It was a busy year for the small business software industry. Some of the leading SMB brands raised piles of money, made game-changing acquisitions, and launched new products and services to box out competitors and make their platforms stickier. We took a look back through the Tech Adoption Index blog, newsletter, and Twitter feed to remind ourselves of the biggest SMB technology events of 2018.
Here’s our list on the 10 most important SMB SaaS stories of 2018.
10. Office Depot Rolls Out Business Services
As a retail business with transactional relationships with most of its customers, Office Depot needed to find ways to build deeper customer relationships in order to fend off direct competitors like Staples and a range of disruptors from Amazon to WeWork. Hence the company’s push, which we reported on back in February, into both business services and co-working space. Office Depot reports that some 5.9 million SMBs operate within three miles of its stores. It aspires to play a much bigger role in supporting these businesses, well beyond selling them paper clips and toner cartridges.
Office Depot also targeted IT services providers as resellers for its “Workonomy” IT and business services offering for SMBs. And it experimented with a WeWork style co-working space at a new store in Los Gatos, CA. These experiments are works in progress but they signal how legacy an SMB brand like Office Depot needs to adapt to an increasingly SaaS-driven SMB marketplace.
According to an Office Depot midyear earnings presentation, Workonomy purports to offer small businesses services that include business and health insurance, something it calls “customer service as a service”, hiring services, business coaching, and tax services.
9. Wix Launches Ascend Platform
One feature of the 2018 SMB software landscape was the growing race among Squarespace, Square, and Shopify to assemble the right package of services in order to become the “one stop shop” to help small businesses run everything from marketing to finance. Website builder Wix signaled that it wanted in on this turf war with the launch of Ascend, its own take on the all in one, full-stack, small business operating system.
It certainly makes sense for Wix to move toward an all-in-one solution. Selling inexpensive websites at scale is a costly endeavor with customer acquisition costs rising every day. With a broader solution, Wix can expect to raise customer lifetime value, essential to offsetting ever-rising customer acquisition costs.
8. Service Titan Raises Big Bucks
When Service Titan announced its $165 million D round in November, at a valuation of $1.65 billion (following an earlier $62 million C round), we wondered how a company with just 2,500 customers could be valued so highly. Then we learned of the buyout of MindBody for $1.9 billion and its 67,000 customers (see item No. 2). Here’s the simple math. MindBody’s 67,000 customers were valued at about $28,000 each while Service Titan’s 2,500 customers were valued at $660,000 — a jaw-dropping 23 times more. This really points to two vastly different business models – one focused on customer acquisition, the other focused on selling extremely high-value solutions to a niche market. It will be extremely interesting to watch how these two companies shape the future of SMB SaaS market.
7. GoDaddy Acquires Main Street Hub
As we heard from GoDaddy’s Irana Wasti at the 2017 Tech Adoption Summit, the domains and websites platform has been aggressively building out its marketing stack. So it was no surprise when GoDaddy acquired Austin-based marketing automation platform Main Street Hub last January.
At a valuation of just $175 million after raising $65 million it was probably a less thrilling exit than Main Street Hub’s founders and investors might have hoped for. Interestingly, Vista Equity Partners, one of the firms on the selling end of the Main Street Hub deal, was on the buying side of the $1.9 billion MindBody deal (see No. 2). This suggests Vista found the vertical focus that MindBody has been pursuing favorable to Main Street Hub’s broader horizontal approach.
6. ZipRecruiter Rakes in $156 Million Raise
Customer experience is king in small business software, and job matching app Zip Recruiter saw an opportunity to make the process of finding good candidates for job openings easier. Zip Recruiter made two early bets that have paid off. First, it invested in AI to improve its matching capabilities. And second, it took a mobile-first approach before it was an obvious choice. In October, the company raked in $156 million in new venture funding to accelerate its already rapid growth.
5. Web.com Sold to Siris Capital
While we wondered about the high valuation of Service Titan – $660,000 per subscriber – the Web.com transaction offered another data point – $588 per subscriber – and there is no missing K in that figure. With a reported 3.4 million customers, Web’s transaction demonstrated that purely pursuing customer acquisition at any price does not lead naturally to an attractive exit. While early shareholders may have done well with this deal, the per customer valuations hints at some softness in Web.com’s business model.
4. Square Enters HR/Payroll Space
In November Square also announced it would move into additional slices of the SMB operating system by enabling their merchants and business owners to offer their employees health care, retirement benefits, and other human capital services. This push into another valuable slice of the SMB wallet puts Square at perhaps the forefront of consolidating SMB wallet share. As with its other moves into adjacencies, time will tell if Square’s foray into the human capital stack further solidifies its very critical role in the SMB space.
3. Gusto Tops 60,000 Customers, Offers Free Product
We’ve covered Gusto for some time now as it pursues a piece of the payroll, benefits and human capital space. The legacy market leaders — Paychex and ADP — have a combined $78 billion market valuation. So it was no surprise that Gusto could raise a C round of $145 million at a $2 billion post-money valuation. With some 60,000 customers, investors valued Gusto’s current customer base at about $33,000 per customer. This suggests that investors see Gusto continuing to take share from the market leaders. They do it today without a direct outbound channel relying on inbound leads and some CPA partnerships. Our guess is that they’ll need to grow even faster in 2019 to make their most recent funding round look like a smart investment.
2. Mindbody Sold for $1.9 Billion
A $1.9 billion valuation for a scheduling software company with 67,000 customers is yet more evidence of how investors are bullish on small-business platforms and are making very big bets on who is positioned to scale from customer counts in the tens of thousands up into the hundreds of thousands and beyond. As we noted in item No. 8 in discussing ServiceTitan’s big year in fundraising, investors are betting on two pathways, one focused on customer acquisition (MindBody), and the other focused on selling extremely high-value solutions to a niche market (ServiceTitan). This isn’t a zero-sum game. Either model could succeed or fail. But if one bet pans out more than the other, that may signal where more of the smart money will flow in 2019.
1. Square Acquires Weebly
Square’s acquisition of site-builder platform Weebly is yet another example of Square moving directly into an adjacency. At a purchase price of $365 million on an investment of about $80 million, it was probably seen as a good but not great exit for Weebly. According to Pitchbook data, when Weebly took a C round of $35 million in 2014, it’s post-money valuation was $490 million. This means Weebly went for roughly a 25% discount on its peak valuation. It will be interesting to see how much energy Square invests in Weebly and if it enters the marketing stack wholeheartedly. These transactions don’t always end well. Intuit’s $500 million acquisition of DemandForce comes to mind as one of many transactions that looked good on a whiteboard but ultimately failed. We expect Square to do better with Weebly since offering presence is a natural adjacency for Square and a key element in staying a step ahead of competitors like Shopify and Squarespace.
Charles Laughlin and Neal Polachek contributed to this post.