The State of SMB Software: 2019 Report

State of SMB Software Report

Access the Full 2019 Annual Report

JAN 22, 2020 - Mark

Included in Our Annual 2019 SMB Software Report

SurePath 2019 Annual State of SMB Software Report

  • Lessons and Takeaways from 2019
  • 2019 Venture Capital (VC) Deals
  • 2019 Private Equity (PE) Deals
  • 2019 Mergers and Acquisitions (M&A)
  • 2019 SMB Software IPOs
  • The SurePath SMB Software Index 2019 Update

 


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The State of SMB Software in 2019

Welcome to our 2019 State of SMB Software Report, looking at fundraising and exit activity in the Small and Mid-Sized Business (SMB) software space in North America. To isolate the SMB deal activity, we analyzed over 7,800 deals narrowing them down to 763 venture deals, 20 PE Growth and Buyout/LBO deals, 45 M&A deals, and 11 IPOs representing ~$62B in deal proceeds to SMB software companies.

2019 was a strong year across all deal categories. Venture capital $ going into SMB software companies was up 39%. VCs showed more interest than ever in the sector. Accel and Battery each made over 15 investments in the space in 2019. 

The restaurant vertical continued to be highly attractive to investors with five deals > $100M. There were four private equity buyouts > $1B. It was a mixed bag for 2019 SMB software IPOs with 6 of the 11 debuts trading below their offering price by year-end.

Our SurePath SMB Index continued to outperform the major indices in 2019, growing ~40% since the start of 2019 compared to ~29% for the major indices. 

We hope you find this report useful and invite you to get in touch to discuss it with us.

 


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2019 Key Takeaways from the SMB Software Market

  1. The SMB software market continues to grow rapidly: total deal value increased 39% YoY in 2019. The record-setting year was driven by an increase in ≥ $1B deals – 10 deals representing $38B capital in 2019 compared to 9 deals representing $20B capital in 2018 – combined with a 23% growth in overall deal volume. The SMB software market is rapidly growing, and we expect the growth to continue in 2020.
  2. Rise of the mega-round: The number of $100M+ VC deals tripled in 2019. The growth in mega deals increased average VC deal size by ~18% in 2019. The biggest single VC raise was Flexport’s $1B later stage VC round led by SoftBank in February.
  3. VC’s can’t get enough of Restaurant Tech, with funding reaching an all-time high of ~$2B in 2019. The record-setting year for the vertical included two VC rounds for Doordash with an aggregate capital raised of over $1B in 2019.
  4. Total VC capital raised for the Legal vertical grew over 200% in 2019. Clio’s $250M Series D round was the biggest legal vertical deal of the year. This single deal was ~64% larger than the total Legal VC funds raised in 2018.
  5. Significant gains for public markets that were caused, in part, by a major sell-off at the end of 2018. Our SMB index was up nearly 40% at the end of the 2019 with Shopify leading the board gaining ~190%.
  6. IPO activity increased, though with mixed performance. There were 11 SMB software IPOs, up from 9 in 2018. At the end of 2019, 6 out of the 11 IPOs were trading below their IPO price.

 

2019 SMB Software Deal Landscape

~$61B of capital was deployed across 839 deals in 2019, representing 39% growth in deal $ and 23% growth in deal volume. Of the capital deployed in 2019, ~76% of capital invested came from M&A/PE/IPO exit activity (~$47B across 76 deals). Early and late stage venture capital accounted for the largest deal volume, capturing 58%. Given the evergreen nature of SMB software, the large volume of venture deals is unsurprising: the realm of SMB software continues to represent a huge opportunity for investors.

2019 Average Deal Size by SMB Software Deal Type

 


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California and New York’s Continued Dominance

California and New York saw the most deal activity representing ~35% and ~12% of total deal volume in 2019. Massachusetts, Texas, and Washington each accounted for 5% to 6% of total deal volume in the record setting year.

 

An Increase in $100M+ VC deals

Average VC funding deal size grew by 18% in 2019 due to the increase of larger VC deals over $100M+. In 2019, 29 deals over $100M+ accounted for 47% of total SMB software VC capital raised.

 

A Record Setting Year for Restaurant Tech VC funding

Total venture capital raised for Restaurant Tech grew 136% in 2019. The growing vertical accounted for approximately 1/5 of vertical-specific VC capital this year. The top 10 largest deals accounted for 94% of total capital raised for Restaurant Tech. Doordash led the pack with a total of $1.1B of capital raised in 2019. Many aspects of running a restaurant from reservations to delivery are now being transformed by software.

Restaurant Tech Raises in 2019

 

Growth in Legal VC Funding

Total capital raised for the Legal vertical amounted to ~$463M in 2019, representing over 200% growth over previous year. The $250M mega raise from Clio in September was the biggest Legal vertical deal of the year, accounting for 54% of total capital raised in the vertical in 2019. Lawyers have traditionally been slow to adopt new technology. The momentum here is clear evidence that this industry is embracing new technology.

 


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Venture Capital Deals

2019 Top VC SMB Software Deals

763 SMB software companies raised a total of $15B of venture capital in 2019. Total capital raised grew by 63% and deal volume increased 38% this year. ~96% of deal value and ~64% of deal volume was in early and later stage VC investment. 

Out of ~$15B total VC capital raised in 2019, companies that help SMBs run and grow their business attracted ~86% of deal value and ~90% of deal volume in the SMB software space in 2019.  From a vertical perspective, Business Management/ERP companies attracted the highest amount of VC in 2019 followed by Marketplace companies. Consistent with previous years, 70% of venture funding went to companies with a broad offering for both the small and medium segments.

2019 Top VC SMB Software Deals

 

2019’s Most Active SMB Software VCs

In 2019, we saw many notable firms make multiple investments in the SMB software sector. A total of 30 firms made 7+ investments in SMB software companies compared to 13 in the previous year. As noted in our SMB software market thesis, we believe even more firms will want to invest in this large, growing and valuable market in the coming years.

2019’s Most Active SMB Software VCs

 


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Private Equity Deals

2019 Top PE SMB Software Deals

Buyout/LBO’s attracted ~93% of total PE and buyout proceeds and ~45% of deal count in 2019. The LogMeIn’s $4.3B public-to-private LBO represented ~50% of total Buyout/LBO proceeds.

In 2019, Private equity investors deployed $9.2B of capital into companies serving the SMB space, up 7% from previous year. ~85% of deployed capital was focused on companies that help SMBs run their business. Security/IT category (LogMeIn) was the top vertical, accounting for 47% of total PE capital deployed in 2019 followed by Booking (Mindbody) which represented 21% of total PE capital. Over 75% of deal size and volume was from companies with broad offering for both the small and medium segments. 

2019 Top PE SMB Software Deals

 

Mergers and Acquisitions

2019 Top M&A SMB Software Deals

The total value of mergers and acquisitions (with disclosed proceeds) in the SMB software space in 2019 was ~$33.6B, across 45 deals. Total deal size grew by ~41% while deal volume decreased by ~46%. Companies that help SMBs track and run their business accounted for ~87% of deal proceeds. Payments and Mar Tech categories accounted for 66% and 8% of total deal size, respectively.~100% of deal size was from companies with broad offering for both the small and medium segments.

2019 Top M&A SMB Software Deals

 

2019 Most Active SMB Software Buyers

2019 Most Active SMB Software Buyers

 


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Initial Public Offerings (IPOs)

2019’s SMB Software IPOs

2019’s SMB Software IPOs

 

Post IPO Performance

At the end of 2019, 6 out of 11 IPOs are performing below their IPO price. The biggest gainer since IPO was Lightspeed POS (+96%), which at its peak was trading +161% above its IPO price in August. Slack posted the biggest loss, performing 42% below its IPO price.

2019 Post IPO Performance

 


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The SurePath SMB Software Index

Recent Changes to the SurePath SMB Software Index

We’ve made several changes to the SMB Software Index over the last year. In total, we added 10 companies that went public at some point between early 2019 and January 2020. These are companies that make it easier for SMBs to move faster (Dropbox, DocuSign, Slack, and Zoom), gather feedback from customers and employees (SurveyMonkey), improve the current and prospective employee experience (Ceridian), sell to customers easier and more efficiently (Lightspeed), analyze social media marketing campaigns (Sprout Social), and more.

5 of the original constituents of our SMB Software Index were removed during this period following the completion of their  acquisition. ShoreTel (acquired by Mitel), Web.com (acquired by Sirus Capital), FirstData (acquired by Fiserv), Mindbody (acquired by Vista Equity Partners), and Carbonite (acquired by OpenText).

 

2019 Index Performance

The SurePath SMB software index appreciated by ~40% in 2019 compared to ~29% for other major indices. The year started from a low base, which was caused by a major sell-off in December 2018. Total cumulative gain for our index was ~150% at the end of 2019. 

2019 SMB Software Index Performance

Shopify was the strongest performer of our index in 2019, growing ~190% since the beginning of the year. The dominant e-commerce platform provider reached 1 million merchants and disclosed revenue growth of ~49% in the most recent quarter. ANGI Homeservices and Stamps.com both lost ~45% of its value since the beginning of the year. Missing analyst expectations and terminating revenue share partnership with U.S postal service respectively were the main causes of the decrease.

You can follow The SurePath SMB Software Index here.

 


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What is the State of SMB Software Report?

Since 2017, our quarterly and annual State of SMB Software Report provides an inside look into the  fundraising and exit activity in the small and mid-size business (SMB) software space in North America.

Access the Full 2019 Annual Report

Mark Macleod
Written By:
Mark Macleod is the Founder of SurePath Capital Partners. Sitting on both sides of the table, Mark has helped raise hundreds of millions of dollars and successfully led companies to acquisitions by Airbnb, Blackberry, Gannett, Rackable Systems, Return Path, Thrivehive and more.

About SurePath Capital

Based in Toronto and San Francisco, SurePath Capital Partners is the only investment bank focused exclusively on the global SMB software market. We work with sellers in this market to ensure they are funded for growth and positioned for meaningful exits. In addition, we work with buyers in this market to help shape their strategy and execute acquisitions.

Follow us on LinkedIn and Twitter for regular updates on deals and trends and in the SMB software market. Say hello: info@surepathcapital.com

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