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Table of Contents
Summary – Reasons for Interest
3-5 Market Size, Fragmentation, Refresh Rate
6, 7 Innovation/Procurement Cycle
8 Macro Tailwinds: SaaS flexibility, internet distribution, bottom up scaling
9 Precedent Cases
10 Investor Landscape
Industry Map
12 Lifecycle of an SMB
13-16 Business Formation Tools
ERP, Legal, Website/Hosting, Productivity/Communication
17-19 Growth and Customer Acquisition Tools
Sales/CRM, Marketing, Commerce/POS
20-23 Business Management Tools
HCM, Finance, Supply Chain/Product Development, BI/IT
Exit Activity & Incumbent Landscape
25 Current Incumbents
26 Acquisition Activity
3
3
Market Size, Fragmentation, Refresh Rate
United Sates
Sources: SMB Group, US Census Bureau Data, World Bank Estimates (www.smb-gr.com/company/smb-market)
Worldwide
Small Office/Home Office (SoHo)1 – 4 Employees
(No commercial location)
Small Businesses5-99 FTE
Medium Businesses100-999 FTE
&Upper Mid-Market
1,000-2,500 FTE
Enterprise 2,500+ FTE
16.5mm firms (72%)21mm FTE (16%)8% total IT spend(6-7% spend growth)
6.3mm firms (28%)55mm FTE (41%)27% IT spend(7-8% spend growth)
100k firms (0.4%)25mm FTE (20%)19% IT spend(6-7% spend growth)
9,000 firms (0.04%)33mm FTE (23%)46% IT spend(3-4% spend growth)
137mm firms (68%)250mm FTE (18%)10% Total IT spend(7-9% spend growth)
65mm firms (32%)700mm FTE (52%)31% IT spend(8-10% spend gr.)
705k firms (0.3%)225mm FTE (17%)21% IT spend(7-9% spend growth)
52,000k firms (0.03%)200mm FTE (13%)38% IT spend(3-4% spend growth)
4
4
Ind
ust
ry R
isk
Market Size, Fragmentation, Refresh Rate
SMB
Lif
esp
an
1 Year Survival Rate
2 Year Survival Rate
5 Year Survival Rate
10 Year Survival Rate
Annual Turnover
Riskiest Industries
Least Risky Industries
Financing Needs
- ~80%
- 69%
- 49%
- 34%
- 10 – 12% (~550,000 – 650,000 firms)
- Transportation, Apparel, Restaurants/Bars, Communication, Travel Agencies
- Real Estate, Insurance, Health Care, Law (i.e. Professional Services and/or Licensed Trades)
- $80k/year average (mostly self-funded and bank credit)
Sources: US Department of Labor, Bureau of Labor Statistics; US Small Business Administration, Office of Advocacy; Fair Isaac Corporation
5
5
Market Size, Fragmentation, Refresh Rate
Source: Profit from the Cloud, 2013 Parallels Global SMB Cloud Insights
6
6
Market Velocity1
Constant Contact:~605k cumulative active
customers (2% Q/Q growth)~50k new customers each
quarter (~40k churn)
Yelp:~74k active business
accounts (13% Q/Q growth)~35% new reviews from
mobile (57mm cumulative reviews)
Innovation/Procurement Cycle
Source: 1. Company filings
Rapidly growing and changing market Willingness to try innovative solutions
0
100
200
300
400
500
600
700
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2012 2013 2014
YELP Quarterly Growth (%, left) CONSTANT CONTACT Quarterly Growth (%, left)
Cumulative Active Listings (thousands, right) Cumultive Active Custmers (thousands, right)
7
7
Software Purchase Plans1
Investment Cycle:
Cloud Computing Adoption:
- 51% of SMBs make at least one new software purchase every 6 months (not including upgrades).
- 66% of SMBs using cloud-based solutions by end of 2013 (up from 14% 2H 2010).
SMB as Consumer
SMB Owners Conditioned:
Demand-side Diversity:
- Tools like Gmail, Drive (Google) and Box began as purely consumer focused before penetrating B2B.
- From a servicing and pricing perspective, the fragmented SMB market resembles B2C approach.
Innovation/Procurement Cycle
Source: 1. Spiceworks State of SMB IT 1H 2013
Rapidly growing and changing market Willingness to try innovative solutions
8
8
Macro Tailwinds
1. SaaS model excellent fit for SMB needs
Huge cost advantages over client-server software (i.e. upfront fee, implementation, maintenance, security); flexibility to scale up/down as needed.
2. Self-serve distribution/sales through Internet
Low cost of customer acquisition, customer service, maintenance through largely self-serve/DIY internet platform.
3. Bottom up approach to market penetration
Earlier to minimum viable product, faster to iterate, improved unit economics through increased ASP, modulated platform by customer size.
9
9
Precedent Cases
SMB Clients/Product Focus Location Exit Value Date Notes
CPA’s, accounting firm/bookkeeping Palo Alto NA$80mm raised
11/13Mix of strategic and VC investment
Web designers, SoHocompanies/domain registration
Scottsdale Acquired $2.25bn 06/11 KKR, Silver Lake, TCV LBO
Wholesaler, biz. services/resource planning*
San MateoIPO:
(NYSE: N)$1.5bn 12/07 Current Market Cap: $6.1bn
Payroll, non-profits/human capital management
Palo Alto Acquired $169mm 06/09Intuit Payroll Services for Small Business
Sales and marketing organizations/CRM*
San FranciscoIPO
(NYSE: CRM)$504mm 06/04 Current Market Cap: $33bn
Bars, restaurants, retail/local listings San FranciscoIPO
(NYSE: YELP)$900mm 03/12 Current Market Cap: $4.9bn
High reward for strong execution across a wide range of horizontal and vertical subsets.
High Bay area concentration
* SMB roots, expanded upmarket
to Enterprise
Source: Capital IQ
10
1 0
Investor Landscape
“Historically, only the world’s largest corporations have been able to afford most productivity-enhancing software, but now even the smallest businesses will have a chance to get in on the action.” – Bay Area VC (~$4.0bn AUM)
”SaaS has changed the paradigm by pushing IT requirements to the cloud into a shared resource…. SMBs are now buyers of software that was previously not accessible to them.” - Bay Area VC (~$1.0bn AUM)
• In last twelve months, only 24 deals totaling $81mm raised1 for companies who list “small business” as focus in their business description.
• Investors must have a sophisticated understanding of unit economic model and ways to improve ASP by moving “upstream.”
• Self-serve product design and sales outreach needed to remain afloat.
• Employ consumer-like pricing and servicing model to tackle fragmented market.
While investors are talking... few have taken action…
1. Source: Capital IQ
11
1 1
Table of Contents
Summary – Reasons for Interest
3-5 Market Size, Fragmentation, Refresh Rate
6, 7 Innovation/Procurement Cycle
8 Macro Tailwinds: SaaS flexibility, internet distribution, bottom up scaling
9 Precedent Cases
10 Investor Landscape
Industry Map
12 Lifecycle of an SMB
13-16 Business Formation Tools
ERP, Legal, Website/Hosting, Productivity/Communication
17-19 Growth and Customer Acquisition Tools
Sales/CRM, Marketing, Commerce/POS
20-23 Business Management Tools
HCM, Finance, Supply Chain/Product Development, BI/IT
Exit Activity & Incumbent Landscape
25 Current Incumbents
26 Acquisition Activity
12
1 2
Lifecycle of an SMB
Year
0 1 3
5
Business Formation
Growth/User Acquisition
Business Management
Average lifespan: 5 years
• Enterprise Resource Planning
• Legal Solutions• Website and Hosting
Services• Productivity and
Communication Tools
• Human Capital Management
• Finance and Accounting• Supply Chain and
Product Management• Business Intelligence
and Information Technology
• Sales and CRM Tools• Marketing Automation
Services• Commerce and Point of
Sale
13
1 3
(Enterprise) Resource Planning Solutions
Business Formation Tools
Leader: Palo Alto Software
• HQ: Eugene, OR
• Founded: 1988
• Funds raised: NA – bootstrapped since inception
• FTE: 56 (LinkedIn)
• Key Exec: Tim Berry, Founder/President
Category Landscape
• 2015 estimated SaaS Penetration: 10%1
• Enterprise Leaders: Netsuite, Oracle, SAP
• 88 solutions listed on Capterra (web-based, 50-99 users)
• Contenders: Aptean, Kenandy, Lettuce, Syspro
• Summary: Product complexity and strength of enterprise players creates significant headwind.
1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf
14
1 4
Legal Solutions
Business Formation Tools
Leader: Rocket Lawyer
• HQ: San Francisco, CA
• Founded: 2002
• Funds raised: ~$72mm (IGC, Google Ventures, Morgan Stanley, August Capital)
• FTE: 183 (LinkedIn)
• Key Exec: Charley Moore, Founder/Exec. Chairman
Category Landscape
• 2015 estimated SaaS Penetration: NA
• Enterprise Leaders: Advisory Board Co., Docusign
• 19 solutions listed on Capterra (web-based, 50-99 users)
• Contenders: Clio, LegalZoom, Shake
• Summary: Particularly fragmented nature of clientele led to early movers and adoption in this space, validation of model, winners largely determined.
15
1 5
Website/Hosting/CMS
Business Formation Tools
Leader: Go Daddy
• HQ: Scottsdale, AR
• Founded: 1997
• Funds raised: $2,250mm (KKR, Silver Lake, Technology Crossover Ventures)
• FTE: 2,435 (LinkedIn)
• Key Execs: Blake Irving, CEO; Bob Parsons, Founder
Category Landscape
• 2015 estimated SaaS Penetration: 11%1
• Enterprise Leaders: Sharepoint (MSFT), SpringCM
• 103 solutions listed on Capterra (web-based, 50-99 users)
• Contenders: Endurance, Network Solutions (Web.com), Rackspace, Squarespace
• Summary: SoHo solutions predominate, trouble is increasing ASP/scaling to more profitable market segments.
1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf
16
1 6
Productivity/Communication Solutions
Business Formation Tools
Leader: Ring Central
• HQ: San Mateo, CA
• Founded: 2003
• Funds raised: $44mm+ (DAG, Hermes Growth, Khosla, Scale, Sequoia)
• Exit: 9/13, $97.5mm IPO (NYSE: RNG)
• FTE: 976 (LinkedIn)
Category Landscape
• 2015 estimated SaaS Penetration: 75%1
• Enterprise Leaders: Blue Jeans Network, Cisco, LogMeIn, Skype
• 118 solutions listed on Capterra (web-based, 50-99 users)
• Contenders: Grasshopper, PivotDesk, Speek, Twilio
• Summary: Office Suite tools far less developed (only 6%1 est. 2015 SaaS penetration) than web communication/collaboration.
1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf
17
1 7
Sales/CRM Solutions
Growth and User Acquisition Tools
Category Landscape
• 2015 estimated SaaS Penetration: 38%1
• Enterprise Leaders: RightNow, Salesforce, ServiceNow
• 138 solutions listed on Capterra (web-based, 50-99 users)
• Contenders: 37Signals (High Rise), Workbooks, Zestia (Capsule), Zoho
• Summary: Fragmented landscape with a number of startups in last 5-7 years, particularly int’l (UK, IN)
1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf
Leader: Insightly
• HQ: San Francisco, CA
• Founded: 2009
• Funds raised: $13mm (Emergence Capital, SozoVentures, TrueBridge Capital)
• FTE: 50 (Crunchbase)
• Key Execs: Anthony Smith, Founder/CEO
18
1 8
Marketing Automation Solutions
Growth and User Acquisition Tools
Category Landscape
• 2015 estimated SaaS Penetration: 15%1
• Enterprise Leaders: Hubspot, Marketo, Oracle, Salesforce
• 68 solutions listed on Capterra (web-based, 50-99 users)
• Contenders: Act-On, Constant Contact, MailChimp, Nurture
• Summary: Enterprise vendors strong but, with vast SaaS penetration ahead, room persists for SMB tools.
1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf
Leader: InfusionSoft
• HQ: Chandler Heights, AZ
• Founded: 2001
• Funds raised: $73mm (Arthur Ventures, Goldman Sachs, Mohr Davidow)
• FTE: 546 (LinkedIn)
• Key Execs: Clate Mask , Founder/CEO
19
1 9
Commerce/Point of Sale Solutions
Growth and User Acquisition Tools
Category Landscape
• 2015 estimated SaaS Penetration: NA
• Enterprise Leaders: Amazon Webstore, Deem, Demandware, Digital River, IBM Websphere
• 116 solutions listed on Capterra (web-based, 50-99 users)
• Contenders: BigCommerce, DropShip, Magento
• Summary: Consumer and retail solutions prevail, leaving underserved verticals (manufacturing) and services (shipping/logistics).
Leader: Shopify
• HQ: Ottawa, ON
• Founded: 2005
• Funds raised: $122mm (Bessemer, Felicis, FirstMarkGeorgian, Insight)
• FTE: 395 (Crunchbase)
• Key Execs: Tobias Lutke, Co-founder/CEO
20
2 0
Human Capital Management
Business Management Tools
Category Landscape
• 2015 estimated SaaS Penetration: 22%1
• Enterprise Leaders: HireVue, Successfactors (SAP), Taleo (Oracle), Workday
• 122 solutions listed on Capterra (web-based, 50-99 users)
• Contenders: Namely, Octopus
• Summary: As with Marketing, many strong enterprise-level tools ignore smaller end and/or niche services (i.e. video interviewing).
1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf
Leader: Halogen Software
• HQ: Ottawa, ON
• Founded: 1996
• Funds raised: $8mm+ (JMI, Covington Capital, TD Capital, Triax Capital)
• Exit: 4/13, $55mm IPO (TSX: HGN)
• FTE: 297 (CapIQ)
21
2 1
Finance/Accounting Solutions
Business Management Tools
Category Landscape
• 2015 estimated SaaS Penetration: 27%1
• Enterprise Leaders: Intuit, Ultimate Software, MSFT
• 73 solutions listed on Capterra (web-based, 50-99 users, Accounting + Loan Servicing)
• Contenders: Bill.com, Freshbooks, Intacct(accounting tools); Bond St, Fundera, Kabbage(lenders/loan brokers)
• Summary: Like Legal (i.e. licensed trade) early movers and adoption, now likely consolidation.
1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf
Leader: Xero
• HQ: Wellington, NZ
• Founded: 2006
• Funds raised: $355mm+ (Accel, Matrix Capital, ValarVentures, Peter Thiel)
• Exit: 4/13, $55mm IPO (TSX: HGN)
• FTE: 297 (CapIQ)
22
2 2
Supply Chain/Product Development
Business Management Tools
Category Landscape
• 2015 estimated SaaS Penetration: 25%1
• Enterprise Leaders: Arena Solutions, Atlassian, DropShip, Ketera, Rally Software
• 106 solutions listed on Capterra (web-based, 50-99 users, PLM + Supply Chain Mgmt.)
• Contenders: Trello, Mozilla Firebug, uShip
• Summary: Serving hard asset businesses perhaps more overlooked than software/tech./media.
1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf
Leader: GitHub
• HQ: San Francisco, CA
• Founded: 2008
• Funds raised: $100mm (Andreeson Horowitz, SV Angel)
• FTE: 202 (Crunchbase)
• Key Execs: Chris Wanstrath, Co-founder/CEO
23
2 3
Business Intelligence/IT Solutions
Business Management Tools
Category Landscape
• 2015 estimated SaaS Penetration: 6%1
• Enterprise Leaders: Cloudera, Informatica, Iron Mountain, Pentaho
• 120 solutions listed on Capterra (web-based, 50-99 users, Business Intel + IT Mgmt)
• Contenders: Box, EVault, Evernote, KISSmetrics, Mixpanel, Womply
• Summary: Low SaaS penetration of wide & deep market, leads to high competition but significant greenfield opportunity.
1. Source: Bain & Co., www.bain.com/Images/BAIN_BRIEF_The_cloud_reshapes_the_business_of_software.pdf
Leader: Dropbox
• HQ: San Francisco, CA
• Founded: 2007
• Funds raised: $1.1bn (T. Rowe, Blackrock, Accel, Sequoia, Glynn Capital, Valiant, Goldman, Benchmark, IVP, Greylock, SVA, Index, et al.)
• FTE: 642 (Crunchbase)
• Key Execs: Drew Houston, Founder/CEO
24
2 4
Table of Contents
Summary – Reasons for Interest
3-5 Market Size, Fragmentation, Refresh Rate
6, 7 Innovation/Procurement Cycle
8 Macro Tailwinds: SaaS flexibility, internet distribution, bottom up scaling
9 Precedent Cases
10 Investor Landscape
Industry Map
12 Lifecycle of an SMB
13-16 Business Formation Tools
ERP, Legal, Website/Hosting, Productivity/Communication
17-19 Growth and Customer Acquisition Tools
Sales/CRM, Marketing, Commerce/POS
20-23 Business Management Tools
HCM, Finance, Supply Chain/Product Development, BI/IT
Exit Activity & Incumbent Landscape
25 Current Incumbents
26 Acquisition Activity
25
2 5
Current Incumbents
Category LocationYear
Formed Size Type
MarketingBoston Area(NDAQ: CTCT)
19951,235 FTE
$1.0bn MVDirect
Commerce/POSBay Area(NDAQ: EBAY)
199531,800 FTE
$67.6bn MVDirect
Website/Hosting, MarketingBoston Area(NDAQ: EIGI)
19972,200 FTE
$1.75bn MVDirect
Finance/AccountingBay Area(NDAQ: INTU)
19838,000 FTE
$23.4bn MVDirect
Finance, ERP, CRM, BusinessIntel, Payments
UK(LSE: SGE)
198112,760 FTE$4.3bn MV
Direct
CRM, MarketingBay Area (NYSE: YELP)
20042,345 FTE
$5.9bn MV Direct
Credit CardsCA, NY, NY
As old as 1850 (AmEx)
Up to 63k FTE (AmEx)
Indirect
Wireless NetworksKS, TX, NY, WA
As old as 1899 (Sprint)
Up to 248k FTE (AT&T)
Indirect
Cable CompaniesPA, NY 1963, 1985 136k,51k FTE Indirect
Payroll, HR ServicesNJ, NY 1949, 1971 61k, 13k FTE Indirect
Concentration in Boston and Bay
Areas
Gaps: Legal, Productivity, Supply Chain/Product Dev.
Source: Capital IQ
26
2 6
Exit Activity
Sources: Capital IQ, Crunchbase
Notable Transactions
Buyer Date Target Size(USD,mm) xRevenue PriorRaised* Prior(LTM)Revs SelectedInvestors
Priceline Jul-14 OpenTable 2,613.0 13.2x 2,426.1 198.3 JATCapital,T.RowePrice,BlackRock(NASDAQ:OPEN)
NetSuite Jul-14 Venda 50.5 2.6x 30.0 19.8 GFPrivateEquity,InvestorGrowthCapital
Netsuite Oct-13 TribeHR 24.8 -- 2.5 ND MatrixPartners,RelayVentures
eBay Sep-13 Braintree 800.0 -- 70.0 ND Accel,Greycroft,NEA,RRE
(+Venmo)
Constant Jun-13 SinglePlatform 92.9 168.8x 4.7 0.6 FirstRound,DFJGotham,PritzkerGroup,RRE
Contact
InfusionSoft Jan-13 GroSocial 30.0 -- 2.2 ND KickstartSeedFund,Monarch,Rock&HammerVentures
Yelp Oct-12 Qype 48.8 4.6x 20.1 10.6 AdventVP,Partech,VodafoneVentures,Wellington
Intuit Apr-12 DemandForce 423.0 33.6x 10.0 12.6 Benchmark,FLOODGATE,PaloAltoVP
BestBuy Nov-11 MindSHIFT 175.0 8.0x 63.4 21.9 ColumbiaCapital,FidelityVentures,TDF,Volition
Intuit Jun-09 PayCycle 169.0 15.8x 29.0 10.7 AugustCapital,CCPEquity,DCM,DraperRichards
Sage Mar-08 Hallco1390 41.9 7.0x 23.5 6.0 InflexionPrivateEquity,YFMPrivateEquity
Average 406.3 31.7x 25.5 35.1Median 92.9 10.6x 21.8 11.7 *FundraisingaveragesexcludeOpenTable