Restaurant, Legal Tech Still the Big Stories in SMB SaaS M&A

SMB software deal volume was a little slow in Q3, but big deals in restaurant and legal tech show the smart money is still chasing a winner in those two prized verticals.

Every quarter, SurePath Capital Partners releases its State of SMB Software Report, chronicling the ebb and flow of investor dollars into companies trying to build billion-dollar-plus companies. We’re always eager to eat up SurePath’s numbers, plus the insights they offer on where the market is heading.

Total deals were down almost 60% from Q2 to Q3, according to SurePath. Q3 was slow mainly because of the normal July-August summer lull, with 56% of the VC deals in the quarter happening in September. Another factor was the lack of mega-deals in Q3 — with nothing exceeding $1 billion closing.

The big story of Q3 is the continued investor enthusiasm for vertically focused SMB platforms, a trend we’ve covered on the LSA Insider blog.

The big winners in Q3 were the restaurant POS platform TouchBistro, which raised $121 million in September. And Clio, the all-in-one business management platform for lawyers, raked in $250 million, also in September.

Support for vertical plays is based largely on the view that without specialization, platforms will struggle for adoption because they will lack the specialization a small business needs from software for it to be truly valuable. We’ve talked to many SMB SaaS founders on our podcast who have told us that they moved from a horizontal to a vertical approach for this reason.

The counterargument to going vertical is that growth will eventually slow as companies penetrate deeper into the available market within a single vertical. Right now, this objection seems theoretical as multiple companies battle it out in large verticals like legal and restaurants for what seems like an endless supply of prospective customer.

The biggest competition so far hasn’t been from rival apps as much as from SMBs that don’t use any technology. The generational shift to younger, app-first business decision-makers promises to open up new opportunities for SMB SaaS companies.

Once customer acquisition becomes a zero-sum game in a given vertical (and likely well before that point), consolidation will occur or players will adapt their products to new categories in order to continue growing.

The story for SMB related IPOs in 2019 has been at best a mixed bag. According to SurePath’s analysis, four of the eight relevant companies that have gone public this year are trading below their IPO prices. The best performer is Lightspeed (SPD), and the weakest performer has been Slack (WORK).

What’s the common denominator?

“Money-burning unicorns with low margins and high valuations have fared the worst,” the report said.

This adds to the conversation we’ve been having on the blog and our podcast about whether the market has had its fill of SMB related companies that can’t seem to mount a credible defense of their aggressive valuations. WeWork‘s recent face plant is one example of this. Perhaps we can point to Slack as another.

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