For years, VCs have had the refrain of how hard it is to sell to the huge but massively fragmented SMB market. Invoking the curse of the SMB market was a great way to winnow out our email boxes and/or avoid a followup meeting.
Today, though, SMB-facing businesses seem all the rage. Why the turnabout?
It’s simple — the migration onto the Web has flipped small and medium sized businesses from the hardest to reach to the easiest to reach businesses. Today, nearly all SMBs are online — using the Web both for their own business and to find goods and services. As a result, where larger enterprises still require direct sales, SMBs often can be brought into the sales funnel using very highly leveraged online marketing campaigns, whether it be SEM/SEO, email marketing, or social media. Large and very profitable software-as-a-service businesses can be built targetting SMBs without ever raising the type of capital necessary for businesses that depend on a direct salesforce.
At Polaris, we’ve had the chance to see this across a number of our software companies, most notably LogMeIn, which went from tiny startup to billion dollar public company in just 5 years and less than $20 million in capital. With our partner Dave Barrett, who worked closely LogMeIn and its marketing guru Sean Ellis, leading the charge, we’ve since backed a range of companies focused on bringing cost- and -management-effective solutions to SMBs, including the likes of Egnyte (file management), KISSMetrics (analytics), Recurly (subscription management) and a couple other not yet public projects.
OK, so maybe it’s not exactly “sexy,” but it sure is a great way to build highly profitable businesses…
VCMike's Blog 
Hey Mike, thank you for noting this. I run a video CDN geared for SMBs and have run into the same fragmentation you describe. I agree that there is a huge opportunity here, and think the focus on SMBs has the potential to catch companies off guard whose value network makes it difficult to come down market. Here’s to hoping the trend continues!
I think sexy is a bit overboard. However, this is something that I noticed a couple of years ago given the changes in technology. It’s the application of web 2.0 consumer tech and enterprise tech going into the cloud coupled with lower costs of entry that is upending the SMB market. In fact, my investment thesis is based exclusively in tech companies that are focused on the SMB market. It will be a fun ride.
Mike,
Good post – we’re finding the same thing. There’s no question that SMBs are far more connected and targetable than they were when, say, SFDC was coming out of the chute.
I will say, though, that it’s still not a layup. SMBs are getting to be some of the most targeted businesses and there are often many options for them to choose from in a given space. There are no really great, trusted resources for them to use to make a selection and sometimes they don’t even know what they need. Companies like http://getapp.com are trying to step in.
I’d love to see a short series of posts from you ‘opening the kimono’ on your SMB techniques much like David Skok has done with SaaS metrics, etc.
Keep up the good work.
Hello Mike,
This is a great post especially for a start-up like us who is aiming to develop products to help small biz. I constantly hear one simple question of how do you plan to scale and distribute as it is a challenge.
In the challenge also lies an opportunity and its great that you see it this way as it boosts entrepreneurs working in this space.
Hi Mike,
I totally agree! Look at http://www.cloudmasons.com They are providing cloud integration services and a turn-key product for SMBs to help them take advantage of the cloud. Based on the experience there we see that it is a lot easier to reach the target market through the cloud itself.
Paul.
I could not agree with you more.
The cost of acquiring enterprise customers has gotten higher and higher over the years. Very hard for startups to break into, without a significant investment in sales.
The cost of acquiring small business customers has been trending downward. There are several companies that manifest this: LogMeIn, Constant Contact and VistaPrint in the Boston area are all good examples.
My company (HubSpot) has benefited from this trend as well, and is doing pretty well.
Agree, web/cloud-based apps & services are a perfect fit for SMBs, and there are new, innovative offerings coming to market on a regular basis. Not bad for the Boston economy either – nice to see some local companies succeeding in the SMB space.
I agree there seems to be a bit of heat here, but I’d rather not get into the right definition of sexy. I believe the biggest reason for the turnabout is Facebook. They have “aggregated” a fragmented market by letting local business owners share photos and stories of their kids and grandkids online. This personal behavior morphed quickly into sharing business photos and stories. Now, it is much easier for them to understand email marketing and flash sale opportunities.
What we found is by focusing on yoga, our niche market, we were better able to convey our message. Yoga professionals get our simple solutions. Our marketing has been focused both grassroots walking into studios and introducing ourselves and social media. We are just starting to look into AdWords yet SEO has also been a bi-weekly focus. Great post!
Hey Mike,
I have been focusing exclusively on SaaS for SMBs for the past few years. It is a great market. Some of our companies in that segment include Freshbooks, Tungle, Shopify. All great companies with killer CLTVs. Glad to see your interest in this sector.
Mike,
Great post. I’ve been working for EnerNOC, a mixed SaaS and more direct sales model targeting the SMB and larger market. it is these less “sexy” segments and business models where there is significant business opportunity, challenges and less hype. B2B data and infrastructure companies can be the most interesting opportunities in both technology and energy, especially in the current environment.
Best,
Kelly
Hello Mike!
I agree with you, but I’d rather not get into the right definition of sexy. I believe the biggest reason for the turnabout is Facebook. It grows too fast on the Internet.