State of SMB Software Report - 2018

THE STATE OF SMB SOFTWARE
A look at 2018’s fundraising and exit trends among North
American SMB software companies
2018

A g e n d a
01 Introduction
02 Methodology and Scope
03 Venture Capital (VC) deals
04 Private Equity (PE) deals
05 Mergers & Acquisitions (M&A)
06 IPOs
07 Public Market Activity
08 Takeaways and Recap

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S u r e P a t h : O u r P u r p o s e
Helping fund, grow , and exit SMB software companies
SurePath maximizes your optionality:
We make sure you know what it takes to build a market leader and capitalize you towards that goal.
We ensure you are always in the minds of strategic buyers so that if they decide to make a move in your
space, you are in the conversation. You can then decide; Keep going or exit?
The process of raising growth capital is very different from raising early stage capital
It is cheaper than ever to start companies, but more expensive than ever to build market leaders. If that’s your
aspiration, you need growth capital
We help you prepare for growth stage and help you raise the capital needed to become a market leader
Growth
Funding
We track every SMB software company in the market
Buyers have recognized that we have unique insights into this market
We leverage our in-depth coverage and insights to accelerate our clients’ acquisition programs
Acquisitions
Great exits don’t just happen. Buyers don’t just show up ready to pay a premium
We work with you to facilitate the BD and Corp Dev intros that pave the way to an eventual exit
No other investment banking firm has the depth of our relationships in the SMB world
Exits
3
3

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S u r e P a t h a n d S M B
Business Management E-Commerce
CRMMarketing Tech
Payments/ POS
We have been part of some the most successful SMB SaaS companies
We have deep relationships with SMB investors and buyers
SurePath is committed to becoming the leading strategic financial advisor to the global SMB software market
4

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R e c e n t S u r e P a t h D e a l s
5
served as the exclusive strategic
and financial advisor to
on its growth
financing led by
USD $60,000,000
on its growth
financing led by
CAD $115,000,000
on its sale to
on its sale to
on its growth
financing led by
USD $11,800,000
a wholly-owned subsidiary of
on its sale to
on its sale to
on its growth
financing led by
USD $32,000,000

surepathcapital.com
T h e S u r e P a t h T e a m
The SurePath team has over 30 years of experience in operating, growing, investing, buying, and selling SMB software companies.
M A R K
M A C L E O D
F O U N D E R
J O S H
S C H E R M A N
V I C E - P R E SI D E N T
D A N I A L
S H A I K H
A S S O C I A T E
6
E R I K
M O S N E Y
A N A L Y S T
S A R A
D E F I N A
A N A L Y S T
K J
L E E
A N A L Y S T

Welcome to our third annual State of SMB Software Report, looking at fundraising and exit activity in the Small
and Mid-Sized Business (SMB) software space in North America. To isolate the SMB deal activity, we analyzed
over 5,776 deals narrowing them down to 553 venture deals, 37 PE Growth and Buyout/LBO deals, 83 M & A
deals, and 9 IPOs representing over $44.3B in deal proceeds. VC funding captured the most dollars, followed
by M & A. However, we see PE as a growing category of deals giving companies two bites at the apple – a
partial exit today, with significant upside for the future.
We track SMB software companies across three broad categories: Grow my Business (front office), Run my
Business (middle office) and Track my Business (back office). For VCs, most activity was in front office. For PE
firms, the middle office was most popular.
2018 was a banner year across every deal category in SMB except angel/ seed funding. We added some new
categories of SMB software companies to our coverage. Even excluding this addition, overall deal volume and
$ were up significantly. 2018 was a great time to raise capital and also a great time to sell.
Public tech stocks took a big hit at the end of the year. Our SMB index was not immune to this and finished 2018
flat with the beginning of the year. Despite this we saw 9 IPOs.
We hope you find this report useful and invite you to get in touch to discuss it with us.
The SurePath team
January 2019
T h e S t a t e o f S M B S o f t w a r e
surepathcapital.com8

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M e t h o d o l o g y
In 2018, there were over 5,766 deals in the B2B software
space, globally.
3,462 deals were in North America
682 deals (553 venture deals, 83
M&A deals, 37 PE/Buyout/LBO
deals, and 9 IPOs) involved
companies with a clear SMB
software offering
9

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2 0 1 8 S M B S o f t w a r e D e a l L a n d s c a p e
1. Source: Pitchbook
2. Deal count excludes deals involving accelerators, incubators, crowdfunding and deals with undisclosed values.
2018 was a very strong year for deal activity across all deal types, except angel/ seed, relative to 2017. Over 70% of the 2018
deal volume came from M&A and early/late stage fundraising activity across 461 deals (378 early/late stage VC investments
and 83 M&A deals).
$2M
$23M $25M
$331M
$286M
$985M
175
378
29
9
83
8
0
50
100
150
200
250
300
350
400
$0M
$200M
$400M
$600M
$800M
$1,000M
DealCount
AverageDealSize(inmillions,USD)
Average Deal Size by Deal Type
Average Deal Size Deal Count
$331M
$8,622M
$737M
$2,977M
$23,767M
$7,884M
Total Capital Invested by Deal Type
Angel/Seed Early/Late Stage VC
PE Growth/Expansion IPO
Merger/Acquisition Buyout/LBO
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2 0 1 8 S M B S o f t w a r e D e a l s B y G e o g r a p h y
2. Deal count excludes deals involving accelerators, incubators, crowdfunding and deals with undisclosed values.
Naturally, California saw the most deal activity representing 35% of all deals. However, the geographic distribution is more
even in SMB than in other categories. SMB-focused companies serve customers all over the world. You can start and run an
SMB software business from anywhere.
11

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S M B V e n t u r e F u n d i n g i n 2 0 1 8
2. Deal count excludes deals involving accelerators, incubators, and crowdfunding and deals with undisclosed values
553 SMB software companies raised venture capital in 2018. Most of the deal volume was in early and later stage VC
investments. There were fewer new seed rounds in 2018.
12
$110M
$221M
$2,302M
$6,320M
77
98
215
163
0
50
100
150
200
250
-
$1,000M
$2,000M
$3,000M
$4,000M
$5,000M
$6,000M
$7,000M
Angel Seed Round Early Stage VC Later Stage VC
DealCount
CapitalRaised(inmillions,$USD)
Capital Raised by Venture Deal Type
Capital Raised Deal Count

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$185M CapitalG
$185M Accel / Sequoia Capital
$165M MSD Capital /
Dragoneer Investment Group
$145M KPCB
$115M T. Rowe Price
$427M Dragoneer Investment Group /
General Atlantic
$300M Tiger Global Management
$250M Fin Venture Capital
$250M Coatue Management / DST Global
$245M Tiger Global Management
2 0 1 8 ’ s T o p S M B S o f t w a r e R a i s e s
Source: Pitchbook
13
For the second year in a row, Slack had the largest funding round in SMB software

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V e n t u r e D e a l s b y C a t e g o r y
SMB software companies raised ~ $9.0B across 553 deals in 2018. Of those, companies that helped SMBs grow and run their
business attracted ~90% of the venture capital in the SMB software space.
Outer ring represents total
capital invested by
category and inner ring
represents total deal count
by category
Source: Pitchbook
We track SMB software
companies across three
broad categories:
• Grow my Business:
Marketing / front office
• Run my Business:
Typically vertical apps
to help operate
(business management,
ERP, etc.)
• Track my Business:
Billing, accounting, etc.
14
229
58
266
$3,971M
$858M
$4,123M
Grow My Business
Keep Track of My Business
Run My Business

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Source: Pitchbook
V e n t u r e D e a l s b y C a t e g o r y ( c o n t . )
15
48
113
59
179
57
27
32
27 11
$1,094M
$1,710M
$1,137M
$2,591M
$792M
$463M
$352M
$784M
E-Commerce
Marketing Tech
Sales Tech incl POS and CRM
Business Management/ERP
HR Tech incl Payroll and Employee
Mgmt
Security/IT
Accounting and Invoicing
Payments
Ad Tech
Consistent with 2017, SMB software companies with Business Management/ERP system and Marketing Tech offerings
continued to attract the highest amount of deal volume and invested capital in 2018. However, in 2018 we also saw a
significant increase in the amount of venture capital deployed into the E-Commerce category.

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V e n t u r e D e a l s b y T a r g e t C u s t o m e r
~75% of venture funding in 2018 went to companies with a broad offering for both the small and medium segments of the
SMB software space. This is the same % as 2017. Relatively few companies served either only the small or medium segments
explicitly. This makes sense as it enables software vendors to reach a larger market.
Source: Pitchbook
16
417
80
56
$6,948M
$677M
$1,327M
Both
Medium
Small

surepathcapital.com
V e r t i c a l - S p e c i f i c V e n t u r e D e a l s
Within the top 10 vertical-specific categories, there was ~$2.8B in capital invested across 181 deals in 2018. Of these,
Restaurant-Tech, Real Estate and Retail specific companies accounted for over 50% of the total deal volume. This is a
continuation of what we saw in 2017 where these verticals also attracted significant capital.
Source: Pitchbook
17
40
31
27
19
14
13
11
10
9
7
$813M
$206M
$273M
$249M
$128M
$131M
$281M
$152M
$506M
$108M
Restaurant-Tech
Real Estate
Retail
Health and Wellness
Construction
Financial Services
Home Services
Legal
Logistics
Software Development

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# of
Investments
Investors
11-12
9-10
7-8
M o s t a c t i v e S M B S o f t w a r e V C s
Many notable firms made multiple investments in the SMB Software sector in 2018. We were pleased to see several partners at
prominent venture firms declare their interest in the SMB space in 2018. They see what we see: a large, growing and valuable
market.
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$3.4B Francisco Partners / British Columbia
Investment Mangement
$1.9B Vista Equity Partners
$1.5B Siris Capital
$550M Warburg Pincus
$460M Thomas Bravo / Updata Partners
$75M Goldman Sachs Private Capital Group
$68M Guidepost Growth Equity
$65M Great Hill Partners
$65M Frontier Capital
$63M FTV Capital
2 0 1 8 ’ s T o p P E G r o w t h / B u y o u t S M B D e a l s
Source: Pitchbook
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S M B S o f t w a r e P E D e a l s i n 2 0 1 8
20
$7,884M
$737M
8
29
0
5
10
15
20
25
30
35
-
$1,000M
$2,000M
$3,000M
$4,000M
$5,000M
$6,000M
$7,000M
$8,000M
$9,000M
Buyout/LBO PE Growth/Expansion
DealCount
TotalCapitalInvested(inmillions,$USD)
Capital Raised by PE Growth and Buyout/LBO Deal Type
Capital Raised Deal Count
Though PE Growth rounds for SMB software companies attracted ~78% of the total PE and Buyout deal count, Buyouts/LBO’s
attracted over 90% of the total deal proceeds in 2018. Of the total deal proceeds, the Verifone and Mindbody public-to-
private LBO’s accounted for ~61%.

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P E G r o w t h / B u y o u t D e a l s b y C a t e g o r y
Source: Pitchbook
PEs are increasingly seeing SMB as a place to invest and grow large, enduring companies. PE Growth/Buyout SMB software
deals accounted for ~19% of total deal proceeds in 2018. Of those, companies that helped SMBs grow and run their business
attracted nearly 98% of the PE growth and Buyout capital. Deal sizes were much larger in the Grow My Business category.
21
12
6
19
$5,080M
$3,404M
Grow My Business
Run My Business

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P E G r o w t h / B u y o u t D e a l s b y C a t e g o r y ( c o n t . )
Private equity investors deployed $8.6B in capital into software companies serving the SMB space in 2018. Of that, the Sales
Tech, POS and CRM category attracted the most capital, largely driven by the VeriFone LBO ($3.4B). SMB software
companies with Business Management and ERP system offerings saw the highest amount of deal volume in 2018.
Source: Pitchbook
5
5
2
13
6
1
5
$1,513M
$152M
$3,415M
$3,137M
$267M
E-Commerce
Marketing Tech
HR Tech incl Payroll and Employee
Mgmt
Payments
22

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P E G r o w t h / B u y o u t D e a l s b y T a r g e t C u s t o m e r
~81% of private equity and LBO/buyout deal volume in 2018 went to companies with a broad offering for both the small and
medium segments of the SMB software space. Relatively few companies served either only the small or medium segments
explicitly. From a capital invested perspective, companies that served the medium segment accounted for the largest
component, driven primarily from the VeriFone buyout in Q3 2018 ($3.4B).
Source: Pitchbook
23
30
4
3
$3,186M
$3,498M
$1,936M
Both
Medium
Small

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$4.8B Adobe Systems
$2.4B Cisco Systems
$2.0B Twilio
$1.7B Adobe Systems
$1.2B Paychex
$1.1B TSYS
$875M Autodesk
$775M Fortive
$700M Global Payments
$600M ARM (subsidiary of SoftBank Group)
Source: Pitchbook
2 0 1 8 ’ s T o p M & A S M B D e a l s
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M & A D e a l s b y C a t e g o r y
The cumulative deal size for all mergers and acquisitions (with disclosed proceeds) in the SMB software space throughout
2018 was ~$24.0B. 90% of deal proceeds were related to companies that helped SMBs grow and run their business.
Source: Pitchbook
25
31
9
43
$10,829M
$2,302M
$10,637M
Grow My Business
Run My Business

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M & A D e a l s b y C a t e g o r y ( c o n t . )
Relative to 2017, where a significant portion of the M&A deal proceeds related to companies with payments offerings, in
2018, the Marketing Tech category attracted the highest amount of the capital deployed. In 2018, we also saw significant
M&A activity within the Business Management/ERP category.
Source: Pitchbook
26
3
22
2
27
6
9
4
6
4
$1,721M
$8,634M
$4,476M
$1,940M
$4,001M
$2,227M
E-Commerce
Marketing Tech
HR Tech incl Payroll and
Employee Mgmt
Security/IT
Payments
Ad Tech

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M & A D e a l s b y T a r g e t C u s t o m e r
~64% of M&A activity in 2018 went to companies with a broad offering for both the small and medium segments of the SMB
software space. Relatively few companies served either only the small or medium segments explicitly.
27
54
13
17
$13,556M
$572M
$10,369M
Both
Medium
Small

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2 0 1 8 ’ s M o s t A c t i v e S M B S o f t w a r e B u y e r s
28
Total Deal
Proceeds
Buyer # of Acquisitions Acquisitions
$6.5B 2
$4.8B $1.7B
$1.2B 2
$875M $275M
$540M 2
$390M $150M
$520M 2
$400M $120M
$165M 2
$150M $15M
Source: Pitchbook

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$207M NAS: SVMK
$180M MYS:AVLR
$175M NYS:SMAR
$86M NAS:IIIV
$756M NAS:DBX
$629M NAS:DOCU
$462M NYS:CDAY
$252M NYS: ESTC
$230M NYSE: EB
Source: Pitchbook
2 0 1 8 ’ s S M B S o f t w a r e I P O s
29

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IPO Date March 23 April 27 April 26 October 5 September 20
Amount Raised $756M $629M $462M $252M $230M
Age at IPO 10 Years 15 Years 10 Years 6 Years 12 Years
Revenue at IPO $1.1B $519M $792M $185M $256M
Headcount at IPO 1,858 2,255 4,212 994 997
Pre-IPO Investors
Sequoia, Accel,
T. Rowe Price, and
more.
Sigma Partners, Ignition
Partners, Frazier
Technology Partners
and more
Kensington Capital,
Blum Capital, and more
Benchmark, Hexavest,
New Enterprise
Associates, and more
Sequoia, Tiger Global
Management, T. Rowe
Price, and more

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IPO Date September 26 June 14 April 27 June 21
Amount Raised $207M $180M $175M $86M
Age at IPO 19 Years 14 Years 13 Years 6 Years
Revenue at IPO $233M $226M $111M $294M
Headcount at IPO 761 1,495 784 326
Pre-IPO Investors
T. Rowe Price, Morgan Stanley,
Baillie Gifford, and more
Warburg Pincus, Sageview
Capital, Technology
Crossover Ventures, and
more
Insight Venture Partners,
Madrona Venture Group
Summit Partners, and more
First Avenue Partners,
Harbert Credit Solutions,
Capital Alignment Partners,
and more

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50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
160%
170%
180%
NAS: DBX NAS: DOCU NYS: CDAY NYS: ESTC NYSE: EB NAS: SVMK NYSE: AVLR NYS: SMAR NAS: IIIV
P o s t I P O P e r f o r m a n c e
32
Of the 9 SMB Software IPOs in 2018, 5 gained over their IPO price. The biggest gainer since IPO was i3 Verticals (+37%),
whereas the biggest loser was Avalara (-29%). Dropbox, which represented the biggest IPO of the year, lost over 25% of its
value by the end of the year.

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SMB is
our
focus
Our
clients
serve
SMBs
Many
other
indices
The first
to see
trends
Introduced in 2016, the SurePath SMB Index originally tracked 35 publicly traded companies that serve SMB
and their performance against other benchmark indices. Over time, as companies in the index have been
acquired, the number of constituents has dropped to 33.
Examined 280+ Annual Reports of Publicly
Traded Companies
Selection of Companies for SMB
Focus
SurePath SMB Index
T h e S u r e P a t h S M B I n d e x
Final Selection of 35
Companies
34

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I n d e x C o n s t i t u e n t s
35
Note: at the end of December 2018, Vista Equity Partners announced that it entered into an agreement to acquire Mindbody. In early January, Fiserv announced that it had entered into an agreement to acquire First Data. Given that these deals have not yet been completed,
their impact is not reflected in the following analysis.

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S u r e P a t h S M B S o f t w a r e I n d e x
• All 33 companies are weighted based on Market Cap and indexed at
January 4, 2016
• 31 of the 33 companies are part of the $1 billion market cap club (a
club we expect will grow over time)
• The companies on the SCP SMB Software Index have a combined
market cap in excess of $340B
36
Company Ticker
Market Cap
(billions)
Automatic Data Processing, Inc. ADP $59.15
Intuit Inc. INTU $55.69
Square, Inc. SQ $29.68
Paychex, Inc. PAYX $25.03
Atlassian Corporation Plc TEAM $21.99
First Data Corporation FDC $21.10
Shopify Inc. SHOP $17.21
GoDaddy Inc. GDDY $11.33
Sage Group plc LON:SGE $8.86
ANGI Homeservices Inc. ANGI $8.29
Paycom Software, Inc. PAYC $8.01
GrubHub Inc. GRUB $7.36
RingCentral, Inc. RNG $7.36
Zendesk, Inc. ZEN $7.02
HubSpot, Inc. HUBS $6.21
H&R Block, Inc. HRB $5.28
New Relic, Inc. NEWR $5.48
Wix.com Ltd. WIX $5.05
Cimpress N.V. CMPR $3.73
Xero Limited. ASX:XRO $3.10
Qualys, Inc. QLYS $3.19
LendingTree, Inc. TREE $3.77
Stamps.com Inc. STMP $3.15
Yelp Inc. YELP $3.04
AppFolio, Inc. APPF $2.12
Groupon, Inc. GRPN $2.15
Deluxe Corp. DLX $2.06
MINDBODY, Inc. MB $1.75
Shutterstock, Inc. SSTK $1.36
LendingClub Corporation LC $1.33
Endurance International Group Holdings, Inc. EIGI $1.12
Carbonite, Inc. CARB $0.98
Marchex, Inc. MCHX $0.14
Market Cap by Index Constituents (in US$ b)
$1bn Market Cap Club (in Grey)
80.00%
100.00%
120.00%
140.00%
160.00%
180.00%
200.00%
220.00%
SurePath SMB Index S&P 500 Nasdaq Dow Jones

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A c l o s e r l o o k a t t h e S M B I n d e x P e r f o r m a n c e
37
SCP Index, 177.69%
S&P 500, 124.55%
Nasdaq, 135.33%
Dow Jones, 136.03%
80.00%
100.00%
120.00%
140.00%
160.00%
180.00%
200.00%
220.00%
SurePath SMB Index S&P 500 Nasdaq Dow Jones

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2.6x
2.6x 2.6x
2.7x
2.8x 2.8x
2.9x 2.9x
3.0x
3.1x 3.1x
3.1x
3.4x
3.3x 3.3x
3.4x
3.6x 3.6x
3.7x
4.0x
4.1x
3.7x 3.7x
3.4x
2.0x
2.5x
3.0x
3.5x
4.0x
4.5x
EV/RevenueMultiple
S M B S o f t w a r e I n d e x M u l t i p l e P e r f o r m a n c e
38

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M o v e m e n t o f t h e I n d e x i n 2 0 1 8
39
TEAM, 89.1%
RNG, 72.5%
ZEN, 71.4%
WIX, 55.8%
SQ, 55.1%
PAYC, 52.2%
NZE:XRO, 46.2%
APPF, 43.7%
ANGI, 40.7%
HUBS, 40.6%
NEWR, 37.7%
GDDY, 33.7%
SHOP, 31.2%
INTU, 24.0%
QLYS, 22.3%
MB, 18.2%
ADP, 13.0%
GRUB, 7.8%
FDC, 1.6%
CARB, 0.0%
PAYX, (3.2%)
HRB, (5.2%)
CMPR, (14.7%)
STMP, (16.9%)
SSTK, (17.2%)
MCHX, (18.2%)
YELP, (19.1%)
EIGI, (20.8%)
LON:SGE, (23.6%)
TREE, (35.5%)
LC, (38.7%)
GRPN, (38.9%)
DLX, (50.1%)
(60%) (40%) (20%) 0% 20% 40% 60% 80% 100%
% Gain/(Loss) in Market Cap

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2018 was a banner year across almost all deal categories: Other than angel/ seed rounds, every other deal
type saw a large increase in deal volume and $. 2018 was a great time to fund your business and sell your
business.
M & A Deal sizes were up significantly in 2018: There were six acquisitions over $1B in 2018 (vs none in 2017).
With lots of capital and high valuations, 2018 saw lots of sale activity including several large take private
transactions.
Business management/ERP and marketing tech were the top categories for deals: As younger people start
small businesses, they want & expect to have software platforms that they can run their business on. And every
small business is always looking for more customers.
Restaurant tech may soon be the first ever ‘winner takes all’ category in SMB: Most SMB markets are too large
and fragmented for one vendor to own. For two years in a row, restaurant tech has seen significant funding.
The stakes are high and every aspect of running a restaurant is being addressed. We expect to see a clear
market leader emerge in this market.
2018 was a challenging year for public markets: Our SurePath SMB index was flat for the year. Gains in the first
half of the year were wiped out in the back half. It still finished well up on all major indices. Atlassian was the
best performer in the index. Deluxe was the worst performer.
Despite the overall public market volatility, IPOs were up significantly : We had 9 IPOs in 2018 (vs. 2 in 2017)
with ~3.0B in capital invested.
T a k e a w a y s & R e c a p
41

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The Leading Financial Advisor in SMB Software
EXPERIENCE
Funding, growing & exiting tech companies
PEDIGREE
Alumni of Constant Contact, FreshBooks, Shopify…
ACCESS
To Tier 1 investors & strategic partners
FOCUS
The only advisor with a dedicated focus on SMB Software
COMMITMENT
Helping our clients and their investors succeed
T h e S u r e P a t h D i f f e r e n c e
42

Danial Shaikh
Associate
danial@surepathcapital.com
647.876.5453
Erik Mosney
Analyst
erik@surepathcapital.com
519.239.5759
Mark MacLeod
Founder & President
mark@surepathcapital.com
416.843.6004
Josh Scherman
Vice-President
josh@surepathcapital.com
646.420.0074
Toronto • San Francisco
Sara Defina
Analyst
sara@surepathcapital.com
416.689.2474
43
KJ Lee
Analyst
KJ@surepathcapital.com
647.500.3457

State of SMB Software Report - 2018

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State of SMB Software Report - 2018