Thinking Inside The Box
Industries ripe for ‘Business in a Box’ disruption
Small businesses are core to the US economy. Over 30M small businesses employ nearly 60M people in the US or 47.5% of the private workforce. While starting a small business has many advantages — independence, autonomy, and flexibility — it’s harder than it looks. After 5 years in business, nearly 50% of small businesses fail.
Running a small business is hard because small businesses are well, after all, small — they don’t benefit from economies of scale or negotiating leverage like large businesses. Instead, they rely on local connections and loyal customer relationships for success. My great-grandparents were small business owners. Their BBQ restaurant, The Little Acorn, was successful in its heyday but ultimately closed when they retired, as it was too much effort to transition to new management.
While small business owners are skilled at their particular trade, most don’t get into the business to manage spreadsheets, place orders, and schedule temp workers. Common reasons for failure often revolve around these non-core tasks. Poor inventory management, bad credit arrangements, and an inability to manage growth in a sustainable way are the top reasons why small businesses ultimately go out of business.
Startups have an opportunity to build software solutions to help small business owners accelerate growth. And those that gain scale themselves can subsequently pass along scale benefits to their small business customers (SMBs). By acquiring and aggregating data from small businesses, startups that gain scale themselves can pass along scale benefits to their small business customers — e.g., by providing aggregate customer insights, by passing along favorable supplier rates, or by offering fair credit arrangements.
My partner Alex Taussig has written about the opportunity to better serve ‘micro firms’ with vertical software solutions in his post on ‘business in a box’ platforms — click here. He defines ‘micro firms’ as SMBs where the owner is the sole decision maker and writes,
“… a microfirm owner doesn’t have time to play around with complicated software. She expects anything she uses in her business to take work off her plate and allow her to focus on her customer and the service she provides. She is looking for products that feel more like Facebook, Uber, and the other consumer apps she’s accustomed to. And, she really doesn’t want to talk to a salesperson before using it.”
If you’ve already read Alex’s article, skip to “Where to Build” section of this post to learn more about industries ripe for BiB disruption, otherwise continue on reading to learn more about characteristics of BiB platforms and why now is a good time for entrepreneurs to build BiB platforms.
What’s in the Box?
A ‘business in a box’ (BiB) platform offers a small business owner the ability to centralize and manage all core functions of the business through a single software layer. At Lightspeed we believe BiBs have three core characteristics:
- Industry-specific features — A BiB must offer a free software solution to run the most critical functions of the business. For a preschool, that may mean messaging parents and collecting tuition. For a construction firm, that may mean ordering materials and coordinating deliveries. For an outpatient center, that may mean staffing nurses and ordering medical supplies.
- Payments integration — A BiB integrates into the customer payment inflow, and often into vendor outflows. From these payment flows, the BiB ultimately extracts a rake to compensate for its free software. It can also provide financial services to both sides of the business in order to drive more liquidity and solve market inefficiencies.
- Customer acquisition support — To justify its rake, a BiB must generate demand for the business. This tight integration between software, payments, and marketing effectively gives a micro firm everything it needs to run the business. Instead of dealing with administrative overhead, the owner can focus on what makes her micro firm special.
The best ‘business in a box’ platforms provide network effects for the long tail of small businesses in the platform’s ecosystem. These benefits may include better negotiating leverage or even better representation in lobbying and legislation. Scale benefits often include increased brand reach, brand equity, and ultimately lower cost of customer acquisition.
Lightspeed has invested in a number of business in a box companies including Faire, Oyo, and ezCater. Faire is a great example of a BiB, as it connects independent brands (mostly SMBs) with independent retailers (also mostly SMBs). Retailers are able to access new and differentiated brands for their store assortment and brands get broader reach. Payments integration enables Faire to provide Net 60 terms to retailers and offer free returns. Retail-specific features, like search and navigation filters that allow for search related to specific criteria (e.g., are handmade, made in the USA, or contribute to social good) help retailers save time and curate a better assortment.
The gig economy is failing temp workers. Workers face low wages, unpredictable schedules, and receive limited benefits. Furthermore, most gig jobs are commoditized and undifferentiated — workers aren’t able to develop and magnify their superpowers.
‘Business in a box’ platforms are well-positioned to offer workers a way out of gig work into more stable, enriching, and entrepreneurial employment in industries with strong labor demand. They provide a path to training and licensing. They help workers learn a trade and establish a business. And they allow the worker to focus on that trade, rather than ancillary business administration.
An impending rise in automation means there will be a necessary shift in demand for labor across industry verticals. In some cases, workers may be forced to re-skill (e.g., because of the rise of driver-less cars). In other cases, workers may identify an opportunity for higher earnings potential and autonomy in industries with high demand. In either case, gig workers, used to platforms like Uber and Lyft, will seek BiB platforms with an easy UX and a centralized feature set. They’ll be comfortable with self-onboarding and will play a critical role in testing and co-developing the feature-set alongside the BiB.
Where to Build?
The best positioned ‘business in a box’ companies will address sufficiently large and growing markets with robust SMB populations and the ability for newcomers to start from scratch — i.e., industries where some skill is required, but not a four year degree or postgraduate education. In identifying industries ripe for disruption via ‘business in a box’ business models, I’ve considered the following characteristics: 1) industry size, 2) share of SMB workforce, 3) growth potential, and 4) labor mobility (e.g., ability for labor supply to grow in response to an increase in demand).
Industry size & SMB share
The top 5 SMB industries (by size of SMB workforce) account for 55% of all SMB workers today (32M people). These industries include healthcare, hospitality, retail, manufacturing, and professional services. The percentage of the SMB workforce in each of the top 5 industries varies from 35% (retail) to 60% (hospitality). While smaller size-wise, the construction, wholesale trade, and education industries have a relatively large percent of their workforce classified SMB workers — see the graph below.
Of the top 5 sectors, healthcare is expected to grow employment most rapidly, at 1.6% compound annual rate of change (CAGR, 2018 to 2028). Construction and education, while smaller in size today, are also expected to see strong employment growth over the next 10 years — at 1.1 and 1.2% CAGR, respectively. Retail and manufacturing, while large, are likely to see declining employment at -0.1% and -0.5% CAGR, respectively.
Labor mobility is the ability for newcomers to establish themselves and quickly be successful in an industry. Mobility is constrained in areas with high education and licensing requirements — e.g., in finance and professional services fields where a 2–4 year degree is required. Mobility is less constrained in areas like retail where special training and licensing isn’t required. While unconstrained mobility can be a good thing, it can be a bad thing when the industry gets too crowded, and thus it’s hard for SMBs to differentiate and find long-term success.
BiB platforms are best suited to industries with a medium-level of mobility (e.g., healthcare, construction, education) because they can help SMBs differentiate and get the licensing or training needed to participate in the economy.
Industries ripe for BiB
When evaluating industries against these criteria, there are a few that stand-out as attractive for SMB-oriented ‘business in a box’ platforms: healthcare, hospitality, professional services, construction, and education.
Several of these industries already have some ‘business in a box’ platforms in market — e.g., Airbnb and Oyo for hospitality, WeeCare and Wonderschool for education. However, across the board there are still several opportunities for new platforms to enter and innovate. Below I’ve gone in-depth on the three fastest growing industries: healthcare, education, and construction, to show how ‘business in a box’ platforms can disrupt each industry. The post is long, so feel free to skip ahead to the industry (or industries) that interest you most.
I’ve outlined various companies in each industry on a spectrum — from marketplace business at one end of the spectrum (e.g., focus on acquisition) to full BiB on the other end of the spectrum (e.g., focus on acquisition AND industry specific features AND payments). In other words, businesses closer toward the BiB end of the spectrum have more features and functions that help a micro firm get started and operate in a comprehensive way relative to those on the other end of the spectrum.
The healthcare sector is the economic sector with the largest number of SMB-based workers today — nearly 9M. The industry is expected to see the greatest increase in demand for labor over the next 10 years, driven by the aging US population. Over 1M additional workers will be needed to fill home health aide and personal care aide jobs. An additional 155K medical assistants, 80K mental health professionals, 55K nurse practitioners, and 37K physicians assistants will be needed. SMB workers comprise 45% of the worker base and are largely individual providers or otherwise concentrated in small clinics. In the home and personal care aides segment, 800K of the 2.2M workers are employed directly by consumers, rather than through an agency.
‘Business in a box’ platforms in the healthcare industry have an opportunity to serve individual providers, small clinics, and staffing agencies. For nearly all use cases, a key function of the ‘business in a box’ platform is acquisition. Clinicians and caregivers need help acquiring new customers. Staffing agencies need help acquiring new talent. Platforms can leverage their brand and benefits to attract new customers and new talent.
Healthcare BiB platforms can also help small businesses with a number of industry-specific, yet non-core and time consuming functions. For example, platforms can enable more streamlined ways to collect and manage data, order supplies, manage inventory, and manage administrative touch-points (e.g., patient communication, insurance and billing). Industry-specific features can also help clinics and their staff keep pace with ever-changing healthcare regulations and insurance billing policies.
Payments features are less relevant to healthcare BiB platforms, as payments are usually complex, as they already involve a third party — the payor (e.g., an employer-sponsored health plan or insurance company).
Today’s ‘business in a box’ platforms in the healthcare industry are largely focused on supply-side acquisition (i.e., digital staffing agencies) and industry-specific features to manage key features like ordering and inventory management and patient communication.
For staffing, platforms like Nomad Health, Trusted Health, and Incredible Health help medical professionals find new and often more flexible jobs. For example, workers can search opportunities by shift, specialty, or location. This increased flexibility enables healthcare systems to unlock underutilized and non-traditional sources of labor that are otherwise excluded based on inflexible shifts or untenable geographies.
On the inventory side, startups like Torch Dental (for dentist offices) and Vetcove (for vet clinics) offer clinics the ability to streamline ordering and inventory management on one platform. Clinics can realize cost savings and reduced ordering times by using these platforms, as the platform has negotiated favorable rates on behalf of its clinics.
Startups like Doctible and Sympto Health provide tools that streamline communication for things like scheduling, symptom management, and procedure follow-up. These platforms have the ability to collect data across several small clinics, ingest, and thereby make better recommendations on required follow-up involving the doctor. This helps clinics optimize cost and produce better outcomes.
On the non-medical caregiving side of the healthcare industry, companies like Honor and Hometeam provide more comprehensive ‘business in a box’ solutions for home health aide agencies. For example, Honor works with local agencies to provide a ‘complete operations solution’ via tools like the Care Pro App. The company helps local agencies recruit caregivers and also helps families find caregivers. Agencies benefit from the Honor brand and are able to take advantage of ‘digital marketing and sales best practices.’ The Honor website notes that agency partners grow their by 30% after just three months with Honor.
The best ‘business in a box’ platforms in the healthcare industry offer a suite of vertical solutions that allow caregivers and clinicians to do what they do best — focus on providing the best care for their patients.
The education industry is a much smaller industry than healthcare, with a total of 3.6M workers vs. healthcare’s 19M. The percentage of SMB-based workers is similar, with 44% of the workforce (1.6M people) based in an SMB setting — for example, a small school or tutoring practice. To-date the industry has been largely staid and low-tech.
The education sector is growing at a 1.2% CAGR over the next decade, thereby making it the second-fastest growing industry by employment (second only to healthcare). The primary and secondary education workforce is aging out, requiring new teachers. The demand for educators for post-secondary health specialties is ramping up quickly, with an additional 70K needed over the next 10 years.
New learning technologies and modes of educational delivery (e.g., live streaming, self-directed study, home-based learning) are now commonplace, creating an opportunity for ‘business in a box’ platforms to enable teachers and tutors to independently create courses, curriculum, and even schools for a variety of learning audiences.
‘Business in a box’ platforms in the education space have an opportunity to serve teachers and tutors by offering platforms for new student acquisition. BiB platforms can also help teachers and tutors better run their business by managing licensing, providing photo-sharing features and curriculum-building features. These platforms can facilitate tuition payments and subsequently monetize by taking a cut of tuition.
The education industry has seen a large amount of activity in the ‘business in a box’ space to-date, as VC-backed startups like WeeCare and Wonderschool tap into strong demand for high quality and affordable preschool education. These startups focus on the full suite of needs — supply acquisition, demand acquisition, and core business functionality (curriculum development, parent communication, tuition payment).
Prenda is another ‘business in a box’ platform tackling the education space, with a focus on primary school education. Prenda’s teachers, or ‘guides’ as they call them, open micro-schools for small groups of students. Prenda helps with student acquisition and provides the curriculum.
The construction industry employs 6M people, the large majority of whom (82%) work in an SMB setting. The industry is expected to experience the third-fastest growth in employment, behind healthcare and education. The demand for new workers is largely driven by today’s aging workforce and limited interest in construction jobs among younger generations. The lack of interest is often attributed to the elimination of applied technology classes in high school in the 1990s and early 2000s (source).
The industry is no stranger to tech-based platforms, as several local services startups help providers (contractors, handymen, plumbers, electricians) find new customers. For example, Thumbtack and Angie’s List aggregate customer demand and syndicate service requests to local providers in return for a small fee. While these services are helpful for marketing and lead-gen, there’s an opportunity for ‘business in a box’ platforms to offer even more comprehensive functionality to help these businesses run better and ultimately differentiate and elevate their services.
Customer acquisition and payments is table stakes, given existing platforms already do it quite well. Given this, new ‘business in a box’ platforms in the construction industry must offer differentiated support with industry-specific tasks like scheduling and routing, payments, and record keeping. Platforms that offer these additional capabilities will be able to provide service professionals with better job matching (based on experience, expertise, availability) and better job routing (based on job locations), thereby enabling a better customer experience and higher customer loyalty.
We’ve already started to see a shift from pure marketplaces and directory-based lead-gen models to managed marketplace models that reflect some of these ‘business in a box’ capabilities. For example, Puls, a home services platform, provides local services pros with a ‘Puls Technician App,’ which allows technicians to build and manage their schedule, follow the proposed route, and communicate with customers. This standardization and centralization simplifies back-end work for pros and enables a seamless and consistent customer experience.
Several other early-stage startups are taking a managed and centralized approach to the home services industry, effectively creating a ‘business in a box’ type offering for their service providers. These startups include Setter and Sheltr, which are positioned as home maintenance platforms. A concierge-based interface streamlines the consumer experience, enabling the platforms to better control and allocate the flow of jobs to service providers.
Outside of the home services space, there are a few ‘business in a box’ startups focused on ordering, delivery, and inventory management for construction supplies. These startups include Toolbx, RenoRun, and Curri. These companies are taking on time consuming, yet non-core functions of the business so providers are able to focus on higher-return activities.
The best ‘business in a box’ solutions in the construction industry will provide managed marketplace solutions — i.e., platforms will consolidate leads and provide scheduling/routing for SMBs, while serving as the single point of contact for consumers. Customers will interact with the platform vs. the SMB, thereby freeing up the SMB’s time to focus on their core capability and providing customers with a streamlined experience.
‘Business in box’ platforms will drive the economy forward over the next decade, as they’ll enable new employment growth and greater operations efficiency in fast-growing sectors critical to the economy — healthcare, education, and construction. The best platforms will offer indispensable support for core business functions, including customer acquisition and back-end optimization. While SMBs will be required to give-up some data and potentially some autonomy, they’ll benefit from the scale, geographic reach, and brand equity of the associated platform. This scale will help turbo-charge growth in a way they couldn’t achieve on their own.
If you’re building a ‘business in a box’ platform for SMBs, I’d like to hear from you. Please send me a note at email@example.com
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