Small Business: Tech’s New Frontier

During the past decade, Enterprise SAAS companies have received the lion’s share of investor capital.

Salesforce is the pioneer, making CRM an absolute necessity for any sales organization to function. But companies like Palo Alto Networks (cybersecurity), Snowflake (data), Datadog (appdev), etc… have proven that enterprise SAAS is the safest bet for a solid multiple in any VC portfolio. They may not be the consumer product (like a Facebook) that can cover the entire portfolio with a 50x multiple, but the business model (annual contracts that automatically renew) with significantly lower operational cost (cloud-based vs. servers) results in sticky revenue, low churn and high-growth potential if the market responds to the problem they solve.

Due to the success of companies above, and VCs looking to bolster their portfolio with SAAS “hedges” to cover consumer products that don’t pan out, the amount of capital flooding the early-stage SAAS market over the past 5 years has been nothing short of awesome.

Market forces are changing in 2022. Enterprises have invested/built a lot of infrastructure around major SaaS deployments, while any upstart “disrupter” aren’t innovative enough to justify a rip and replace. Though Salesforce can be a bit clunky, would you really swap it out with a new CRM?

Additionally, while small and cheap tools that plug-and-play into cornerstone platforms may provide additional value, tech stack ecosystems have simply become too large for Director’s to derive much value from each and every one.

Plus, the functions (e.g. security, devops, engineering) that have larger budgets for all these tools are inundated with so much sales activity that value props are becoming white noise. PLG may solve a lot of these issues for products that provide additional value, but the fact is, most organizations are now leveraging hundreds of SAAS products at any given time, while the marginal utility of another one has become very low.

Digital transformation in the small business space is (not so) quietly generating the highest growth potential moving forward. Companies like Toast, products that help digitize the restaurant industry, Bill.com, back-office software for small business operations to run efficiently, and HubSpot, CRM and inbound marketing solutions for the SMB, are $10B+ public companies and early winners in this new paradigm shift. While the enterprise has become “softwared-out,” these companies saw an opportunity to focus on being the sole provider of digital transformation, for a large target market that had yet to embrace technology.

Stripe is probably the best example, as they are currently the highest-valued private company ($90B) with a mission to become the payment processor of choice for all small businesses.

Adjacent markets, like Amazon and Shopify aggregators (e.g. Thrasio, Perch, etc…) also center their value prop around helping small businesses that are scaling beyond what they can handle to become more efficient through acquisition.

Over the next 10 years we’ll see the same growth and maturation in this market that we saw with Enterprise SAAS between 2011 and 2021. But eventually, every small business will reach a point where most (if not all) of their software needs are taken care of. What’s next? The emergence of the “creator economy,” with solopreneurs able to generate significant revenue from platforms like Youtube, podcasts, Medium, etc…, will need to incorporate themselves. A number of “picks and shovels” products & services will be required to serve them.