Josh Scherman has one of the best available vantage points for assessing the health of the small-business software market. SMB software was on fire in 2019, with $61 billion flowing into the space. As we move deeper into a less certain 2020, Josh remains bullish that the space, in all its vastness, has enormous upside.
Josh is a vice president at SurePath Captial Partners, a firm that advises SMB software companies as they look to raise capital or find attractive exits. SurePath’s leaders, including Josh and founder Mark MacLeod, have backgrounds at SMB-focused startups. Josh was VP of Business Development at inDinero, an accounting software firm targeting startups. Mark is a former Freshbooks CFO.
SurePath is also a noted thought leader in SMB software, producing a steady stream of content, notably its State of SMB Software report, which measures the volume of deals and highlights trends. Josh will share highlights of the report at the upcoming Localogy 20/20 event in San Antonio.
Earlier this week we had a chat with Josh to get his take on events in the SMB world. What the year ahead looks like. And what it takes to raise capital and succeed in this sector. The following are some highlights from the conversation, with audio clips for the benefit of those of you at the gym or in your cars.
What’s the End Game in ‘Restaurant Tech’?
After a monster year of fundraising in 2019, “restaurant tech” players like Toast, which raised $250 million last year, are sitting on piles of capital ready to be deployed. We asked Josh what the end game is for this sector following the inflow of so much capital.
The mission for companies like Toast, UpServe, TouchBistro, and others raising capital is to deploy that capital to convince as many restaurants as possible to make the painful switch from a legacy POS system to a modern system, which Josh argues will improve the business lives of restaurateurs. Then it’s a matter of layering on services to become more and more critical to the operation of the business.
“The concept of winner take all is pretty dramatic,” Josh said. “But it does feel like we are heading in the direction of having a few dominant players in this space.”
How Will Today’s Headwinds Change the Outlook for SMB Software?
Some potential headwinds have emerged in recent days and weeks, most notably the massive Wall Street selloff over coronavirus concerns (some of which has been since recovered). And there is the hangover from WeWork and other high flying companies at least tangential to the SMB space that highlight some of the worst tendencies in tech.
Josh doesn’t see these issues having much impact on the SMB software market, though he does believe many companies will have extra motivation to tighten up operations and perhaps access capital markets now as a hedge against any future uncertainty. One thing the SMB market has going for it is rationality.
“Investors need to see that the sausage machine is working,” Josh said. “They need to see a path to accelerating growth and profitability.”
What’s More Important, the TAM or the Team?
We also talked about what is the single most important factor in deciding whether to invest in an SMB software business. Josh said of course TAM (total addressable market) always matters. But he said that the management team is particularly important in the SMB space.
And by this, he doesn’t mean the best academic pedigree or technical background.
“You can’t fake a passion for the SMB market,” he said.
Founders who have that passion will spend countless hours with SMBs learning about their businesses, pain points, goals, and objectives. In Josh’s experience, the founders that get into the SMB market just to make money invariably fail.
Remember, Josh will share highlights from SurePath’s State of SMB Software Report on the final day of Localogy 20/20.
11:20 – 11:40
The State of Local SaaS and Whether to Integrate, Consolidate or Exit?
Our final conversation will stitch together all of the signals in the local SaaS market into a coherent narrative. Or at least we will try. Some questions that will exist beyond Localogy 20/20 include, which comes first, integration or consolidation? When consolidation occurs, does integration lead or follow? At the end of the day, SMBs are looking for simple solutions that solve their most pressing business challenges. Whether via consolidation or integration, those that focus on forming partnerships that lead to greater simplicity and ease of use for the local business owner will prevail.
Josh Scherman, SurePath Capital