$17 Billion in Capital Flows into SMB Software Companies in Q2

SurePath Capital Partners’ “State of SMB Software” report is always a treasure trove of insights. The Q2 report came out this week, and it includes some revealing nuggets about where investors believe the biggest opportunities exist within the diverse and expansive small-business SaaS industry. According to the report, $17 billion in deal proceeds flowed to SMB software companies in Q2 across 247 venture deals; six private equity growth, buyout or leveraged buyout deals; 17 M&A deals; and four initial public offerings.

SurePath has organized the SMB software industry into three buckets. The first, “grow my business” is focused on solutions that help SMBs acquire customers (martech, e-commerce, social media management). The second category “run my business” includes tools that help SMBs manage their day to day operations (presence management, booking, productivity, CRM). The final category, “track my business” is focused on back-office solutions (accounting, payments).

Overall SurePath’s report shows that VC and private equity investors were most excited about the “run my business” category in Q2. However, it was also a big quarter for deals in the accounting/invoicing software category (track my business), notably H&R Block’s acquisition of Wave Apps, which we covered here when it was announced.

We find it notable that “grow my business” is receiving less capital than tools more focused on a small business’s day-to-day operations. This aligns with our view that the energy in the local space is moving from an emphasis on helping small businesses acquire customers to helping them run their businesses more effectively.

In fact, the LSA’s Modern Commerce Monitor small business survey research has consistently shown that small businesses are motivated by the desire to save time and run their businesses more efficiency when they acquire software.

Here are some specific highlights from the Q2 report, from our point of view.

  • Restaurant tech is a very hot vertical in the SMB software space, according to the Q2 report. In fact, restaurant tech has raised more in the first half od 2019 than it did in all of 2018. The biggest money-raisers so far this year are DoorDash ($365 million), Toast ($365 million) and EZ Cater ($250 million).
  • Accounting/invoicing is also hot, as noted, with VCs pouring $666 million into accounting software in Q2 2019, vs just $129 million in Q2 2018, and just $109 million in Q1 2019. SurePath suggests the biggest opportunity is in building easy to use accounting software for very small businesses, many of which do not currently use any accounting software. The $405 million H&R Block-Wave deal was a big factor in the Q2 bump for accounting deals.
  • SurePath cites two deals that indicate banks are moving more into SaaS in order to broaden their appeal to small and medium-sized businesses. Namely Morgan Stanley’s acquisition of Solium and J.P. Morgan Chase’s acquisition of InstaMed. We recently covered this topic from a partnership angle, noting BNP Paribas’ deal with OneUp to compete with fintech giants like Sage, Intuit and Xero.

While this quarter was quite a bit smaller than Q1 (50% less total deal volume) it was up 2.5X Q2 2018. Our takeaway is that investors continue to support the vast SMB opportunity while honing in on key areas like fintech and restaurant tech. “Grow my business” solutions are still attracting capital, but the energy and momentum seem to be moving towards middle and back-office solutions, as well as solutions that are focused on owning key verticals.

What the SurePath data doesn’t capture explicitly is the money that is being invested by product teams in the accounting, invoicing and payments area by front of the office SMB SaaS players.

Companies like Thumbtack, which we wrote about earlier this week will be pushing heavily on expanding its product offerings to hook into the invoicing, tracking, and payment resolution for their customers. We’re confident the SMB SaaS companies operating in the “grow my business” segment today are investing heavily in the “run my business” and “track my business” areas as well. And that investment may well dwarf the $666 million in VC money that flowed into account/invoicing last quarter.

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