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2023 VC Predictions: From the Ashes of a Pandemic, a Phoenix Is Rising for SMBs

December 17, 2022

As we’ve all seen, 2020 and 2021 were extremely challenging years for small and medium-sized businesses (“SMBs”) in America. For a short period, we paused to recognize many SMB owners and employees as frontline workers. But as we all adapted to a new normal, SMBs are once again generally overlooked by headlines or magazine covers even though they are mission-critical to the success of our country.

From the local butcher to corner barbershop and neighborhood pizza parlor, SMBs remain the lifeblood of the American economy—they’re responsible for more than 40% of U.S. GDP and 55% of U.S. employment. In emerging markets, SMBs make up as much as 90% of GDP. 

When the COVID-19 pandemic first hit in early ’20, most small businesses were forced to close up shop, shuttering their physical store presence and hoping for better days. Many shifted to e-commerce and online ordering where possible, driving a rise in SMBTech adoption and benefiting companies like Toast, Shopify, and Square, but this shift only made up a small portion of the revenue drop for most SMBs.

Staffing cuts were swift and impactful; according to the U.S. Small Business Administration (SBA), food service and drinking places (restaurants/bars) saw a 48% drop in employment from April ’19 to April ’20. Many survived only through sheer grit, government loans, landlord rent deferrals, and other survival tactics.

A revival of entrepreneurship in America

As Americans emerged from the pandemic, however, a surprising trend emerged—a surge in new business applications. According to the U.S. Census Bureau, the U.S. saw a record 4.4 million new business applications in 2020, a number that was surpassed again in 2021 with a whopping 5.4 million applications. In 2019, the last pre-pandemic year, the number was 3.5 million.

As workers left the office, storefront, and manufacturing facility in early 2020, they had extra time on their hands—perhaps to explore an idea they’d had for many years. And enabled by modern technology, it has never been easier for an entrepreneur to launch a website, e-commerce store, or digital experience to complement her/his Main Street storefront.

  • A couple with a passion for kids and education could launch a childcare facility on Brightwheel* in a matter of weeks, and thousands did. 
  • A pizza parlor owner could launch a second location built for takeout and delivery (pandemic safe) by partnering with Slice* and DoorDash.

As we predicted in Fall 2020, the revival of the U.S. economy is being led by small businesses, and many of them are new businesses launched since the pandemic began. The momentum is continuing—in fact, according to U.S. Census Bureau data, business applications for October 2022 showed an increase of 1.2% compared to September 2022. Projected business formations saw an increase of 1.6% for the same time period.

What does it mean for 2023?

Today’s small business owners are facing a historic double whammy with labor and inflation. In June of this year, a record high 48% of small business owners reported unfilled job openings, and 57% said they had few or no qualified applicants for open positions. In September, 83% of small business owners in a U.S. Chamber of Commerce survey said rising prices have had a significant impact on their business. Many have increased their prices to end consumers, helping to drive our country’s historically high levels of inflation. 

As we look toward 2023, however, we forecast an optimistic outlook for SMBs. Here’s why: 

  • The Fed’s efforts to tame inflation are starting to work, specifically in areas like food and transportation costs that directly impact SMBs. 
  • Labor is returning to the workforce after years of concerns over health safety (COVID-19) and pandemic stimulus checks.
  • For the SMBs that survived the pandemic and the millions of new businesses launched in ‘20/’21 (mentioned previously), the tools, technology, and financing options available have never been greater. These tech-savvy operators will thrive in ’23 and beyond.

According to the SBA, 93% of SMBs today are using at least one technology platform, 86% say technology helped their business survive the COVID pandemic, and 83% plan to increase their use of technology platforms. GGV’s recent pulse check of U.S. SMB owners confirms this trend—about 40% of respondents forecasted that they plan to increase their software spend in 2023.  

A decade ago, technology solutions for small businesses were extremely limited, if available at all. Today, over a weekend, a business owner can literally launch a website on Wix, an e-commerce store on Shopify or BigCommerce*, enable payments via Square* or PayPal, and enable payroll and employee communication via Homebase* (millions of SMBs are on these platforms already today). She or he can also launch marketing services on a myriad of channels including Facebook, Instagram, or TikTok. None of this existed a decade ago, or if it did, it was unruly and too complex for SMBs.

As our colleagues Hans Tung, Robin Li, Huey Lin, Rares Crisan, and Marcello Rossi have written about embedded fintech, it’s also easier than ever to get working capital financing, a business loan, or provide employees with compelling financial services.

The 2020-2022 era has been an extremely challenging one for SMBs. Despite a lot of economic doom and gloom, we think 2023 will be a breakout year for SMBs. Riding the wave of new business applications in this era, business owners will adopt and thrive with technology like never before. The result will be businesses that grow faster, are more profitable, and create a better experience for customers and employees.

Cheers to ’23! 😊

*Represents a company in GGV’s portfolio