Vertical SaaS (vSaaS) has been and will continue to be a high priority area for investors. Integrating payments into this strategy can be highly lucrative, but execution quality varies significantly across different funds. In this series, we’ll be interviewing private equity investors who are actively engaged in this space. We’ll explore their insights on identifying promising investments, best practices for onboarding vSaaS companies into their portfolio, and the key strategies they recommend for driving the most value.
Founded in 2007, Long Ridge partners with founders and management teams with the goal of building some of the fastest-growing companies in the financial and business technology sectors. Through this experience, the firm understands the unique challenges and opportunities that growth companies face in taking their businesses to the next level. Sohum Daftary (Senior Associate) and Doug Nelson (Principal) are actively involved in all aspects of the firm’s investment process, from origination and due diligence through deal structuring, execution, and post-investment portfolio management. Sohum and Doug work closely with Long Ridge’s executive teams to support growth initiatives and build world-class businesses.
Q&A
Q: What misconceptions do SaaS companies have when integrating payments into their business models?
A:
Doug: One misunderstanding is what it takes from a team perspective to make a payments monetization strategy work. Oftentimes, a software company will say, “I’ll just embed Stripe. I don’t need to staff this with any payment specific talents. And if I build it, the merchants will come, right?” In reality, it’s a lot more complicated than that. So if you take a thoughtful approach to designing your payments strategy upfront and you staff it appropriately with a team who can both manage the operations and communicate the value proposition of integrated payments to an end merchant, then ultimately you’re going to be more successful in driving growth through payments monetization.
Q: How does the sale of payments differ from traditional software sales for SaaS companies?
A:
Sohum: Primarily in revenue structure, integration complexity, and compliance requirements. Payments revenue is predominantly transaction-based, so growth depends on transaction volume rather than just user counts, which can lead to greater unpredictability in forecasting and return on sales and marketing spend. Operationally, payments solutions require deeper integration into a customer’s tech stack, adding complexity and extending the onboarding timeline compared to standard SaaS. Security and compliance are also central in payments sales, with regulations like PCI DSS shaping both the sales conversation and ongoing operational support. While this can add friction in the sales process, the benefit is a stickier, longer-term customer relationship that’s harder to transition.
Q: How does embedded payments compare to other forms of embedded finance, such as embedded lending or banking as a service?
A:
Sohum: Each has their own value chain, with varying margin and risk. Embedded payments, lending, and BaaS, for example, differ mainly in usage frequency, revenue models, and integration complexity. Payments have frequent transactions with lower margins but scale fast, while lending can offer higher margins through episodic loans tied to credit risk. BaaS provides stable revenue from accounts and APIs but needs deeper infrastructure and can be more difficult to underwrite through banking partners. Payments integrate easily at checkout; lending requires complex credit systems, and BaaS needs full banking compliance, making each suited to different business needs.
Doug: If I were to compare and contrast a couple of the strengths and weaknesses of embedded payments versus, say, embedded lending, we like embedded payments for a few key reasons. First, it’s a very powerful economic model. Depending on the vertical in which you’re operating, you can get access to a recurring stream of cash flow that allows you to be more effective in the way that you price your software offering. Over and above that, the resources that are available today as an ISV, if you’re trying to embed payments, are far greater than what was available seven or eight years ago (with Forward being a great example of that type of new infrastructure provider). By contrast, embedded lending requires a different set of partnerships and a different mentality around growth versus risk that I think a lot of companies lose sight of. It’s very easy to grow a book of loans–you’re giving away capital. It’s much more difficult to grow a book of loans profitably with an eye towards proper risk management, collections, underwriting, etc. So if I were to place a bet, all other things being equal, I would place a bet on an embedded payments model versus an embedded lending model for those reasons.
Q: What are the most common mistakes that payments-focused SaaS founders make at the growth stage?
A:
Sohum: At the growth stage, companies that want to integrate payments into software should 1) position their product as the system of record, i.e., the mission-critical tooling to run a store, service, etc. and 2) constantly look for ways to solve their clients’ problems – whether it’s accepting card-based or other forms of payments, simplifying UX for employees and end customers, prioritize compliance, providing visibility into operations, etc. To do this, teams need to have excellent, proactive customer success organizations that stay on top of clients and communicate with product and sales orgs.
Q: What are some of the key risks and obstacles involved in offering payments as a SaaS company?
A:
Sohum: There’s a range of risks and different ways to slice who “owns” that risk, depending on the level of integration with the processor. It’s important to understand how issues such as chargebacks or fraud impact your business. For example, does that get passed onto your payment facilitator? How much risk appetite does your payment facilitator have before they shut you down? On the flip side, by taking on greater “risk” and owning the underwriting process, software companies can increase their margins, and typically, this happens as operators trend in this direction after becoming more familiar with payments processing.
Q: What do you see changing in this market over the next five years?
A: Sohum: I think one of the big trends is outsourcing. Rather than building it yourself, you’re going out and finding best in class providers for payments. I think you’ll also see folks integrating card issuing and card acquiring to enable end clients to better manage working capital and unlock efficiencies.
