Why we love the SMB Market

When you look at the portfolios of most venture funds, you will see plenty of companies that serve enterprise and plenty that serve consumer. Strangely, despite the fact that small and mid-sized businesses (SMB) represent the vast majority of our economy, SMB-focused startups are relatively under-represented in the venture economy.

The reason for this is that it’s hard to build a big company when you sell to really small customers. If you charge $20/ month, you need a ton of customers to generate big revenues.

In addition, an unavoidable consequence of serving those small customers is that many of them go out of business. It’s very common to lose 1/4 of your customer base every year through churn.

Despite these challenges, we love the SMB market and have made it one of our core focus areas at SurePath. Here’s why:

SMB is a global, evergreen market

There are 30 million small businesses in the U.S. There are 60 million in the English-speaking countries and 600 million globally. Entrepreunership is universal.

Because the SMB market is so vast it is virtually impossibe for one player to win a market. There’s always room for new players. There’s always room to consolidate through acquisition to gain market share and new offerings. That means plenty of action for our core fundraising and exit practices.

As just one data point about the opportunity size here: Salesforce loses about $550M in revenue every year due to churn. So, just trying to pick off Salesforce’ lost customers represents a sizeable market opportunity.

Long market cycles

In both consumer and enterprise markets are won or lost relatively quickly. No one would start a social network to compete with Facebook’s core today. That market was won quickly by them.

SMB behaves differently. SMB market segments tend to have much longer life spans. Kaufman Foundation estimates that there are 3 million new businesses started every year. So, whatever your product category you always have an influx of new potential buyers who will be seeing your company and product for the first time.

The implication of this is that you can take your time. It doesn’t mean you move slowly. It does mean that you can build a large company over the long term.

Constant Contact went public relatively early (because the VC markets were not as robust as they are today), but it was 21 years from inception to there acquisition this year by Endurance International. And they still have lots of market to go after.

From Office to Apps

The previous generation of entrepreneurs happily ran their businesses on paper, Excel, Word, etc. They created their own systems. The new generation assumes that whatever need they have as they grow their business, there’s an app out there that solves it. They will find through search or an app store. If they like it, they will subscribe.

Given the size of the market, this change in technology adoption will result in massive growth in every category of SMB software.

Buyer concentration

There were 163 acquisitions of SMB SaaS companies in N. America in the last 3 years. Nine buyers made over 1/2 of those acquisitions. Because it’s so hard to achieve scale in SMB, there are relatively fewer buyers of SMB startups. In order to help our clients achieve meaningful exits we maintain deep relationships with all the most active buyers in the SMB sector.

So, for all these reasons we think the SMB market represents a compelling, long term opportunity to fund, grow and exit great companies.