Mark MacLeod and his team at SurePath Capital released their annual report today. As in past years, this report captures the financial essence of the SMB software activity in the U.S. In 2019, some $61 billion worth of identifiable capital was put to work to solve the challenges small business owners face in running the front, middle and back of the house activities.
I say “identifiable” because while SurePath Capital has handsomely added up rows and columns of Venture Capital, Private Equity and IPO activity, we believe there’s considerably more money being invested into the space. For instance, if you consider SurePath’s SMB Software Index, you’ll note that three companies — Automatic Data Processing, Intuit, and Paychex — account for $172 billion of market capitalization.
No doubt each of these companies is are actively investing in their businesses to improve the experience they deliver to the small business customer. So while $62 billion is nothing to sneeze at, there’s a much bigger pool of capital focused on the sector.
SurePath identified restaurants as one of the sectors garnering a significant amount of capital and attention in 2019. Of the $1.9 billion invested in the sector, $1.1 billion was consumed by DoorDash. Take out that raise and 2018 saw about as much activity dollar-wise as 2019. Toast was a significant benefactor of the sizzling sector (pun intended), raising $250 million.
So what’s up with the restaurant space? This piece lays out some of the reasons restaurants are adopting new technology. Whether it is increasing order size, making it easier for customers or patrons to experience the restaurant or leveraging loyalty programs to retain the best guests, there are substantive ways new technology is paying off for restaurant operators.
Interestingly, the same article indicates that 32% of operators feel as though their technology adoption is lagging. And we know that millions of restaurant operators haven’t yet adopted new technology so no wonder there’s lots of energy in this sector. The modern consumer expects a modern dining experience — increasingly they’ll be getting it.
One other observation. I am struck by how well Chipotle has figured out the modern consumer. Two years ago the company embarked on a digitization effort to make it easier for customers to order from their phones and laptops. Today, digital sales account for about 40% of Chipotle’s total sales. As companies like Chipotle and Dominos make it easier and easier to meet the needs and expectations of the modern consumer, smaller more localized restaurants will necessarily have to deploy technology to remain competitive.
The other sector that SurePath calls out is legal. Clio took down the biggest chunk of money with a $250 million raise last year or 54% of the $463 million raised in the sector. Like other segments, the modern client — aka modern consumer — has expectations around things like immediacy and transparency.
Lawyers, like other local service providers, can no longer hide behind an aura of legal binders and leather-bound law books. Instead, today’s lawyer needs to leverage technology where it matters most in terms of delivering a compelling client experience. And according to Clio’s 2019 Annual Legal Trends Report, potential Gen Z or Millennials clients are more likely to consider a lawyer’s website, brand, and reviews that prior generational groups.
Again, it’s no wonder money is flowing into the legal sector. Thee expectations of Gen Z and Millennials continue to mirror what they might expect from Chipotle, One Medical, Amazon or any other company that puts today’s consumer at the center of their business model.
This report is packed with information. Mark and his team at SurePath do a great job of gleaning insights from a massive trove of data.
“We launched the State of SMB Software report in 2017 because we saw the massive market that was developing here and wanted to make sure we deeply understood it,” Mark told us yesterday. “SurePath is the only investment focused exclusively on the SMB software market. We need to know everything that is going on and over time know every SMB software company out there. Today’s SMBs are increasingly turning to software for every aspect of their business. The SMB software market is large, global and growing quickly.”
As no stranger to local and small business space, I am glad SurePath has chosen to focus on this market. We know it is a massive market. We also know it has hurdles that those in enterprise software don’t have to clear. We also know that without technology adoption by local and small businesses around the country and around the world, our main streets would be desolate. Or, even worse, homogeneous.