There has been something of a de facto rule that software companies have adhered to over the past few decades: Focus on selling to large businesses.
This dogma has existed for several reasons. First, acquiring customers is expensive and the traditional marketing channels used for customer acquisition like Google Adwords and Facebook have skyrocketed in cost. So, the only way to have a viable business with high sales and marketing costs is to sell contracts valued in the hundreds of thousands of dollars. Second, larger companies are highly incentivized to adopt new technologies, given that the cost of being on an outdated technology system could potentially mean losing millions of dollars a year.
We’ve seen some incredible companies build multibillion-dollar businesses on the backs of enterprise customers, from Oracle to Snowflake. But as we look ahead to the next decade, selling to small and medium-sized businesses may, in fact, be one of the biggest untapped opportunities for tech companies.
SMBs: Underestimated, underserved, underappreciated
Small and medium businesses are the unsung heroes of the U.S. economy. They represent an enormous share of the economy, and yet few realize just how integral they are.
There are 32 million small businesses in the U.S., representing 99 percent of all businesses in America and accounting for roughly 50 percent of the U.S. workforce. Small businesses also create two-thirds of net new jobs and represent 44 percent of GDP.
What’s more, even with fewer than 100 employees, some small businesses can generate tens of millions of dollars in revenue. Take Life’s Abundance, a healthful pet food small business based in Jupiter, Fla., which made $38 million in revenue in 2018 with only 51 employees. Or Spikeball, the company behind the volleyball-inspired sport with a trampoline-like net, which made $19 million in 2018 with 23 employees. Some gas stations make $2 million of top-line revenue with a handful of employees. An auto-mechanic shop with four to five employees can make $500,000 to $1 million.
Today, the majority of these mom-and-pop shops do most of their daily business operations — think scheduling, payroll, customer support, invoicing, accounting, paying bills, etc. — with either pen and paper or generic tools that they have to augment with other systems in order to work for their needs. This isn’t because they are unsophisticated; just the opposite: running a small business is a lot harder than showing up at a cushy tech job with free food. It’s mostly because, to date, small-business software-development efforts — including products, marketing, and customer support — have mainly targeted big enterprises.
Two major tailwinds are making selling to small businesses more attractive. First, there is a generational shift happening whereby small businesses are being passed down to younger owners. Second, consumers are demanding Google-like experiences from the everyday mom-and-pop shop. A consumer would like to text her nail salon for appointments and pay over SMS; a car owner would like to streamline car-maintenance appointments, and people would like direct deliveries from their favorite local grocery stores or coffee places.
Despite these trends, there are still risks in selling to small businesses. About 30 percent of new companies go out of business within their first year. This can lead to high churn if you are a tech company selling the software. That said, if used currently, software can play a significant role in the long-term success of that business.
What will SMBs buy in the next decade?
While overall IT spending from SMBs will certainly grow, there are five areas where I expect increasing demand from small businesses for new, relevant, affordable technological solutions:
- Payroll. The rise in flexible work arrangements (aka the decline of typical 9-to-5 work schedules) has made a lot of HR and payroll software obsolete. In order to attract and retain talent, SMBs will need payroll solutions that fit their specific way of compensating employees, such as commissions, tips, time off, break time, etc. Two-thirds of SMBs today still use offline payroll solutions.
- Accounting, finance, and HR. Almost half of the small businesses (45 percent) employ neither an accountant nor a bookkeeper, meaning they have the burden of keeping their books themselves. While Quickbooks has been dominant for some time, many businesses would like to completely outsource bookkeeping so they can focus on their core work. In addition, 25 percent of small businesses still record their finances on paper, instead of on a computer.
- Cybersecurity. Small businesses have begun bearing a greater burden of cyberattacks, yet very few are prepared for them. Consider that 43 percent of cyberattacks were focused on small businesses; however, according to a recent report from Accenture, only 14 percent of small businesses are prepared to defend themselves. With attacks costing an average of $200,000, small businesses need affordable, easy-to-deploy solutions that are relevant to the threats they’re facing, not out-of-box software designed for a personal-computer user or a Fortune 500 company.
- Remote collaboration. The labor market isn’t just historically tight — it’s also changing shape. As remote work becomes the new normal, employees need ways to coordinate, creating opportunities for cloud-based and mobile-friendly work-productivity applications.
This is by no means an all-inclusive list of the opportunities that SMBs will create over the next decade. The most important point is a broader one: Small businesses are growing, and they’re looking to technology to supply their core competitive advantage.
With their limited size, pace of growth and reliance on technology, they will require that founders, VCs and Wall Street rethink the conventional wisdom of software, sales, and success.