SMB Software Q2 2019 Report
State of SMB Software Report
Q2 SMB Software Report Includes:
- SMB Software Market Size
- Lessons and Takeaways From Our Q2 2019 Report
- Q2 2019 SMB Software Deal Landscape
- Top SMB Software Raises for Q2 2019
- SMB Venture Funding in Q2 2019
- Q2 2019 PE SMB Deals
- SMB Software M&A Deals for Q2
- SMB Software IPOs
- SurePath SMB Software Index Summary
A Look at Q2 2019’s Fundraising and Exit Trends Among North American SMB Software Companies
Welcome to our third annual 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 980 deals narrowing them down to 247 venture deals, 6 PE Growth and Buyout/LBO deals, 17 M&A deals, and 4 IPOs representing ~$17B in deal proceeds to SMB software companies.
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).
We have expanded on our usual coverage by unpacking the biggest trends that we saw this past quarter. We hope you find this report useful and invite you to get in touch to discuss it with us.
Lessons and Takeaways From Our Q2 2019 Report
- Total deal value down over 50% from Q1 but up ~2.5x over Q2 2018. Deal volume was consistent across both quarters in the first half of 2019 recording more than 240 transactions in each.
- A historic quarter for SMB Accounting/Invoicing software: The Accounting/Invoicing vertical attracted ~7x more VC funding than the average total deal value over the past 5 quarters and had ~$2.1B of M&A activity across 4 deals. This included H&R Block’s $405M acquisition of Wave. Although frequently overshadowed by front office solutions, the back-office problems of SMBs present an opportunity that investors can’t pass up.
- Restaurant tech continues to gain momentum: The most prominent vertical theme across the State of SMB Software reports since inception has been the funding magnet that is the Restaurant Tech vertical. The amount of investment fueled innovation within this age-old industry is head and shoulders above any other vertical in the SMB space yet again in Q2 2019.
- 4 IPOs completed – 1 more filed: 18-year-old customer intelligence powerhouse Medallia is set to IPO in early Q3 2019, riding the coat tails of a star-studded first half of the year including public offerings from Slack, Zoom, PagerDuty, Lightspeed and Pinterest.
- BI/Analytics deal activity is alive and well: There are several enterprise/mid-market business intelligence exits happening in 2019, primarily through strategic M&A, including powerhouses like Looker, Tableau and Periscope Data. With this amount of consolidation in 1H 2019, companies on the SMB side of the BI spectrum should be thinking about where they fit into the altered landscape and what an exit looks like for them.
- Bulge bracket banks make bets on SMB software: Both Morgan Stanley and JPMorgan made significant investments in SMB software companies in Q2 2019 spending over $1.4B USD together.
SMB Software Market Size Q2 Deals Overview
- In Q2 2019, there were over 980 deals in the B2B software space, globally.
- 785 deals were in North America
- 275 deals (247 venture deals, 17 M&A deals, 6 PE/Buyout/LBO deals, and 4 IPOs) involved companies with a clear SMB software offerinG
Q2 2019 SMB Software Deal Landscape
~$17B of capital was deployed across 274 deals in Q2 2019 – less than half of the deal value seen in Q1 2019 but ~2.5x the deal value realized in Q2 2018. Of the capital deployed in Q2 2019, nearly ~73% of the capital invested came from M&A/PE/IPO exit activity (~$13B across 27 deals). From a deal volume perspective, early and late stage venture capital raises accounted for the largest deal category.
Q2 2019 SMB Software Deal by State
Naturally, California saw the most deal activity representing ~40% of all deals, followed by New York which represented ~12% of all deal. Colorado, Washington and Texas have been consistently contributing ~4-5% of deal volume respectively over the past few quarters.
Q2 2019’s Top Software Raises
SMB Venture Funding in Q2 2019
247 SMB software companies raised venture capital in Q2 2019 – almost the exact same amount of deal volume seen in Q1. ~63% of the deal volume and ~96% of deal value was in early and later stage VC investments. The average round was ~$11M for early stage and ~$50M for later stage.
Venture Funding Report Highlights:
- Venture Deals by Category - SMB software companies raised ~$4.4B across 247 deals in Q2 2019. Of those, companies that helped SMBs grow and run their business attracted ~77% of deal value ~93% of deal volume in the SMB software space. Amongst our 16 SMB software categories, Accounting/Invoicing companies attracted the highest amount of VC in Q2 2019 – slightly edging the usual Business Management/ERP thanks to large raises from Carta and Divvy. Business Management/ERP had higher deal volume in Q2 vs. Q1 2019 when they led the field.
- Venture Deals by Target Customer -~65% of venture funding in Q2 2019 went to companies with a broad offering for both the small and medium segments of the SMB software space – a similar proportion to that realized throughout 2017, 2018 and Q1 2019. Having offerings for both small and larger businesses gives vendors the ability to satisfy the needs of a broader market and grow with their customers.
- Vertical-Specific Venture Deals - Across 26-disctinct verticals, we saw 99 deals with a total of ~$1.2B raised in Q2 2019. Top 10 verticals represented ~85% of vertical-specific deal value and ~58% of volume, largely consistent with what we saw in Q1 2019. Restaurant-Tech is the clear winner for vertical specific investment as VCs back their horses in the race to be market leader.
Q2 2019 PE SMB Deals
PE Deal Report Highlights:
- PE Growth / Buyout Deals by Category -In Q2 2019, private equity investors deployed ~345M of capital into companies serving the SMB space which was very light relative to past quarters including $3.1B deployed in Q1 2019. Q1 deal value from PEs were somewhat inflated due to the large LBO’s of Chrome River and MindBody. SMB software companies funded or acquired by private equity investors fell across a broad range of categories in Q2 2019 with Productivity and Accounting/Invoicing leading the way on deal value via Symphony Communication Services and Bill.com transactions
- PE Deals by Target Customer - 2/3 of private equity deal volume in Q2 2019 went to companies with a broad offering for both the small and medium segments of the SMB software space. This trend is logical as PEs generally target mature companies with offerings across the SMB spectrum rather than a growth stage company who has traction in a single market segment.
Q2 SMB Software M&A Deals
M&A Deal Report Highlights:
- M&A Deals by Category -The cumulative value of all mergers and acquisitions (with disclosed proceeds) in the SMB software space in Q2 was ~$5. 6B across 17 deals. Q2 saw a drop off from the ~$24.6B of deal value realized in Q1 2019 but actually had more than 2x the deal value vs. Q1 after adjusting for Fiserv’s acquisition of First Data in January. Companies with Mar Tech and Accounting/Invoicing offerings were involved in the highest volume of M&A of deals in Q2 2019 accounting for ~$4.9B of deal value over 8 transactions – inflated by Looker’s ~$2.6B acquisition. Again, we find the Accounting/Invoicing vertical being highlighted in the M&A data just as we saw in the VC data.
- M&A Deals by Target Customer - ~90% of M&A activity in Q2 2019 involved companies with a broad offering for both the small and medium segments of the SMB software space - consistent with what we’ve seen historically. In general, a more mature company with a robust offering to a broad range of SMB markets is a more attractive target for M&A.
SMB Software IPOs
SurePath SMB Software Index Summary
Introduced in 2016, the SurePath SMB Index originally tracked 35 publicly traded companies that serve the SMB market and their performance against other benchmark indices. Over time, as companies in the index have been acquired, and other relevant companies have publicly listed, the current number of constituents is 37.
Read Our Full Report Below via SlideShare
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.
Our Methodology and SMB Categorization
Beginning in 2019, we updated our approach for tracking SMB software companies. While we continue to track SMB software companies across three broad categories of Grow my Business (front office), Run my Business (middle office) and Track my Business (back office), we have re-assessed and expanded our sub-categories within each of them as follows:
- Grow- Sales Tech, Marketing Tech, Advertising Tech, E-Commerce, Social Media Management, and Marketplace
- Run- HR Tech, Security/IT, Business Management / ERP, Practice Management, Productivity, Reputation Management, Booking, Customer Support, Websites, and Member Management
- Keep Track of My Business- Accounting & Invoicing and Payments
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.