As much as early stage investors stake their claim on identifying "the next big thing", history shows there's probably far more misses than hits. Investors don't know everything, and sometimes we follow a trend too closely (or too late). This is one of the reasons why we started Tercera, an investment and advisory firm dedicated to empowering the next generation of cloud professional services firms. People-based businesses have long been the red-headed stepchildren of venture. We aim to change that. 

But professional services isn't the only market segment that investors have dismissed too quickly, ultimately missing out on billions in returns. Just look at SMB Tech, or for the non acronymers out there, technology designed specifically for Small to Mid-sized Businesses. Even Bessemer Venture Partners, which I believe gets trends faster than most (certainly they did with cloud computing) highlights a number of SMB Tech brands they missed out on as part of their anti-portfolio. Incredible brands like Atlassian, Intuit, PayPal, Okta and Zoom. Hey, we all make mistakes.

I'll start by saying SMB Tech is already big. IDC predicts that total IT spending by SMBs will exceed $676B by 2021. Back in 2018, when IDC's SMB Tech report came out, annual growth was close to 5%, but with the pandemic forcing businesses of every size to get their online presence in order, my guess is that's now on the low end. In the US alone, SMBs represent 99% of all businesses and 44% of the US GDP. Even in a downturn, that is a lot of spending power!

GGV Capital, which recognized the SMB Tech opportunity early on, has been tracking the performance of this category through their SMB Tech Index for a number of years. In the last 8 years, that group of public companies in that Index has grown from an aggregate market cap of ~$15B to more than $200B (check out the chart below).

Jeff Richards and Tiffany Luck, the resident SMB Tech experts at GGV (among many other things) gave a great keynote about the space and why it's taking off at the recent Time to Value Conference. The conference, put on by Traction on Demand, brings together the Salesforce community to discuss ways they can reach their business goals faster.  Here's some highlights from their discussion and why we all should pay a little more attention to (as Tiffany describes it) this trillion dollar opportunity. 

What's Driving Growth in SMB Tech

Back in the '80s and '90s, SMB Tech was not the most compelling market opportunity. Few small businesses had the capital, interest or knowledge to invest in big IT projects or the infrastructure to support them. It was also incredibly hard to scale the sales, marketing and customer service operations necessary to support such a broad, diverse (and dare I say, needy) set of businesses. But, as Jeff and Tiffany point out, that’s changed over the last 15 years. Mainly in these four areas:

1. Cloud. Software-as-a-Service and Infrastructure-as-a-Service have made it faster and easier for SMB Tech companies to spin up new products and services than ever before. When Amazon Web Services (AWS) launched S2 and EC2 in 2006 it was a game changer, and Microsoft and Google have followed suit. These three companies continue to compete, lowering cloud infrastructure costs for all of us along the way.

2. Mobile. Do you remember life before your iPhone? Me neither. But there was such a time. When Apple launched the first iPhone in 2007 it put technology in the hands of everyone. And while it started with consumers, many of whom are also SMB owners, the introduction of pocket sized computing planted the seed for mobile in every corner of the world. The launch of the App store in 2008 also changed the software distribution game.

3. Digital. Just as it’s hard to recall life pre-iPhone, the same goes for social media. Social platforms and digital marketing have made it that much easier for SMB owners to reach their audience wherever they are. COVID-19 has accelerated this and proven that you can no longer just have an offline presence. A digital one is mandatory. Social and digital marketing have also helped with unit economics, making it possible to reach, acquire and retain target customers for a far more reasonable cost that what was possible with traditional sales and marketing techniques.

4. Payments. It wasn’t until the launch of Braintree in 2007 and Stripe in 2010 that the high infrastructure costs of building out and accepting payments for SMBs became a thing of the past. Suddenly new SMB Tech players could integrate payments into their offerings, providing a better customer experience, supplementing revenue streams, and helping with retention. 

What the Best SMB Tech Companies Do Well

So what makes the best SMB Tech companies stand out? Having met with 150-200 SMB Tech companies a year, here’s what Tiffany and Jeff have noticed. Interestingly, many of these are not too different from the best practices we see at Tercera when meeting with professional services companies.

• They focus. Focus is essential in any business, especially in a nascent one. The best SMB Tech players have discipline. They focus their entire business, across all departments, on the SMB customer. They have that customer in mind when formulating their mission and culture, when building and optimizing their products, and when creating and fine tuning their marketing and sales engines. 

• They go horizontal or vertical. Tech companies have been successful selling across industries, and SMB Tech is no exception. RingCentral, Square, Shopify, Wix are great examples of those taking a horizontal approach. However, Jeff and Tiffany have seen a lot of successful companies choosing to go vertical. Mindbody, which focused on delivering online software for the health and wellness space, sold for over $1 billion a few years ago. Slice, which focuses on software for independent pizza merchants, is growing like crazy. Slice's Chief Business Officer talks about the importance of having clarity in our recent Lieutenant Series Q&A.  

• They deeply understand customer economics. The biggest killer for SMB Tech companies is not having a good grasp of the economics around customer acquisition, churn, and overall Customer Lifetime Value (CLV).  All three of these need to work together for a sustainable business, and if leaders only focus on growth, growth, growth without understanding unit and customer economics, it's not going to turn out well.

• They get in the payment flow. The exchange of money (billing and payments) is a critical part of the IT solution stack for any small businesses. Getting into that flow will not only add value by making customers' life easier, if done right, it can also provide a valuable source of recurring revenue for a SMB Tech provider. It makes SMB customers less likely to leave as well. Once a customer has moved billing, payment or customer information to a platform, they're infinitely more sticky.

• They create network effects (when possible). Building an ecosystem around an offering is one of the best ways to create compounding growth, to make your marketing dollars go further, and to keep customers loyal.  Salesforce and Apple are masters at this in my opinion, and some of the best SMB Tech providers are building a network effect into their business models. Jeff and Tiffany highlight companies like Shopify, Square, DocuSign, Etsy, GrubHub, Yelp, Houzz, Dropbox and Toast who all do this extraordinarily well.

The gist of Jeff and Tiffany's session is there's never been a better time to start a new business in this space, or to invest in it. While COVID has wreaked havoc on many small businesses, technology has never been more readily available to help these businesses streamline, adapt, and create. Consider some of these encouraging stats from a survey GGV recently completed with Hello Alice:

• 83% of SMB owners believing their business will improve in 2021 

• 54% spent more on software in 2020 versus 2019

• 75% project spending on software to go up in 2021 relative to 2020

• 93% of SMB owners plan on hiring 2021 

While many small businesses like restaurants and gyms are going under, there are many more being launched even in the midst of the pandemic. In their recent blog, “The Reboot of the US Economy Will Be Built Around Small Businesses,” Jeff and Tiffany point to the fact that applications for employee identification numbers (EIDs) are at the highest levels in a decade, and how SMB Tech sits squarely in the middle of this boom.

It’s true what some say, that with adversity comes inspiration and innovation, and that certainly seems to be happening across the SMB market.