According to a Gartner, vertical-specific software is by far the largest category of the software market posting $100B in sales in 2013 and accounting for 28% of the market. The second biggest category, operating systems, holds only 8% of the market, ahead of database management systems, ERP, middleware and security.

$100B is a surprisingly large number given that customers in many vertical markets are notorious laggards when it comes to adopting technology. Most still rely on paper-based, manual processes and the majority of the $100B software spend is on legacy technology.

Going forward, we believe the total opportunity in vertical markets is far larger than Gartner’s $100B. Replacing manual processes is perhaps an order of magnitude bigger… 10 x $100B is literally a trillion-dollar opportunity!

Consumers Lead the Way (Again)

Inspired by ease-of-use of sites such as Amazon.com and eBay, Salesforce.com kicked off the SaaS industry, and consumers have led the way in other markets ever since. With the proliferation of mobile and cloud technologies, software will penetrate industries that were previously impervious to change.

Consumer Internet companies such as Priceline, Uber, Airbnb, Expedia and Zillow are transforming their vertical markets (travel, hospitality and real estate) and are already valued at $150B.

Software in Disguise

As software eats the world, more and more vertical markets will be transformed. However, the next-generation technology companies may not sell software at all. For example, companies such as Google and Facebook view themselves as software companies but do not make money selling software.

Many next-generation B2B companies that transform their industries may not be software companies in the traditional sense. Instead, they may provide a service, a product or complete solutions such as BPO (business process outsourcing) or DIFM (do-it-for-me) services.

For example, Athena Health ($5B market cap) offers healthcare providers a combination of software and business services that range from eligibility verification to insurance claims submission. The company has been described as an “an excellent illustration of SaaS-enabled BPO.”

Straying even further from software sales, Vesta, whose software helps detect credit card fraud in transactions, decided to sell a fraud loss indemnification solution to its telco customers. Vesta grew for the next 10 years, guaranteeing billions of dollars in transactions for carriers on its way to achieving Inc. Magazine Hall-of-Fame status by making it on the Inc. 500 list five years in a row.

• Accounting

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Beyond Silicon Valley

Great vertical market software companies get created wherever there is deep domain expertise. Out of the top 32 publicly traded vertical software/solutions companies valued at more than $1B, only four (12.5%) are based in Silicon Valley. The other 28 companies representing 94% of the market capitalization are headquartered in cities such as Bedford, Charleston, Chicago, Landover, Oleathe and Plano.

Two vertical software companies, valued at more than $11B apiece and virtually unknown in Silicon Valley circles are Verisk Analytics, based in Jersey City, and Constellation Software, based in Toronto.

As we’ve gotten more serious about finding vertically focused companies, we’ve had to travel. During 2014, more than 90% of Altos Ventures’ capital deployed in new investments funded companies based outside of California.

Disclosure: Altos Ventures is an investor in several DIFM companies including Bench and OutboundEngine.