60% of Americans work for a small business, and small businesses (SMBs) account for 44% of the US economy/GDP. Small business is the lifeblood of our economy. During the COVID-19 ("C19") pandemic, many of these small businesses have been devastated – with hundreds of thousands going out of business for good. In the midst of this devastation, however, it’s important to look ahead and ask “what’s next?” Our answer – the “reboot” of small business is already underway, and it is being built on technology. The winners will be small business owners, employees and the SMBTech companies that “arm the rebels.”
The small business bust has been widely covered – restaurants, hair and nail salons, fitness centers, small retail shops struggling to make ends meet as their traditional model of physical, in store experiences came to a screeching halt with the rise of C19 in March. Local online marketplace Yelp reports more than 160,000 businesses on its platform have closed, with 60% unlikely to reopen. Hardest hit are restaurants, small retail, beauty & spas, bars & nightlife and gyms. A significant percentage of the spike in unemployment came in April and May as small businesses were forced to lay off employees to try and survive. For these businesses, the C19 pandemic has been devastating, and may increasingly be so as the CARES Act and other stimulus programs run out and outdoor dining shuts down due to fall and winter weather.
Perhaps less covered has been the “boom” to match the bust. SMBs in the housing and home improvement industries, auto dealers, bike shops and other merchants are seeing record spikes in business. A local HVAC merchant told us “business is up 3X since 2018 – we can’t keep up” (the same day, we spoke with a local restaurant owner who told us “we are down 52% year over year – without the PPP loan we’d be dead”). Home sales are at record highs, vacation homes are listing and selling in 24 hours sight unseen, and prices for used cars are up 5-10%, if you can find the one you want. A local bike shop owner we spoke with said “We are in the middle of a global pandemic, I don’t have anyone physically coming into my store - but sales are the best they’ve ever been – no way anyone saw this coming.”
This phenomenon of boom vs bust is called a “K Shape Recovery” (read more on this here), where one part of the economy rides a wave up and to the right while the other rides a challenging downward trend. We are hearing mostly about the downward trend, largely because it has been so devastating to the country’s unemployment rate and SMB service economy. Net/net for many small business owners, things are as bad as they’ve ever been. And yet for a merchant down the street, they are as good as they’ve ever been. So where do we go from here?
We are in inning one of a massive reboot of the American economy. C19 drove a massive CTRL ALT DEL in our economy, but the turnaround is already happening – entrepreneurs aren’t waiting. As highlighted last week in the Wall Street Journal, applications for EID numbers (you need one to start a new company) are up about 40% over 2019 (3.2 million this year vs 2.7 million a year ago same time) and are at the highest levels in a decade.
In short, entrepreneurs aren’t waiting for the economy to “come back” – they are already spotting opportunities and launching new companies. There’s a catch, though. The merchants of the post-C19 economy won’t be building around “Main Street” real estate like their predecessors, at least not until we have more clarity on what the rules of a post-pandemic world look like. Instead, they are building around an SMBTech stack – the SMBTech stack is the new Main St storefront.
Think about it – if you were launching a new restaurant today, would you do so without mobile ordering, pickup and delivery via Slice, Toast, DoorDash or another technology platform? If you were launching a women’s clothing boutique, would you do so without an ecommerce presence on BigCommerce, Shopify, Etsy or Poshmark? Or if you were opening an outdoor gear rental business would you do without a POS system from Square or a web site from Wix?
Today in almost every vertical there are SMBTech platforms like Brightwheel and ServiceTitan offering "operating systems" for SMBs. Every single new company formed in every single industry will start with the question of “What technology do I need to launch and grow my business?” This is a trend that started a decade ago and will accelerate at an unprecedented pace over the next 6-12 months.
C19 didn’t start this trend towards the importance of SMBTech, but it likely accelerated it by 3-5 years. We track an index of 22 SMBTech companies which shows over $450 billion in market value created over the last decade by companies like Square, Shopify, Intuit, Wix, BigCommerce, RingCentral, Zendesk and others. It’s a category not many investors understand, because for decades prior to the iPhone era, the majority of the technology industry was focused on large enterprise. As we cover in our prior post on the subject, everything changed in the 2005-2010 era with the rise of AWS, the iPhone, digital marketing and integrated fintech. We aren’t the first to spot this trend – SMBTech companies have some of the best post-IPO returns of any asset class, and many of the top names are up over 100% this year, recognition by investors that the future looks bright for the SMB economy:
Square (SQ) +187% YTD
Shopify (SHOP) +171%
Wix (WIX) +123%
Hubspot (HUBS) +89%
BigCommerce (BIGC) + 252%
RingCentral (RNG) +69%
While we can paint a rosy picture, the reality is also challenging. Starting a small business is hard, and it’s even harder today with C19 rules and regulations constantly shifting, borrowing capital remains a challenge and of course – perhaps most difficult – competing with larger, national brands. In the restaurant space, for example, companies like Starbucks, Chipotle, Shake Shack and Domino’s have been investing in technology for many years now and have never been more “tech forward.” Chipotle forecasts mobile orders will make up more than 50% of its business eventually, Domino’s has famously parlayed an aggressive investment in technology into more than 75% of its orders coming from digital channels (mobile + web), and Shake Shack has announced entirely new restaurant concepts based on mobile ordering and pickup. In short, there is a high likelihood these brands win more than their fair share of the market in the near term.
Five to ten years ago, it would have been very difficult for an SMB to compete. Today, it’s a different story. Innovation and scale from SMBTech leaders means new upstarts can deploy and leverage comparable tech stacks on Day 1. Want to launch a new, local authentic pizza restaurant? Create a web site with Wix, offer your customers ordering via the Slice mobile app, POS from Square and online marketing from Hubspot. Not only is it doable, it’s far easier and cheaper than ever before to adopt and leverage technology as an SMB. As a result, we anticipate almost every business started in the post-C19 era will be built on a modern “SMBTech Stack” on Day 1. You’d be crazy to do it otherwise.
Can SMB’s survive in a “big tech / big brand” world? It won’t be easy. But again, we aren’t starting from scratch. Shopify’s annual GMV (gross merchandise sales by merchants on its platform) was $125 million in 2010 – this year it will be over $120 billion. Amazon reported $54 billion in third party provider revenue on its platform in 2019, eBay $90 billion, Etsy’s GMV run rate is $10 billion, and restaurant focused platforms like Toast and Slice are both on track to handle billions in GMV in 2021. Net/net hundreds of billions of dollars in revenue for SMB’s is now flowing through established and thriving platforms that barely existed a decade ago (eBay and Amazon existed, but the SMB portion of their platforms have grown by $100B+ in a decade).
For small businesses created in the post-C19 era, the adoption of an SMBTech stack should make them more profitable and durable than their predecessors. First, digital sales are typically higher margin than in-store. Second, merchants may be able to avoid the costly overhang of commercial real estate that puts the business in a “Going out of Business” mode when the economy turns (or experiences another global pandemic, god forbid). Third, we are seeing very positive momentum with technology platforms providing capital to merchants, replacing the role typically played by community banks (which have largely disappeared). Square has been an innovator in this area, and has already provided over $1 billion in loans to over 100,000 merchants. Better technology, less overhead and access to capital will provide a tailwind for entrepreneurs launching a new business in the back half of 2020 and into 2021.
For the American economy to reboot, we need small business to survive, reboot and thrive. This reboot will be built on technology and will help drive more profitable, more enduring companies. Let’s go!
Jeff Richards (twitter: @jrichlive) and Tiffany Luck (@lucktm) are investors at GGV Capital, a global venture capital firm with over $6 billion under management. GGV Capital portfolio companies included above include Square, Zendesk, BigCommerce, Slice, Brightwheel and Poshmark.