But because of the for profit rules that have been put in place for schools that are businesses, they have retention requirements. Meaning there's, you know, x percent. If if if less than the required percentage of of students drop out, like, you get shut down.
Luke Sophinos:They have placement requirements where you have to actually place students into the workforce in their field of study, like 70, 80%, like substantial percentage numbers. If I look at traditional education, how they get their funding, it's not around any of that. There's there's no, there's no requirements around career or jobs. There's no requirements around retention rates. Like, yeah, they get benchmarked on that, but there's no punishment or, or, or lack of funding fulfilling what they're supposed to be fulfilling, what society has asked them to fulfill, which is jobs.
Luke Sophinos:And so as a result, faculty gets incredibly bloated. We talk about, you know, we politicize everything on the campus. Like, it's it's gotten so, out of control whereas trade schools have just focused on the primary mission, which is training you to go into the workforce and get a job. And I think they're I not I think. They're force and get a job.
Luke Sophinos:And I think they're I not I think I know they're kicking ass as a result of that. And so I hope that the 4 years kinda get on track here and and focus again on what, you know, made them great initially, which is career readiness. Right? Skills.
Michael Houck:Yeah. To to your point, there's just no accountability right now. Yeah. From a founder's perspective, do you think that more founders should target these sort of maybe less sexy industries, problem spaces, and blue collar tech, and and helping trade schools in particular, maybe?
Luke Sophinos:Yeah. So look, I'm a huge proponent of, like, boring businesses, boring industries, like, I'm a huge believer in them. One of the, there's a lot of reasons for that. One of the main reasons is just lack of competition. Right?
Luke Sophinos:So I got lucky in the sense that I kind of fell into the trade school piece because we tried to scale, you know, the software I talked about to every traditional college in the country and we totally failed. We couldn't sell into them, super bureaucratic red tape. And so we were fortunate that we had a trade school come inbound and they didn't have, you know, blackboard.com or canvas, like traditional LMSs. They were running on pen and paper and we said, wow, here's this pretty big industry that's got either nothing or very legacy software. Like, we can be the modern kind of operating system for them.
Luke Sophinos:And that's what we built out over the last decade. And so I'm a huge believer in, you know, if I would have stayed in the 4 year space, there is relentless competition because every software founder, nearly every software founder probably went to a traditional education institution and and, you know, came up with something or, or, or faced a problem and built a solution. Whereas finding these industries that may look small on the surface, but when you dig into them and you layer in payments and and other things that you can add on from a product standpoint, they get they get venture scale. A lot of them do. And so huge believer in that.
Luke Sophinos:Absolutely.
Michael Houck:And when you're when you're going after those types of customers who have the pen and paper, you know, that you're not they're not migrating from one piece of software to another because it's better. They're migrating from a whole new system to a whole new system. Right? How do you convince them to trust you guys enough that they'll be able to maintain their businesses with your software?
Luke Sophinos:Yeah. No. I mean, it's a good question. I think I think a lot of that the trust building comes down to, you know, relationships, spending time with them. I mean, I remember our first customer, we were we were on the campus, like we were out of the building.
Luke Sophinos:We weren't doing zoom presentations. We were sitting in there, you know, holding their hand, rolling it out, debugging. I mean, you know, I've been to like probably a 1000 trade schools in the last decade. Right? And that's not some sexy cool thing to say, but that's what it takes if you wanna build a successful industry specific software solution.
Luke Sophinos:You wanna build that trust that enables people to take a bet on you. And you gotta find that early adopter, like, there's people that aren't gonna take a bet on you. And we were fortunate enough to find somebody that wanted to take a bet on a, you know, back then, a a a young kid. But, you know, she knew that we were gonna work like dogs and make it happen, and and and we did.
Michael Houck:When you're in that position and you find this customer in a different market, how do you know that it makes sense to pivot the whole business basically to go after that market and the opportunity is actually there? How do you how do you do that mental calculus?
Luke Sophinos:At the time, it was a really easy, easy decision for us. And, and the reason why is because we had tried to scale to a bunch of customers. We were spending a bunch or to a bunch of new other schools. We were spending a bunch of money and we were, we were totally failing, and the data was very clear and apparent that that was happening. And then we had this trade school come inbound that said, hey.
Luke Sophinos:Instead of all these students, like, paying you $20 and I'm, you know, collecting, you know, lunch money here, lunch money there, right? This school is going to pay us $200,000 a year on a recurring software model. And by the way, they were telling us that every other school had this had this problem, and they were actively introducing us to a lot of other schools that had this particular problem, and we were going to the trades shows in the industry and identifying that everybody had this problem. And so it didn't happen overnight, but over, like, a 6 to 12 month period, it just was, like, this process, this path makes a lot more sense. It's a lot easier.
Luke Sophinos:Like, I can feel the product market fit. Like, I can feel that they want it, that they don't we don't have competition. They're willing to pay a lot more. And then over here, I'm getting my ass handed to me. And so I think that's a, that's a common theme though with a lot of founders is you have to be open and explore when you don't have product market fit yet, you know, industries beyond just the one that you think was the right initial starting point.
Luke Sophinos:And then you go from there.
Michael Houck:So, obviously, Course Key is a vertical SaaS product. You talk a lot about vertical SaaS more broadly on x and on social media and through your newsletter. Break it down for the audience here. Like, what is the difference between vertical SaaS and traditional SaaS, and, you know, we can get deeper into it from there.
Luke Sophinos:Yeah. Sure. So, you know, at at a 1,000 foot view, vertical software is just industry specific software. So it's software built for what? For businesses in one industry.
Luke Sophinos:So, if you're building software for veterinarians, right, or if you're building software for machine shops, or if you're building software for, you know, gyms or trade schools, that's the general overview. Horizontal software is what gets most of the press. It's the most sexy thing. It's, you know, what everybody talks about, which is anybody can use it. Is, well, that's at least the pitch.
Luke Sophinos:I think that's not the reality, but so an example of and by the way, there's a ton of fantastic horizontal software companies, so it's not a knock on them, but it's things like DocuSign. Right? It doesn't matter what industry you're in. You can you you could probably use DocuSign. So any sort of kind of business software that that is broad in its application that any industry can leverage it.
Luke Sophinos:Something like Notion. Like Notion, like ClickUp. Yeah. Totally.
Michael Houck:So I guess why do you see vertical SaaS opportunities as being more attractive, maybe, right now and going forward in the next decade than than horizontal SaaS?
Luke Sophinos:Yeah. I mean, so there's there's a couple things for that, but the the main reason is because vertical SaaS creates a much better customer experience. It's tailored to the user. It's built for them and their business processes and their workflows and the things that they experience every single day. When you, when you leverage horizontal software, you basically have to shoehorn in a solution and try to make it work for you, and that's not the case in in vertical SaaS.
Luke Sophinos:So does it make sense that the first 10 to kinda 20 years were much more bent towards horizontal software? Yeah. Because software wasn't commoditized yet. Right? And so we were founders, rightfully so, were chasing big market sizes.
Luke Sophinos:Right? So, like, e signatures, a lot more market a lot bigger market size than e signature for trade schools. Right? But, you know, as as software has gotten more and more commoditized, like, my kind of belief is that to build a successful business today requires relentless focus and relentless focus on one particular industry. And the reason being is that it's gonna create a better experience for the customer and that and those customers are gonna choose you every time over a horizontal solution.
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Michael Houck:So vertical software sounds like it's gonna be highly differentiated maybe from industry to industry, from solution to solution. Right? Even if they're solving the same problem. What are sort of the common traits that makes a successful venture scale vertical SaaS, startup?
Luke Sophinos:Yeah. No. It's a great question. So I think there's there's a couple of things. The the first thing that I like to I like to point people in the direction of is is a successful wedge product is is what I call it.
Luke Sophinos:So, obviously, within verticals, within most verticals, they want kind of a one stop shop, one software solution that they can use for everything, specifically in industries that lack, like, IT resources or engineers. Right? Like a laundromat. Right? Like a laundromat would probably wanna use just 1 software tool versus 25.
Luke Sophinos:I think a successful wedge product is per is important because it's really hard to build a one stop shop out of the gate and do it well. Right? And so when I say wedge it's like, what's the first thing that you're gonna start with that's gonna get you in the door? It's gonna be a reputation prover. It's easy to implement.
Luke Sophinos:It's easy to get to a quick win, and you can scale that to a lot of different businesses within that vertical quickly. And then you can take that, learn more about the customer, learn more, what's the second big problem that you can solve, or what's a bigger revenue generating product that you can solve, right? You move into multi product. So, the second common trait after the successful wedge, your wedge product is multi product offering. So the only way to build a venture scale business when you're going after 1 industry in almost all cases is going multi product, which is very counterintuitive by the way, to what you'll hear in horizontal software.
Luke Sophinos:Right. Do one thing, do it the best. It's actually not the case in, in these tasks. You have to add multiple modules as fast as you can, which is really tough to pull off. So that's number 2.
Luke Sophinos:Number 3 is, is post going multi product. You need to be able to evolve into a platform. You need to eventually be able to evolve into kind of the operating system or the OS of this particular space. Hypercritical. If somebody else evolves into the OS before you, you're eventually gonna get your lunch eaten.
Luke Sophinos:Because like I said, back to the laundromat example, they want 1, 1 piece of software in a lot of these industries, or one vendor to work with. The final piece that is probably the most important and, and it can come before the third one, is you need to be able to monetize on the transaction. And so, what I mean by that is, almost every vertical SaaS business of significant size owns the payments workflow. Right? So they actually own the transaction, they own the movement of money, and when you own the movement of money, you can actually take a percentage of the movement of money.
Luke Sophinos:And so your your your market size can become 10 times, 50 times, a 100 times. I've seen a 1000 times bigger because of that. So if I'm sell I'll give you a good example. If I'm selling to restaurants, right, so Toast is a famous restaurant, vertical SaaS solution. It's the market leader.
Luke Sophinos:If you go into a restaurant, they're probably on Toast. I think I'm gonna use rough numbers. I think there's like a 1000000 restaurants in the US, roughly. If if if toast just tried to sell $10 a month software to restaurants and there's a million of them, Right? We're looking at a $120,000,000 market size.
Luke Sophinos:I might I don't know if I'm doing the math correctly, but it's not it's not a big market size. But those million restaurants, I think, do, like, 100 and 100 of 1,000,000,000,000, potentially, like, a $1,000,000,000,000 worth of revenue. Someone in the comments will will will give us all the right numbers. Like, if I get if all of a sudden I'm getting a percent percent and a half by being the point of sale solution in in the restaurant market, well, now I look like Toast and I'm going public and my stocks ripping and I'm building a massive, you know, multi $1,000,000,000 company. So you have to own the transaction if you wanna build a venture scale business.
Luke Sophinos:And that's common by the way in every single large vertical SaaS business is a the lion share of the revenue kind of over to over time becomes their their payments or their Fintech offering.
Michael Houck:If a founder is looking at a new market and they're thinking about building a vertical SaaS company in it, do they basically need to say, okay. Is there already a one stop shop player who has a percentage of the transaction in this space or not? Is it that binary? So there's a couple of ways to think about it. One is you have to decide what kind of business do
Luke Sophinos:you wanna build. Do you wanna build a venture a venture scale business? Right? Do you wanna raise a bunch of money and you wanna go for the moon? Or do you wanna build a bootstrap business?
Luke Sophinos:Because if you're gonna build a bootstrap business, there's nothing saying that you need to get into the kind of the payments workflow, and you can build a great, you know, couple $1,000,000 a year business, maybe, you know, tens of 1,000,000 of dollar a year business and just kinda SaaS tooling. That that that's totally a path. If you say to yourself, yeah, I wanna build a venture scale business, there's typically kinda 2 ways that I think about this. When you look at an industry, there's there's either gonna gonna be when you go into it, there's kind of 3 things that happen. There's either a large industry or excuse me.
Luke Sophinos:There's, like, a large legacy software player that owns a good chunk of the market. There's no, like, kinda key owner of the market. There's a bunch of point solutions or a bunch of kind of 2 or 3, you know, product companies in it. Or, 3, they're actually leveraging a bunch of horizontal solutions in the market and they're trying to connect them all and make them play together and work for the businesses in that market. Everybody's doing something a little bit differently, but I guess there's a 4th which is getting more and more rare, but or they're doing stuff on pen and paper.
Luke Sophinos:And I think it's really important to look at that to determine whether or not to go to go for it and and whether or not you can build something of venture scale or not That's what I would focus on Like, if there's a modern player that's starting to get out there in market market share It's really tough to build something of of serious scale because now you're dealing with rip and replace in every sales conversation that you're having.
Michael Houck:Why do you think that some people will criticize vertical SaaS for not being venture scale even though there clearly are venture scale opportunities of the in the space?
Luke Sophinos:Yeah. So, you know, when I was raising money, you know, our last round, we we did a series b in in 21, you know, an a in 19 and and and a seed and pre seed before that. I used to get laughed out of the room in Silicon Valley. Like, how did you even get this meeting telling me that you're gonna build a venture scale business in trade schools? Right?
Luke Sophinos:I think the positive for people listening today is is most VCs now understand the the Fintech component, and they understand that you can build a venture scale business in a lot of industries, assuming you can paint the pathway kinda logically to where you're gonna own the transaction, and you're you're gonna take a piece of the overall revenue flowing through the market. So I think it the the good news is back then, they didn't understand that, and I would try to tell them that, and they they didn't get it. Today, I think most VCs get it. So that's positive. I think it's changing, Michael.
Luke Sophinos:So I don't think people are coming up against it as much where, where, where people don't see a venture scale opportunity is in, you know, really small verticals. If where, even if you own the, the, the kind of transactions workflow, you're still not gonna get there. Or if there's already a dominant player that owns the transaction, and they just don't see you being able to kind of take them out.
Michael Houck:How do you see AI changing the opportunity in vertical SaaS? You know, we're talking about the logical progression from a one size fits all solution to a more specialized solution. It seems like the next logical step there is a personalized solution. Right? Klarna, I think, is trying this by replacing some big SaaS vendors with internal tools that they're building.
Michael Houck:You can probably take it even further than that. There's even some agencies now offering it to start ups. Do you think that's true of where the logic of Perficient is going? And if so, what happens to vertical SaaS opportunities?
Luke Sophinos:Yeah. So I'm I'm a huge I I think AI, like most people, is gonna change literally everything. And what I like to tell people here is just like we talk about vertical software and horizontal software, we can talk about vertical AI and horizontal AI. So most of the application of AI today is horizontal, and most of the, AI tooling that we're using is accessing data from the open Internet. The open Internet is actually very surface level, if you think about it.
Luke Sophinos:Right? It here are the top ten things to do in Denver or New York or whatever. Here's the 5 restaurants to go to. Where all the gold mine of data is for AI is actually in vertical software solutions. They're behind login screens in all sorts of, you know, of industries.
Luke Sophinos:And so vertical AI that can actually leverage proprietary, like, industry specific data, I think is going to change everything. And where it's gonna change everything is in specific job functions. Right? So if you actually get to a point where, you know, all of a sudden we have a a vertical AI solution for lawyers like Harvey. Right?
Luke Sophinos:And I'm leveraging a whole kind of proprietary data set around that. That's super intriguing. I think when you think about vertical AI, but I'm a big believer that it's gonna change pretty much everything. And and when you look at AI, you can look at it the same way as you look at software. So you have horizontal software and vertical software.
Luke Sophinos:You have horizontal AI and vertical AI. Most of the application around AI today is horizontal, and it's leveraging data from the open Internet. Open Internet actually is pretty is not super detailed. It's not it's it's pretty surface level. Right?
Luke Sophinos:Top 20 things to do here. Here's all the 50 restaurants to go to in your city. Like, where all the powerful data is it's trapped behind login screens from vertical software solutions. Right? And so, I see vertical AI as a a totally next gen huge opportunity where if you can access kind of proprietary industry data that's not on the open Internet, you have an insane advantage to build a behemoth and where we're seeing most people go, which I think is right is job specific vertical AI.
Luke Sophinos:Right? So an example of this would be, Harvey, right, with with, lawyers. So, they're actually tapping into the legal software kind of dataset or ERP or vertical SaaS solution. And now all of a sudden they're, they're able to do a function of an associate, right, or a, a legal analyst. And so the data piece, I think, is the really important critical part here, is you have to get beyond the the open internet to build something really effective.
Luke Sophinos:And and if you do this right, your customers should should open kind of Pandora's box, to enable you to do that.
Michael Houck:It's super clear that you're very passionate about the opportunity in vertical SaaS. You talk about it a ton, both in the newsletter and on on X. I'm curious, you know, what's driving that? Why create the content? Why sort of share that playbook?
Michael Houck:What's motivating that for you?
Luke Sophinos:Yeah. I mean, you know, when I was when I was building in you know, I'm still building. I'm about a decade in. There is nothing written about vertical software. Everything is about SaaS and and everything on SaaS is kinda geared towards, like, broad horizontal solutions and the playbooks and the requirements and everything you do from hiring to raising money to strategy to operation.
Luke Sophinos:Literally, everything is different in real SaaS. And I made a bunch of decisions based on things that I learned or heard from people that were were building, you know, great, successful, horizontal SaaS companies that crash and burn for me on the vertical SaaS side. And, you know, I think at some point it was 2020 or 2021. And I just said enough's enough. You know, there it isn't out there.
Luke Sophinos:I've had enough conversations with vertical SaaS founders that, that share my sentiment. Like, let's just start writing about it. Let's start putting out the playbooks because no one else is let's learn from each other. Let's go from each other. Let's figure out, you know, let's enable people to not make the same mistakes that that I made or or other founders made at that time.
Luke Sophinos:So, you know, that's why we do it. And and it's just been an awesome way to to meet a ton of great, you know, VSaaS founders and folks at all stages of, of building.
Michael Houck:And you you've compiled a lot of that into the vertical SaaS bible. Right?
Luke Sophinos:Yeah. So I I basically, you know, I kept getting hit up and saying, hey. Is there one place I can go for, like, everything? And, you know, and I had, like, a decade worth of vertical SaaS writing. And so, so, yeah, we, we package it up and, and, and we put it in, in one singular destination that people can go and, and leverage.
Luke Sophinos:And, and it's a paid resource because it's literally a decade plus of content. I think it's 1000 of pages, but, you know, for those that, that can do that, which I understand, you know, my newsletter, all free can go there and get, get a ton of great information as well.
Michael Houck:We'll, we'll drop the link to both in the, in the description. I think, you know, by now throughout this conversation, you've probably convinced a lot of founders to explore or entertain the idea or even just go after a vertical SaaS opportunity that's that they've been thinking about. For founders who are convinced but haven't started, where should
Luke Sophinos:they start? You know, my big belief in this is you have to pick an industry and not a problem. I think we get kind of business building and business creation all wrong where we we hone in on problem sets and not industries. And so my recommendation to folks always is is go look at all the industries that are out there. There's a ton of fantastic resources that, you know, the NA the NAICS literally publishes like a 1,000 plus industries.
Luke Sophinos:The Better Business Bureau, I think, has 5,000 industries. And it there's a bunch of lists out out there on all this stuff. I have a 1,000 on on, you know, in my kind of database, and find one that you're passionate about. Go deep, explore it, see where there are opportunities, see where there are problems, see where there are challenges, see what the competition looks like. And if you do that and you kind of do that maniacally, I think you'll find an opportunity.
Luke Sophinos:You'll be shocked about how many opportunities are still out there.
Michael Houck:And then for the people who aren't convinced, what's your, what's your pitch to them? Why should they reconsider their opinion?
Luke Sophinos:For people that aren't convinced, I usually like to ask a really simple question, which is when it's your birthday, do you like getting a gift that takes you a few weeks to put together? You gotta kind of hodgepodge it this way. Maybe you gotta go to the store and get another product, bring it back, try to put it together, to get to the outcome you want. Like that's the world of a lot of businesses and a lot of industries that are shoehorning together kind of vertical SAS solutions. I think the answer you'd say is no, I'd rather get the thing that I'd rather open it up, and it's built for me.
Luke Sophinos:It's meant for me kinda right out of the gate. So if that doesn't convince you, I don't know what will.
Michael Houck:Or even just do you prefer a cake that says happy birthday or happy birthday, Luke? Okay. I also wanna touch on fundraising really quick because, you know, you guys have raised, I think, 18,000,000 in equity financing for VCs, but you've also raised, I think, 10,000,000 in debt across 2 different rounds. You know, a lot of traditional advice is that debt is scary, especially when you're on the venture path, super high risk, best to avoid. What made that the right decision for you guys?
Luke Sophinos:I think my general kind of rule of thumb with with with venture and with that is is twofold. One is I just wrote a post about this is, like, you have to give yourself an escape hatch. Like, I truly believe that. I think too many founders raise it too high evaluations. They they give up control, and they get put in these situations where it's, like, you go big or you go bust.
Luke Sophinos:And, you know, when I raised our series b, like, I had a I had a tough conversation with the fund, and I just said, look, I'm I'm not gonna ever put the business in a situation where, like, if we're not seeing the we're not still seeing because of the time we were the the venture opportunity that we're going to just keep kind of burning and spending money, trying to get us back on that path. And what you'll, and, and what you'll find with a lot of companies is, at some point, you know, you can have a great business, You can have a, a 10, 20, dollars 30,000,000 a year business. That's just not gonna meet the needs that a VC needs and being able to have the escape hatch and press the button and get onto a private equity track where you get profitable and you can sell at, you know, not like, the, the VC type multiples, but still like, you know, 4 or 5, 6 X type of range. I told that VC we're going to do that. And he was, you know, supportive of that.
Luke Sophinos:I think it's really important regardless of if it's equity or debt, that you have those conversations and you give yourself an escape hatch. So you don't end up working 5, 10, 15 years of your life on something that, you know, gets to a good size, but, but blows up because the incentives aren't aligned. You can still do really well. Your team can still really do well. Your, you know, your VCs can can do well, not in the in the terms of the economics that they need to experience, but, you know, get get their money back or get, you know, a turn or 2 on their money back.
Luke Sophinos:I think that's important. The other thing with the debt is I I'd be very cautious of debt. I think debt is really, really dangerous. You know, we've had challenges with that at Korski that we've had to overcome. Unfortunately, we have, I have many friends that haven't, but I think debt can be super appetizing because there's no dilution.
Luke Sophinos:Right. People will loan you out a lot, like all the way up to kind of a 1 to 1 ARR type of level. But it comes with a lot of things and, and it, and you might feel like everything is going up into the right. And then, you know, it hits you real hard when that that that isn't the case. And so I would I think the the standard advice that you preface this question with, I would I would push everyone to follow, which is like, be very cautious with debt.
Luke Sophinos:Try to not use it if you don't
Michael Houck:have to. How did
Luke Sophinos:you guys work through that? We had a supportive investor base that kind of helped us through some challenging situations when it came to debt. I probably can't share more than that other than we overcame it. Cause I don't know what, what I can or can't, but, you know, just be cautious with it.
Michael Houck:Let's do a couple rapid fire questions at the end here that we like to do. So first one, name an investor who other founders should take capital from and and why.
Luke Sophinos:Wayne Hugh at SignalFire. Super bright guy. I think he sees sees the future. Very supportive. Helps you through good times and bad.
Luke Sophinos:Has your back. People I think have heard of SignalFire. I don't know if they've heard of Wayne, but he's tremendous.
Michael Houck:What's one thing you change about the startup world?
Luke Sophinos:Less focus on glamour and glitz when it comes to raising money. I'm sure you got that answer so many times and more focus on revenue. And I think also we're seeing, a change here, but bootstrapping is super badass And the people that can pull that off, it's, it's incredible. And so there's the bootstrap if you bootstrap successfully, like, you are, you are the, the man or
Michael Houck:the person. What's your number one piece of advice for a first time founder?
Luke Sophinos:I think I think it's just being being maniacal. Like, you just you just can't stop at nothing. If you don't stop at nothing, you'll you'll get through all the pain in the eating glasses, Elon Musk, like, likes to say. Like, you just can't stop.
Michael Houck:And then last one, this is actually a a Peter Thiel one. What's something you believe that most people disagree with you about?
Luke Sophinos:Not focusing basically, constantly trying to lessen your market size. Make it smaller and smaller and smaller. So most people obsess over market size, a, especially investors. I think the more you kinda shrink your market size and the more you hone in and just focus, focus, focus on solving a set of problems for a very defined customer base, the more they can't live without you and you can, and you can definitely kind of accelerate and grow that. It it's not about growing your market size.
Luke Sophinos:It's about shrinking it.
Michael Houck:That's a good one. You can increase your leverage with them. Cool. Well, Luke, thanks for coming on, man. This was great.
Michael Houck:Where can folks find you? Where can they find the bible? Where can they find everything vertical SaaS?
Luke Sophinos:Yeah. So I'm I'm active on Twitter. It's x.com, at Luke Sofinos. And then I also have a newsletter over at, Luke Sofinos dot com. It's s o p h I n o s dot com.
Luke Sophinos:And then I'm also I also kinda dropped the the vertical SaaS bible this year. It's vertical SaaS bible.com. Sweet. Well, thanks
Michael Houck:for coming on, man. Good to see you. Awesome.
Luke Sophinos:Thanks for having me. Appreciate it.
Michael Houck:Thanks for listening. I write up my main takeaways from every conversation and make them available to all of our members at foundingjourney.com, along with a bunch of other perks and more content. If you found this conversation valuable, subscribe to Founding Journey on Spotify, YouTube, Apple Podcasts, or whenever your favorite podcast app is. I post a new episode every Thursday. Also, consider leaving us a rating or a review.
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Michael Houck:next time.