Strong Opinions @marksbirch

There are a lot of thoughts on the small-midsized business (SMB) technology space.  Unfortunately they mostly lead to lots of questions.  Why are SMB’s such a tech backwater?  Do SMB’s even want to embrace technology?  How come technology companies run into major challenges reaching SMB’s?  What does it take for tech startups to find success in the SMB market?

The SMB market is one that I am passionate about and have spent the better part of several years analyzing.  It is a core part of my investment thesis and tech startup portfolio like Onepager.  Some ventures have failed, some have stalled, and some are still navigating the turbulent straits of a little understood market.

Why do I believe in the SMB tech market?  It is not because I look at SMB owners as tech poor or ignorant Luddites.  These owners have high powered smartphones and tablets, use social sites like Facebook and Twitter, and are readily familiar with spreadsheets and other office tools.  In fact, the businesses I have spoken with are thirsting for technology that they can readily use by themselves and their staff.  The challenge is making that technology that not just fills a need, but does so in a way that is easy to use for their business and demonstrates a return on their time and investment.  It is about cutting the business friction and time wasted during their day.

This desire for better tools and the size of the SMB market make it a prime opportunity for disruption.  Outside of a website (usually a poor one at that), accounting software (Intuit rules this roost), and an office software package (almost exclusively Microsoft Office), and an order/register system (highly industry dependent), that pretty much covers the technology imprint for most SMB establishments.   Given the advances in technology and SaaS coupled with new device formats such as smartphones and tablets, this is a greenfield market ripe for taking.

Yet we have astonishingly few success stories.  Google has had the most success with SMB’s with their ad sales and the small yet growing Apps business.  File sharing vendors like Box have gotten a lot of recent attention.  That is followed by email marketing firms like Constant Contact and Mailchimp that have effectively mined the SMB space.  Then you have collaboration folks like 37 Signals, job posting sites like Craigslist and Monster, and the group deals space with GroupOn and Living Social’s of the world.

So what is holding back this market if the need is there and the opportunity is available?  I am glad to see that tech publications like Pando Daily shining a light on small business tech.  While the analogy they use is absurd, they are right to point out the market is simply too large and diverse to tackle all at once while the payoff is small for each deal.  However, there is a deeper level of nuance that is missed here.  There are two issues any SMB tech startup needs to tackle if they are to find success:

• Business Development Skills – The key to selling to the SMB market is achieved either by hiring a massive sales force and “knocking” on lots of doors or by closing partnerships with companies that already have those SMB customers.  If you got millions in VC money, go ahead with option one, but most startups need to get started with the latter path.  The problem is that most startups simply do not have the business development acumen to pull off these types of deals.  This requires enterprise level sales chops, extreme hustle, and the stomach to endure long and difficult sales cycles that often lead nowhere.  Plus, it requires a broader and more creative approach other than simply walking up to AMEX Open and asking for a deal.  Think about it, how many pitches do those folks see per day?
• Value Based Pricing – Businesses pay for stuff.  Since this is the expected behavior in the B2B market, so why do startups shoot themselves in the foot by going freemium?  Offer a limited free trial, give them awesome support, create a strong community, but do not offer software for free.  The second deadly sin is to underprice the product or service.  The idea is that this will ensure “capture a wide market”, but all it does is ensure customers think the software is cheap and disposable.  Smarter startups instead price based on the value of their offering.  Built into that model are options to seamlessly move customers to more premium services, encourage longer-term commitments, and create an ecosystem of additional products and service providers to support customers.  But to get there, you need to start here and now with higher price points.  Box may get away with $15 per month, but that is not going to help startups that are simply trying to stay afloat.

The opportunity is still very wide open.  Startups are finally beginning to understand the challenges faced by small businesses and are delivering great technologies for small businesses that are easy to use without significant cost or complexity.  However, it requires more than great technology to survive and startups need to have the conviction to set a higher price and to be much more creative in developing quality partnerships to drive awareness and signups.

Have you ever watched the Pixar movie, WALL-E?  It is one of my favorite Pixar movies, but that is beside the point.  In the movie, the behemoth behind much of the rampant consumerism that led to the wasting (and subsequent escape) of the planet was a mega-corporation called Buy-n-Large, or BnL for short.

People assumed that BnL was an extension of the big box stores such as Walmart, Target, or Costco.  However, I think it is really a glimpse into the future trajectory of Amazon.

I like Amazon and have been shopping with them for nearly a decade.  When Amazon launched Prime, I eventually signed up realizing that I was doing more and more shopping through Amazon.  Then I started buying all my music and storing it there.  Christmas shopping was all done online, mostly through Amazon.  Just today I signed up for subscriptions to fill all of my personal care needs.  Who did I use you might ask for my subcom needs?  It was Amazon.

What else is Amazon doing?  They are running most of our websites and web applications.  If you need to hook up payments, they got that for you.  They are offering boatloads of movies and shows, some even for free, to Prime customers.  They have their own competing white-labelled products.  They have great customer service and a very favorable return policy.  Switching phones and / or carriers?  They handle that too.

Jason Calacanis recently called it the “Cult of Amazon” in his newsletter.  I have to agree with many of his sentiments.  Why bother ever going to retail stores or malls?  He neatly sums up the choice by saying, “[Amazon] Prime gives you the joy of consumption without the pain of acquisition.”

In fact, Amazon is so convenient, one does not even have to think about the act of consumption.  It is efficient consumption to the extreme.  The only thing that would be even more convenient is that the product materialized immediately out of thin air upon clicking that 1-Click order button.  Pretty sure they are working on that as we speak.

There is a downside to all of this convenience however.  Just as the box stores have been destructive to Main Streets and small businesses, Amazon and other eCommerce sites have the potential to be equally destructive.  The free market side of me says that we should not be concerned as this is the future of commerce and we have to experience growing pains to become more efficient.

However, small retail businesses are critically important for communities.  They create jobs, lease real estate, require local services, and contribute to the tax base.  These taxes pay for infrastructure and schools and community services like police, firefighters, and emergency responders.  We lose all of those benefits when dollars go into corporate coffers to some distant company.  At least the box stores keep the money local through sales and real estate taxes.

All is not doom and gloom though for small business and local retailers.  While most people dislike poor retail experiences, many still enjoy shopping.  As great as visualization technologies and online community reviews and recommendation engines may be, nothing beats feeling and experiencing the product live.  The serendipity of that discovery and the sharing of that discovery with friends is still something better done in real life.

All of this is for naught however unless smaller retailers have the means to compete.  That boils down to getting the same operational efficiencies that the Goliath’s currently enjoy through technologies and networks.  They need not, nor should aspire necessarily, to “beat” the Amazon’s of the world as that is a losing battle.  However, small businesses can absolutely survive and thrive by leveraging some of the technologies and tools of the eCommerce players.  In fact, small businesses have the benefit of combining the advantages of physical location with low-cost technologies that are easy to use and deploying.  Whether it is website creation, eCommerce platforms, social media monitoring, CRM, or back-office operations, SaaS technologies and providers will continue to proliferate.

This only holds of course if Amazon does not become Buy-n-Large.

In the rush to be a “lean startup”, we may be missing the boat when it comes to the business technology market.  Many startups have become blinded by the holy MVP which somehow is supposed to magically validate the product-market-customer fit leading the founders onto the glory of a big exit and Internet riches.  The problem is most business customers, particularly small and mid-sized businesses, are not much into your idea of a minimally viable product.

Small business owners are for the most part, not very technical, are not minting cash, and only have limited time.  They are not willing to spend time on using a product that does not immediately fit their needs.  If it is too limited, too confusing or too difficult, then they are moving on.

It is from this vantage point that SMB technology providers need to start.  While building an MVP is useful, it is only the starting point for conversation with potential customers as to what the real product will do, which includes a much richer feature set than you might initially have envisioned.  Whereas the consumer web startups can take more liberties and make a more aggressively “minimal” product, SMB require something more robust from the very beginning.

This leads to the next point, which is choosing a vertical focus.  If you do not figure out early on which vertical markets to focus on, you might find yourself building a product with conflicting feature sets and quickly creating a bloated and complex product.  Services companies have very different HR and accounting practices than retail product based companies.  The way doctors manage customers is different than contractors or restaurants or real estate agents.  The language is different, the work flows are unique and the regulations industry specific.  If you decide to go horizontal, your climb is going to be that much more difficult unless you are picking something that is relatively new, such as daily deals or social media, where the obvious features are still evolving.

If your startup is targeting the SMB space, build your MVP, but realize that is merely step one before you get to a product that SMB owners would be willingly to pay for en masse.

I meet a lot of entrepreneurs and hear a lot of investor pitches.  The majority of the pitches are for the most part awful and the ideas even worse.  I almost get the impression that the people behind these ideas are not serious, much like the people that purposely bomb their auditions for American Idol to get a laugh.  They crave the attention and want to feel important, but the whole affair is simply an embarrassing waste of time.

However, a good portion of pitches are credible and the ideas intriguing.  The founders are totally engaged and passionate about their vision.  They come prepared and are deeply knowledgeable about their market and path of execution.  Even if there are flaws, the presentations come together and there is a sense of confidence that these startups will find success.  And in most cases, I still have to say no.

If I had the wherewithal, I would invest in every one of these startups.  I would call my venture 10,000 Startups.  While the vast majority would fold, many more would succeed and some might even be the next titans of the technology market.  There would be incubators and accelerators and mentors and offices and all the ramen entrepreneurs could eat.  The reality however is that I have yet to find my billions, so I have to make do with the few investments I make a year.  Thus I have to be extremely disciplined and focused on where I place my investments.

To maintain that discipline, I hew closely to my investment thesis.  I stay close to home with my investments by only investing in NYC based companies.  I stick to domains that I know well, which is enterprise, B2B software.  I believe small and mid-sized businesses are poised to be the next massive market opportunity for technology as high cost and difficulty of implementation fade away as barriers to adoption.

This invariably means that many deals that pass my way I am going to have to pass on.  There are a ton of consumer apps in NYC that are really impressive, but consumer is not on my radar.  There are some great SMB business apps being created in Boston and San Francisco, but I want to be near the founders and stay involved.  It limits me from getting involved in what could be great companies, but I believe that the thesis I have put together makes sense and is something I need to test out before thinking about expanding the boundaries.

It still kills me however to tell a founder no, particularly when I think the founder is awesome.  It reminds me of what Fred Wilson said when he introduced Shelby.tv at TechStars NYC Demo Day.  He had met the team a couple of years earlier and had kept his eye on them.  He was impressed with the team, but not the idea.  Come full circle, here he was backing those same founders with a new vision and a brilliant product.

I believe in the philosophy of investing in great founders.  For the time being however I am sticking to my investment thesis even if means missing out in the near term.  So I wait for the intersection of the great founder and the right idea to say yes.