Small businesses are the backbone of the U.S. economy, representing about 99% of U.S. businesses and 50% of U.S. employment. Despite the sheer size of the segment—approximately 30 million small and medium-sized businesses (SMBs) in the U.S.—it has only been in the last decade that technology companies have come to market with software solutions tailored to SMBs.
There are two parts to this equation. First, companies serving SMBs, which we talk about as SMBTech companies, have to be able to acquire and serve SMBs efficiently. Changes in the technology landscape over the past decade-plus (including the launch of AWS, the rise of social and mobile, and many other factors we outline here) have made this possible.
The second part of the equation is the readiness of SMBs to adopt software. We’ve seen SMB owners’ sentiment shift over time in conjunction with the consumerization of software, and the COVID-19 pandemic illustrated that technology is table stakes for businesses of all sizes and especially critical for SMBs that were forced to move online.
Both parts of this equation are strengthening, making now an incredible time to be building an SMBTech company. SMBTech companies show that if you build a product for SMB buyers, they’ll purchase and expand their software usage. Since SMBs are a meaningful mover of the economy and are still in the process of digitizing operations and embracing a modern software stack, our team at GGV is excited about the amazing teams building SMBTech companies, powering the digitizations of these SMB businesses. We’ve already seen nearly $1 trillion of value created in the public market and several billion dollars of value in the private markets.
Even in today’s environment, we’ve seen early indicators from SMBTech public companies’ November 2022 earnings reports that technology adoption will endure in this new period of uncertainty. For example, HubSpot (sales and marketing software for SMBs) recently announced their Q3 2022 results and beat their forecasts, achieving 38% year-over-year revenue growth for the trailing 12 months. Bill.com (payment management software for SMBs) achieved staggering success in their most recent quarter with 94% year-over-year total revenue growth (exclusive of revenue growth from the acquisition of Divvy and Invoice2go).
To gauge how SMB owners are thinking about software adoption in 2023, GGV initiated its second annual SMB Owner Pulse Check to hear from SMBs with more than one employee. We first reached out to SMB owners across the U.S. in September 2021 to learn about their software spending predictions. About a year later, we’re finding that owners are displaying resilience in the current market conditions by seeking out software solutions that can help them scale their businesses going into the year ahead.
Our most recent pulse check reaffirmed three key trends:
About 44% of respondents forecasted that they would increase their software spend in 2023 with 50% of respondents believing spend would increase between 1% and 50% year over year. Notably, only 7% of respondents are using fewer software vendors now than they did in the last 12 months, evidencing the stickiness of the SMB category when a product delivers upon its stated value.
Perhaps most surprising is that among the SMB owners who we surveyed, price is the least important criteria when evaluating software. With smaller teams and limited resources, SMBs are optimizing for software solutions that provide quick time to value.
More than 45% of respondents listed ease of use as the most important factor when choosing a software provider versus 28% of respondents who considered collaboration capabilities the most important, followed by 12% of SMB owners who reference price as the most important evaluation criteria. As the economy continues to experience seismic shifts, price sensitivity is an area that we’ll want to track closely.
Trust matters to SMB owners, and this reveals itself in how SMBs make software decisions. After searching on Google, SMBs source software solutions from referrals from peer SMB owners (46% of respondents selected this) or employees (40%). What this means is that when selling to SMBs, there are huge opportunities to build community and virality.
As SMBs continue to move across the technology adoption curve, new software providers are emerging every day to meet their needs. From Shopmonkey for auto repair to Rinsed for car washes to Brightwheel* for pre-schools and Odeko* for coffee shops—there is no denying momentum is building for the SMB sector. Our optimism is not without awareness that volatile economic conditions have historically hit SMBs hardest. Therefore, it’s our hope that the continued adoption of technology will equip SMBs with the tools that can lead to more efficiency. These tools can also help SMB owners effectively scale their businesses, helping them build sustainable, flourishing businesses that bolster the economy.
*Represents a company in GGV’s portfolio