SMB Automation Software
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The document provides an overview of the SMB automation market. Key points: 1) The SMB market is large and fragmented, with over 200 million firms worldwide employing over 1 billion people. However, SMBs only account for about 30% of total IT spending. 2) The SMB market is rapidly growing and changing. SMBs have high rates of turnover and are willing to try innovative solutions. They also have short innovation/procurement cycles. 3) The SMB automation market can be segmented into tools for business formation, growth/customer acquisition, and business management. Current and potential leaders are discussed for categories like ERP, legal/website solutions, marketing, commerce, and more. 4) While the
SMB Automation Software
- 1. 1 1 SMB Automation Sector Introduction and Thesis Patrick Montague
- 2. 2 2 Table of Contents Summary – Reasons for Interest 3-5 Market Size, Fragmentation, Refresh Rate 6, 7 Innovation/Procurement Cycle 8 Macro Tailwinds: SaaS flexibility, internet distribution, bottom up scaling 9 Precedent Cases 10 Investor Landscape Industry Map 12 Lifecycle of an SMB 13-16 Business Formation Tools ERP, Legal, Website/Hosting, Productivity/Communication 17-19 Growth and Customer Acquisition Tools Sales/CRM, Marketing, Commerce/POS 20-23 Business Management Tools HCM, Finance, Supply Chain/Product Development, BI/IT Exit Activity & Incumbent Landscape 25 Current Incumbents 26 Acquisition Activity
- 3. 3 3 Market Size, Fragmentation, Refresh Rate United Sates Sources: SMB Group, US Census Bureau Data, World Bank Estimates (www.smb-gr.com/company/smb-market) Worldwide Small Office/Home Office (SoHo) 1 – 4 Employees (No commercial location) Small Businesses 5-99 FTE Medium Businesses 100-999 FTE & Upper Mid-Market 1,000-2,500 FTE Enterprise 2,500+ FTE 16.5mm firms (72%) 21mm FTE (16%) 8% total IT spend (6-7% spend growth) 6.3mm firms (28%) 55mm FTE (41%) 27% IT spend (7-8% spend growth) 100k firms (0.4%) 25mm FTE (20%) 19% IT spend (6-7% spend growth) 9,000 firms (0.04%) 33mm FTE (23%) 46% IT spend (3-4% spend growth) 137mm firms (68%) 250mm FTE (18%) 10% Total IT spend (7-9% spend growth) 65mm firms (32%) 700mm FTE (52%) 31% IT spend (8-10% spend gr.) 705k firms (0.3%) 225mm FTE (17%) 21% IT spend (7-9% spend growth) 52,000k firms (0.03%) 200mm FTE (13%) 38% IT spend (3-4% spend growth)
- 4. 4 4 IndustryRisk Market Size, Fragmentation, Refresh Rate SMBLifespan 1 Year Survival Rate 2 Year Survival Rate 5 Year Survival Rate 10 Year Survival Rate Annual Turnover Riskiest Industries Least Risky Industries Financing Needs - ~80% - 69% - 49% - 34% - 10 – 12% (~550,000 – 650,000 firms) - Transportation, Apparel, Restaurants/Bars, Communication, Travel Agencies - Real Estate, Insurance, Health Care, Law (i.e. Professional Services and/or Licensed Trades) - $80k/year average (mostly self-funded and bank credit) Sources: US Department of Labor, Bureau of Labor Statistics; US Small Business Administration, Office of Advocacy; Fair Isaac Corporation
- 5. 5 5 Market Size, Fragmentation, Refresh Rate Source: Profit from the Cloud, 2013 Parallels Global SMB Cloud Insights
- 6. 6 6 Market Velocity1 Constant Contact: ~605k cumulative active customers (2% Q/Q growth) ~50k new customers each quarter (~40k churn) Yelp: ~74k active business accounts (13% Q/Q growth) ~35% new reviews from mobile (57mm cumulative reviews) Innovation/Procurement Cycle Source: 1. Company filings Rapidly growing and changing market Willingness to try innovative solutions 0 100 200 300 400 500 600 700 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2012 2013 2014 YELP Quarterly Growth (%, left) CONSTANT CONTACT Quarterly Growth (%, left) Cumulative Active Listings (thousands, right) Cumultive Active Custmers (thousands, right)
- 7. 7 7 Software Purchase Plans1 Investment Cycle: Cloud Computing Adoption: - 51% of SMBs make at least one new software purchase every 6 months (not including upgrades). - 66% of SMBs using cloud-based solutions by end of 2013 (up from 14% 2H 2010). SMB as Consumer SMB Owners Conditioned: Demand-side Diversity: - Tools like Gmail, Drive (Google) and Box began as purely consumer focused before penetrating B2B. - From a servicing and pricing perspective, the fragmented SMB market resembles B2C approach. Innovation/Procurement Cycle Source: 1. Spiceworks State of SMB IT 1H 2013 Rapidly growing and changing market Willingness to try innovative solutions
- 8. 8 8 Macro Tailwinds 1. SaaS model excellent fit for SMB needs Huge cost advantages over client-server software (i.e. upfront fee, implementation, maintenance, security); flexibility to scale up/down as needed. 2. Self-serve distribution/sales through Internet Low cost of customer acquisition, customer service, maintenance through largely self-serve/DIY internet platform. 3. Bottom up approach to market penetration Earlier to minimum viable product, faster to iterate, improved unit economics through increased ASP, modulated platform by customer size.
- 9. 9 9 Precedent Cases SMB Clients/Product Focus Location Exit Value Date Notes CPA’s, accounting firm/bookkeeping Palo Alto NA $80mm raised 11/13 Mix of strategic and VC investment Web designers, SoHo companies/domain registration Scottsdale Acquired $2.25bn 06/11 KKR, Silver Lake, TCV LBO Wholesaler, biz. services/resource planning* San Mateo IPO: (NYSE: N) $1.5bn 12/07 Current Market Cap: $6.1bn Payroll, non-profits/human capital management Palo Alto Acquired $169mm 06/09 Intuit Payroll Services for Small Business Sales and marketing organizations/CRM* San Francisco IPO (NYSE: CRM) $504mm 06/04 Current Market Cap: $33bn Bars, restaurants, retail/local listings San Francisco IPO (NYSE: YELP) $900mm 03/12 Current Market Cap: $4.9bn High reward for strong execution across a wide range of horizontal and vertical subsets. High Bay area concentration * SMB roots, expanded upmarket to Enterprise Source: Capital IQ
- 10. 10 10 Investor Landscape “Historically, only the world’s largest corporations have been able to afford most productivity- enhancing software, but now even the smallest businesses will have a chance to get in on the action.” – Bay Area VC (~$4.0bn AUM) ”SaaS has changed the paradigm by pushing IT requirements to the cloud into a shared resource…. SMBs are now buyers of software that was previously not accessible to them.” - Bay Area VC (~$1.0bn AUM) • In last twelve months, only 24 deals totaling $81mm raised1 for companies who list “small business” as focus in their business description. • Investors must have a sophisticated understanding of unit economic model and ways to improve ASP by moving “upstream.” • Self-serve product design and sales outreach needed to remain afloat. • Employ consumer-like pricing and servicing model to tackle fragmented market. While investors are talking... few have taken action… 1. Source: Capital IQ
- 11. 11 11 Table of Contents Summary – Reasons for Interest 3-5 Market Size, Fragmentation, Refresh Rate 6, 7 Innovation/Procurement Cycle 8 Macro Tailwinds: SaaS flexibility, internet distribution, bottom up scaling 9 Precedent Cases 10 Investor Landscape Industry Map 12 Lifecycle of an SMB 13-16 Business Formation Tools ERP, Legal, Website/Hosting, Productivity/Communication 17-19 Growth and Customer Acquisition Tools Sales/CRM, Marketing, Commerce/POS 20-23 Business Management Tools HCM, Finance, Supply Chain/Product Development, BI/IT Exit Activity & Incumbent Landscape 25 Current Incumbents 26 Acquisition Activity
- 12. 12 12 Lifecycle of an SMB Year 0 1 3 5 Business Formation Growth/User Acquisition Business Management Average lifespan: 5 years • Enterprise Resource Planning • Legal Solutions • Website and Hosting Services • Productivity and Communication Tools • Human Capital Management • Finance and Accounting • Supply Chain and Product Management • Business Intelligence and Information Technology • Sales and CRM Tools • Marketing Automation Services • Commerce and Point of Sale
- 13. 13 13 (Enterprise) Resource Planning Solutions Business Formation Tools Leader: Palo Alto Software • HQ: Eugene, OR • Founded: 1988 • Funds raised: NA – bootstrapped since inception • FTE: 56 (LinkedIn) • Key Exec: Tim Berry, Founder/President Category Landscape • 2015 estimated SaaS Penetration: 10%1 • Enterprise Leaders: Netsuite, Oracle, SAP • 88 solutions listed on Capterra (web-based, 50-99 users) • Contenders: Aptean, Kenandy, Lettuce, Syspro • Summary: Product complexity and strength of enterprise players creates significant headwind. 1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf
- 14. 14 14 Legal Solutions Business Formation Tools Leader: Rocket Lawyer • HQ: San Francisco, CA • Founded: 2002 • Funds raised: ~$72mm (IGC, Google Ventures, Morgan Stanley, August Capital) • FTE: 183 (LinkedIn) • Key Exec: Charley Moore, Founder/Exec. Chairman Category Landscape • 2015 estimated SaaS Penetration: NA • Enterprise Leaders: Advisory Board Co., Docusign • 19 solutions listed on Capterra (web-based, 50-99 users) • Contenders: Clio, LegalZoom, Shake • Summary: Particularly fragmented nature of clientele led to early movers and adoption in this space, validation of model, winners largely determined.
- 15. 15 15 Website/Hosting/CMS Business Formation Tools Leader: Go Daddy • HQ: Scottsdale, AR • Founded: 1997 • Funds raised: $2,250mm (KKR, Silver Lake, Technology Crossover Ventures) • FTE: 2,435 (LinkedIn) • Key Execs: Blake Irving, CEO; Bob Parsons, Founder Category Landscape • 2015 estimated SaaS Penetration: 11%1 • Enterprise Leaders: Sharepoint (MSFT), SpringCM • 103 solutions listed on Capterra (web-based, 50-99 users) • Contenders: Endurance, Network Solutions (Web.com), Rackspace, Squarespace • Summary: SoHo solutions predominate, trouble is increasing ASP/scaling to more profitable market segments. 1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf
- 16. 16 16 Productivity/Communication Solutions Business Formation Tools Leader: Ring Central • HQ: San Mateo, CA • Founded: 2003 • Funds raised: $44mm+ (DAG, Hermes Growth, Khosla, Scale, Sequoia) • Exit: 9/13, $97.5mm IPO (NYSE: RNG) • FTE: 976 (LinkedIn) Category Landscape • 2015 estimated SaaS Penetration: 75%1 • Enterprise Leaders: Blue Jeans Network, Cisco, LogMeIn, Skype • 118 solutions listed on Capterra (web-based, 50-99 users) • Contenders: Grasshopper, PivotDesk, Speek, Twilio • Summary: Office Suite tools far less developed (only 6%1 est. 2015 SaaS penetration) than web communication/collaboration. 1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf
- 17. 17 17 Sales/CRM Solutions Growth and User Acquisition Tools Category Landscape • 2015 estimated SaaS Penetration: 38%1 • Enterprise Leaders: RightNow, Salesforce, ServiceNow • 138 solutions listed on Capterra (web-based, 50-99 users) • Contenders: 37Signals (High Rise), Workbooks, Zestia (Capsule), Zoho • Summary: Fragmented landscape with a number of startups in last 5-7 years, particularly int’l (UK, IN) 1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf Leader: Insightly • HQ: San Francisco, CA • Founded: 2009 • Funds raised: $13mm (Emergence Capital, Sozo Ventures, TrueBridge Capital) • FTE: 50 (Crunchbase) • Key Execs: Anthony Smith, Founder/CEO
- 18. 18 18 Marketing Automation Solutions Growth and User Acquisition Tools Category Landscape • 2015 estimated SaaS Penetration: 15%1 • Enterprise Leaders: Hubspot, Marketo, Oracle, Salesforce • 68 solutions listed on Capterra (web-based, 50-99 users) • Contenders: Act-On, Constant Contact, MailChimp, Nurture • Summary: Enterprise vendors strong but, with vast SaaS penetration ahead, room persists for SMB tools. 1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf Leader: InfusionSoft • HQ: Chandler Heights, AZ • Founded: 2001 • Funds raised: $73mm (Arthur Ventures, Goldman Sachs, Mohr Davidow) • FTE: 546 (LinkedIn) • Key Execs: Clate Mask , Founder/CEO
- 19. 19 19 Commerce/Point of Sale Solutions Growth and User Acquisition Tools Category Landscape • 2015 estimated SaaS Penetration: NA • Enterprise Leaders: Amazon Webstore, Deem, Demandware, Digital River, IBM Websphere • 116 solutions listed on Capterra (web-based, 50-99 users) • Contenders: BigCommerce, DropShip, Magento • Summary: Consumer and retail solutions prevail, leaving underserved verticals (manufacturing) and services (shipping/logistics). Leader: Shopify • HQ: Ottawa, ON • Founded: 2005 • Funds raised: $122mm (Bessemer, Felicis, FirstMark Georgian, Insight) • FTE: 395 (Crunchbase) • Key Execs: Tobias Lutke, Co-founder/CEO
- 20. 20 20 Human Capital Management Business Management Tools Category Landscape • 2015 estimated SaaS Penetration: 22%1 • Enterprise Leaders: HireVue, Successfactors (SAP), Taleo (Oracle), Workday • 122 solutions listed on Capterra (web-based, 50-99 users) • Contenders: Namely, Octopus • Summary: As with Marketing, many strong enterprise-level tools ignore smaller end and/or niche services (i.e. video interviewing). 1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf Leader: Halogen Software • HQ: Ottawa, ON • Founded: 1996 • Funds raised: $8mm+ (JMI, Covington Capital, TD Capital, Triax Capital) • Exit: 4/13, $55mm IPO (TSX: HGN) • FTE: 297 (CapIQ)
- 21. 21 21 Finance/Accounting Solutions Business Management Tools Category Landscape • 2015 estimated SaaS Penetration: 27%1 • Enterprise Leaders: Intuit, Ultimate Software, MSFT • 73 solutions listed on Capterra (web-based, 50-99 users, Accounting + Loan Servicing) • Contenders: Bill.com, Freshbooks, Intacct (accounting tools); Bond St, Fundera, Kabbage (lenders/loan brokers) • Summary: Like Legal (i.e. licensed trade) early movers and adoption, now likely consolidation. 1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf Leader: Xero • HQ: Wellington, NZ • Founded: 2006 • Funds raised: $355mm+ (Accel, Matrix Capital, Valar Ventures, Peter Thiel) • Exit: 4/13, $55mm IPO (TSX: HGN) • FTE: 297 (CapIQ)
- 22. 22 22 Supply Chain/Product Development Business Management Tools Category Landscape • 2015 estimated SaaS Penetration: 25%1 • Enterprise Leaders: Arena Solutions, Atlassian, DropShip, Ketera, Rally Software • 106 solutions listed on Capterra (web-based, 50-99 users, PLM + Supply Chain Mgmt.) • Contenders: Trello, Mozilla Firebug, uShip • Summary: Serving hard asset businesses perhaps more overlooked than software/tech./media. 1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf Leader: GitHub • HQ: San Francisco, CA • Founded: 2008 • Funds raised: $100mm (Andreeson Horowitz, SV Angel) • FTE: 202 (Crunchbase) • Key Execs: Chris Wanstrath, Co-founder/CEO
- 23. 23 23 Business Intelligence/IT Solutions Business Management Tools Category Landscape • 2015 estimated SaaS Penetration: 6%1 • Enterprise Leaders: Cloudera, Informatica, Iron Mountain, Pentaho • 120 solutions listed on Capterra (web-based, 50-99 users, Business Intel + IT Mgmt) • Contenders: Box, EVault, Evernote, KISSmetrics, Mixpanel, Womply • Summary: Low SaaS penetration of wide & deep market, leads to high competition but significant greenfield opportunity. 1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf Leader: Dropbox • HQ: San Francisco, CA • Founded: 2007 • Funds raised: $1.1bn (T. Rowe, Blackrock, Accel, Sequoia, Glynn Capital, Valiant, Goldman, Benchmark, IVP, Greylock, SVA, Index, et al.) • FTE: 642 (Crunchbase) • Key Execs: Drew Houston, Founder/CEO
- 24. 24 24 Table of Contents Summary – Reasons for Interest 3-5 Market Size, Fragmentation, Refresh Rate 6, 7 Innovation/Procurement Cycle 8 Macro Tailwinds: SaaS flexibility, internet distribution, bottom up scaling 9 Precedent Cases 10 Investor Landscape Industry Map 12 Lifecycle of an SMB 13-16 Business Formation Tools ERP, Legal, Website/Hosting, Productivity/Communication 17-19 Growth and Customer Acquisition Tools Sales/CRM, Marketing, Commerce/POS 20-23 Business Management Tools HCM, Finance, Supply Chain/Product Development, BI/IT Exit Activity & Incumbent Landscape 25 Current Incumbents 26 Acquisition Activity
- 25. 25 25 Current Incumbents Category Location Year Formed Size Type Marketing Boston Area (NDAQ: CTCT) 1995 1,235 FTE $1.0bn MV Direct Commerce/POS Bay Area (NDAQ: EBAY) 1995 31,800 FTE $67.6bn MV Direct Website/Hosting, Marketing Boston Area (NDAQ: EIGI) 1997 2,200 FTE $1.75bn MV Direct Finance/Accounting Bay Area (NDAQ: INTU) 1983 8,000 FTE $23.4bn MV Direct Finance, ERP, CRM, Business Intel, Payments UK (LSE: SGE) 1981 12,760 FTE $4.3bn MV Direct CRM, Marketing Bay Area (NYSE: YELP) 2004 2,345 FTE $5.9bn MV Direct Credit Cards CA, NY, NY As old as 1850 (AmEx) Up to 63k FTE (AmEx) Indirect Wireless Networks KS, TX, NY, WA As old as 1899 (Sprint) Up to 248k FTE (AT&T) Indirect Cable Companies PA, NY 1963, 1985 136k,51k FTE Indirect Payroll, HR Services NJ, NY 1949, 1971 61k, 13k FTE Indirect Concentration in Boston and Bay Areas Gaps: Legal, Productivity, Supply Chain/Product Dev. Source: Capital IQ
- 26. 26 26 Exit Activity Sources: Capital IQ, Crunchbase Notable Transactions Buyer Date Target Size (USD,mm) x Revenue Prior Raised* Prior (LTM) Revs Selected Investors Priceline Jul-14 OpenTable 2,613.0 13.2x 2,426.1 198.3 JAT Capital, T. Rowe Price, BlackRock (NASDAQ: OPEN) NetSuite Jul-14 Venda 50.5 2.6x 30.0 19.8 GF Private Equity, Investor Growth Capital Netsuite Oct-13 TribeHR 24.8 -- 2.5 ND Matrix Partners, Relay Ventures eBay Sep-13 Braintree 800.0 -- 70.0 ND Accel, Greycroft, NEA, RRE (+Venmo) Constant Jun-13 SinglePlatform 92.9 168.8x 4.7 0.6 First Round, DFJ Gotham, Pritzker Group, RRE Contact InfusionSoft Jan-13 GroSocial 30.0 -- 2.2 ND Kickstart Seed Fund, Monarch, Rock & Hammer Ventures Yelp Oct-12 Qype 48.8 4.6x 20.1 10.6 Advent VP, Partech, Vodafone Ventures, Wellington Intuit Apr-12 DemandForce 423.0 33.6x 10.0 12.6 Benchmark, FLOODGATE, Palo Alto VP BestBuy Nov-11 MindSHIFT 175.0 8.0x 63.4 21.9 Columbia Capital, Fidelity Ventures, TDF, Volition Intuit Jun-09 PayCycle 169.0 15.8x 29.0 10.7 August Capital, CCP Equity, DCM, Draper Richards Sage Mar-08 Hallco 1390 41.9 7.0x 23.5 6.0 Inflexion Private Equity, YFM Private Equity Average 406.3 31.7x 25.5 35.1 Median 92.9 10.6x 21.8 11.7 * Fundraising averages exclude OpenTable
Editor's Notes
- #7: BRM – to find data on how much capital traditional growth players were managing in 2003 versus now. Idea would be to show that these folks have moved up market
- #8: BRM – to find data on how much capital traditional growth players were managing in 2003 versus now. Idea would be to show that these folks have moved up market
- #27: BRM – to find data on how much capital traditional growth players were managing in 2003 versus now. Idea would be to show that these folks have moved up market