The artificial intelligence landscape is undergoing a transformation. While the first wave of AI has been led by horizontal AI (general-purpose tools like ChatGPT, Claude, and Gemini that apply across industries), the second wave will be dominated by vertical AI. These industry-specific models, trained on niche datasets, workflows, and compliance needs, are poised to deliver real business value. But what exactly sets vertical AI apart, and why is it the future of AI investment?
Horizontal AI vs. Vertical AI: Defining the Difference
Horizontal AI refers to AI models designed for broad, cross-industry use. These include large language models (LLMs) like ChatGPT, which can generate content, summarize text, and answer general queries. While powerful, they lack deep domain-specific knowledge and struggle with industry-specific workflows and terminology.
Use Case: A marketing team might use ChatGPT to generate blog post ideas or social media copy, but it wouldn’t be effective for drafting an industry-specific regulatory filing.
Vertical AI, on the other hand, is built for specific industries like healthcare, finance, legal, manufacturing, and beyond. These models are trained on proprietary or industry-specific datasets and understand the unique language, regulations, and workflows of their respective sectors. Rather than providing generic AI-powered assistance, vertical AI integrates deeply into business processes, improving efficiency and outcomes in ways horizontal AI cannot.
Use Case: A legal AI model trained on case law and contracts can assist lawyers in drafting legally sound documents with compliance considerations in mind, something a general-purpose AI cannot reliably do.
Why Generic Models Fall Short in Industry-Specific Use Cases
One of the biggest limitations of horizontal AI is its lack of domain-specific expertise. A generic model like ChatGPT can generate a broad range of responses, but without access to proprietary industry data, it often fails in specialized use cases. For example, if you ask ChatGPT for a detailed legal contract review or an accurate financial risk assessment, it may generate plausible-sounding but legally or financially flawed responses. This risk of hallucination and misinformation is particularly problematic in regulated industries such as healthcare, finance, and legal services, where precision and compliance are non-negotiable.
For example:
- A horizontal AI tool might confidently generate an incorrect medical diagnosis based on incomplete data, which could mislead healthcare providers.
- In finance, AI-generated investment advice could violate regulations if it doesn’t properly account for risk disclosures.
- In legal settings, a generic AI model might misinterpret case law, leading to incorrect contract drafting.
These risks make generic AI untrustworthy for industries where accuracy is paramount. Businesses can’t simply plug ChatGPT into their existing industry workflows without significant customization, testing, and tweaking, making implementation costly and time-consuming.
The Data Advantage: What Makes Vertical AI Unique?
The power of vertical AI lies in its data. Unlike horizontal AI, which is trained on publicly available datasets, vertical AI is fueled by proprietary industry-specific data sources, such as:
- Enterprise data from internal business processes
- Regulatory and compliance data unique to specific industries
- Customer interactions and operational workflows
- Industry partnerships and proprietary databases
This access to niche data enables vertical AI to deliver highly accurate and context-aware insights, significantly reducing errors and enhancing decision-making.
Vertical AI vs. Vertical Software: Understanding the Investment Landscape
Investors have long been familiar with vertical software, which builds tailored solutions for specific industries. Vertical AI takes this a step further by embedding artificial intelligence into these industry-specific platforms. The key distinction lies in where the AI innovation happens:
- Vertical software is primarily about workflow automation, with AI as a feature.
- Vertical AI builds intelligence into the core of the product, leveraging domain-specific models and proprietary datasets to deliver decision-making capabilities, predictions, and process automation.
To better visualize the difference, consider the following examples:
| Category | Primary Focus | Example Use Case |
| Vertical Software | Automates industry workflows, may include AI as an add-on | A CRM tool tailored for real estate professionals that streamlines customer interactions but doesn’t inherently make decisions |
| Vertical AI | AI-driven decision-making integrated deeply into industry processes | An AI-powered legal research tool that interprets case law, predicts case outcomes, and assists in contract drafting |
The most successful vertical AI companies will not just serve as AI assistants but will evolve into platforms with embedded intelligence, becoming the system of record or system of intelligence for their industry.
The Business Case for Vertical AI
From an investment perspective, vertical AI presents compelling advantages:
- Stronger ROI and monetization: Businesses can directly measure cost savings, automation efficiency, and revenue impact.
- Lower churn and higher stickiness: Embedded within daily workflows, vertical AI solutions become indispensable.
- Data network effects: Over time, these AI models become more powerful as they ingest more proprietary data from industry-specific users.
- Regulatory alignment: Designed with industry compliance in mind, vertical AI is far more trustworthy than generic models.
- Competitive moat through integrations: Deep connections with existing enterprise software and industry-specific tools create long-term defensibility.
Who’s Leading the Vertical AI Charge?
Several companies are already demonstrating the power of vertical AI, including York IE portfolio companies:
- VLM Run: AI-powered workflow automation for logistics and supply chain management.
- Alivo: AI-powered platform for roofers
- Givzey: AI-powered tools for non-profit fundraising and donor engagement.
These startups are leveraging proprietary datasets, workflow automation, and deep integrations to build highly specialized AI-driven platforms that redefine their respective industries.
The Future of AI Investment: Why Vertical AI Will Win
The next AI wave belongs to vertical AI. Unlike horizontal AI, which struggles with real-world industry applications, vertical AI aligns seamlessly with business needs. It is defensible through proprietary data and user behavior, deeply integrated into industry workflows, and poised to deliver tangible ROI.
For investors, this represents a massive opportunity. The most successful vertical AI companies will not just build AI assistants; they will create intelligent platforms that become mission-critical systems within their industries. As AI continues to reshape the business landscape, those who invest in vertical AI today will be leading the industries of tomorrow.
