Silicon Valley Looks to Put a Cloud Over Main Street

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cloudsIf you listened to folks in Silicon Valley, it would seem like there has never been a better time to run a small business. The internet, they say, is the great democratizer, eroding many long-standing barriers to entry that kept competition at bay. New technologies make it easier and cheaper than ever to get a business off of the ground and compete with much larger players.

But the data suggests otherwise. In fact, the past decade has been much more of a boon for big business. According to census data, small businesses’ share of employment has declined markedly. The portion of employees working for retail businesses with under 500 employees has dropped 10% in the past eight years, declining from a little over 40% in 2006 to 36% in 2011.  As the New York Times pointed out, very small companies, with 20 or fewer employees, were a shrinking proportion as well.

That gap, the disparity between the promises of technology and the reality on Main Street, points to an unintended consequence of the tech-marketing industry’s voracious rate of growth.  It suggests that the top-end growth of the technology sector — the creation of new products — has vastly outstripped the abilities of the small business owner consume it, limiting the markets ability to support new products.

However, a new effort by small business technology companies to network various products — from payroll and accounting to point-of-sale and marketing — will help reduce the complexity across the software stack, creating renewed headroom for growth. It’s starting in back-office, automating some of the more redundant aspects of running a business, but eventually, that type of integration will make its way to the point-of-sale and eventually to the marketing and advertising industries as well

In Payroll, A Sign of the Times
Joshua Reeves is one of the voices in Silicon Valley that thinks the golden age is nigh for SMBs. A few years ago, Reeves and two fellow Stanford engineering grads made a big bet on one of the backwaters of entrepreneurial life: payroll. In 2011, they founded ZenPayroll, a startup that develops payroll software for small businesses. Fast forward three years, and the company is processing $1.1 billion in payments on an annual basis.

Like the payments company Square, ZenPayroll has found its early success by selling to the smallest segment of businesses, many of whom have been underserved by the existing market. Reeves says that nearly 40% of small business still do payroll by hand, largely because the incumbents were either too costly or their systems required resources — say an office with a computer and server— that many do not have.

Today, the value proposition for ZenPayroll and other cloud providers is driven primarily as an alternative to nothing. By developing software in the cloud, there’s no need for servers to store the information. If the system breaks down, the company fixes the problem remotely. Plus, a business owner can manage the account from a mobile device. All of this, makes the product cheaper and more accessible to a wider audience. 

That pitch has spawned a boon in the number of companies selling software to businesses. There are new startups building software for taxes and accounting, for compensation and employee tracking, for point-of-sale, loyalty and marketing — all developed around the same premise. Each piece of software claims to be better, faster and cheaper than its legacy predecessor — a claim which is more or less true. Just earlier this week, LightSpeed, one of a number of venture-backed retail software providers, raised $35 million — and that’s on the lower end of the capital spectrum for its competitors.

But Square — arguably the largest and most mature of these upstarts — has learned that expanding a market is not the same as changing one. The payments industry, like payroll, is big and complex, and it’s much easier to add a block to the top than pull one from the center. In the world of business software, the products more or less function as the always have, with payroll handling payroll and point-of-sale handling point-of-sale and little conversation between the two. The same dynamics around scale, and which business can do what remain relatively the same. For small business, the cloud revolution looks more like remodel.

A Cloud That’s Not Just Cheap and Easy
Let’s take a step back, and think about these changes within the broader story of connectivity. The internet is more or else a story of networks. As people add parts of their lives to the network  — from mail to friends to finances — the digital network starts to better resemble our real-life one.

The same works for a business. The more parts of a business that run off of a single network, the more data to feed an algorithm, and the easier it is for a computer to make decisions without human input. However, the systems that run businesses tend to be slightly more complicated than our lives, because, well, inventory is (usually) harder to manage than friends. But cloud storage made that all feasible for small businesses by reducing the price point and eliminating the server.

For Reeves, the cloud offers much more than a cheaper version of the past. The revolution for small business, he argues, isn’t about recreating payroll or point-of-sale, but in using networks to rethink the relationship of these products to one another. 

“When we thought about our role it was not just about making compensation software easier and faster, but rethinking the purpose of the product,” said Reeves. “Modern software isn’t just about mobile or easier user experiences; it’s how these companies work with each other. Ten modern products is not good enough.They need to work seamlessly together.”

To wit — ZenPayroll rolled out a series of new partnerships earlier this month aimed at eliminated much of the redundancy facing business owners in back-office. Today, that means allowing payroll, accounting, benefits, HR and more to share some basic data and eliminate redundancy in the back-office. Eventually, Reeves wants to start rethinking the back-offices relationship with other parts of a business. He says the company is currently in talks with point-of-sale providers to allow small retailers to tie compensation to the performance of its salespeople each day. Make a few big sales — receive 100 bucks that day. That kind of stuff.

Beyond the Back-Office
The back-office has always favored a certain wonkishness that seems easily compatible with computing. As Reeves puts it, “payroll is a set of rules — both internal and legal — and computers are much better at following rules than humans.” However, as software pushes its way into parts of business traditionally considered in need of a creative touch of human, there will be new opportunities to tie the front and back offices together.

The networked approach has already taken hold in email and loyalty — two areas which have always been data-driven. Companies like Pardot and Hubspot, which provide marketing automation solutions, have exploded in recent years as larger brands look for ways to use data to help streamline operations.  Collectively, B-2-B marketing automation companies brought in $750 million last year, more double from two years ago. It’s still small, but heading in the right direction. 

But automation has the potential to impact small businesses in a much more profound way. Today, most tech companies build for brands because they have the resources — internal departments, agencies, etc. — to put these new technologies to use. Small businesses do not.  But for smaller businesses, a cohesive digital business stack — where payroll, point-of-sale and loyalty are run on the same server — could create an opportunity to easily share data with new systems. It’s an API for a business — just as Facebook has an API for our friends.

Steven Jacobs is Street Fight’s deputy editor.