Vertical Integration is the New Hot Thing

For a long time, services were a boring backwater: thrashy, low-margin work that perhaps needed to get done in service of something worthwhile (such as selling a SaaS subscription) but best avoided for any company that cared about growing quickly and at high margins.

Over the past two years, the tables have turned. Companies that would've sold per-seat software subscriptions five years ago are now rolling out service packages, powered by their own in-house software.

But not every attempt to vertically integrate looks the same. While some companies organically expand into services, others embrace a more aggressive M&A strategy. And venture investors are following the shift, increasingly seeking out companies with a services strategy, a situation that would’ve been incomprehensible just five years ago.

Today's letter will explore the vertical integration trend in real estate tech: why it's happening now, how differently companies are approaching it, and what it means for the industry's investors and entrepreneurs.

The End of the SaaS Premium

SaaS was long the gold standard. Services, in contrast, were seen as lumpy and unpredictable. That distinction showed up directly in the multiples each business model commanded in the public markets, with investors paying a premium for steady SaaS income.

But the SaaS premium is not what it once was. SaaS EBITDA multiples (9.7–12.2x) now overlap neatly with IT services EBITDA multiples (9.8–10.2x public, ~12x on private deals). While it’s not possible to run a perfect comparison between very different companies with very different models, the SaaS premium has clearly deflated over the past twelve months.

Services businesses, on the other hand, are now en vogue.

Take Pulley: it’s a software platform using AI to help commercial real estate firms submit permitting documents. But rather than sell it directly to architecture firms as a software tool, Pulley offers it to developers directly as a service.

"[Pulley] was always this fully managed service," explains Charlie Jacobsen, co-founder of Pulley. "That's what it takes to get great permitting outcomes for complex commercial projects. And it's also what the market demands."