SurePath Capital Breaks Down Last Year’s Money Moves in SMB Software

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Last week, my firm SurePath Capital Partners released its annual State of SMB Software Report, which looks at fundraising and exit activity in the SMB software space in North America. 

To isolate the SMB deal activity, we analyzed over 3,700 deals, narrowing them down to 287 venture deals, 27 private equity (PE) deals, 11 M&A deals, and 2 IPOs representing over $6 billion in deal proceeds.

We track SMB software companies across three broad categories: grow my business (front office), run my business (middle office), and track my business (back office). For VCs, most activity concerned the front office. For PE firms, the middle office was most popular.

While there are some pure-play companies that just serve small businesses, most companies serve small and mid-market customers. This mirrors our deal practice at SurePath, where we work with software companies serving freelancers all the way up to mid-market enterprise.

Below are the key takeaways from this year’s report.

Early stage funding is alive and well across all software categories: There were over 200 early stage fundraising transactions in 2017. Martech, as an example, while crowded already, still saw 96 funding deals. Despite this funding activity, we do see consolidation coming in the future. There are just too many point solutions. Most of them will not figure out customer acquisition at scale.

Deal activity was broadly distributed across categories: Venture Capital funds invested mostly in front office applications that help SMBs grow. Private Equity firms preferred middle office applications that help their clients run their businesses. The largest exits were in back office, especially payments.

SMB software companies serve a wide range of customers: “SMB” covers everything from a freelancer to large mid-market enterprise. Most of the companies that transacted in 2017 serve both the small and the mid-market. There were relatively few players focused on just one segment of the market.  

Vertical software is on the rise and attracts healthy valuations: Over $1 billion was invested in vertical-specific companies last year. The restaurant vertical was the most active. Upserve & Toast alone raised over $200 million. Construction and home services make up the next busiest vertical.

Software and payments are like peanut butter and jelly: Adding payments grows revenue per customer, makes the software stickier, and completes the solution for the business owner. 

Few IPOs, but strong public market performance: There were no pure play SMB IPOs in 2017. However, our SMB Index outperformed all major indices. Lending Tree, Square, and Shopify were the top performers. Lending Club experienced the biggest decline.

Mark MacLeod is the Founder of SurePath Capital Partners, the leading strategic financial advisory firm to the global SMB software market. Follow him at @startupcfo.