Winning in the SMB Market
Yesterday was a busy day for startups building for SMBs.
Restaurant payments app Sunday announced their series A funding of $100M, coming five short months after a significant seed round.
Levelset, which helps construction companies get paid, was acquired by Procore for $500M.
Personally, having spent the past 15 years, off and on, building Go-to-Market teams for startups selling to SMBs, I am fascinated by companies growing quickly in the SMB Market. My experience has shown that there are no shortcuts to success when working with small businesses. It isn't easy to acquire SMB customers— so when a startup is succeeding—I look to see what lessons to learn from their approach. What unique advantage have they built that makes it possible for them to win in such a difficult market?
SMBs - the Holy Grail
Today, every Startup wants a piece of the SMB Market. In the U.S. alone, there are roughly 30 million small businesses.
Historically, because of the difficulty of selling to SMBs, software companies have focused on building products for the Consumer or the Enterprise. That changed as SaaS startups saw the immense success of Shopify and Square— who have proven that you can build a $100B business with SMBs as your primary customer.
And for most startups building a marketplace business, they must acquire SMBs for one or both sides of the marketplace. It's impossible to imagine Yelp, eBay, DoorDash, and Etsy without small businesses on their platform. Even Amazon generates the majority of its revenue from 3rd party sellers, who are primarily SMBs.
The Challenge of SMBs
Most off-the-shelf advice shared with startups centers around two topics—product and distribution.
There is the "10X Rule" about Products.
"As a good rule of thumb, proprietary technology must be at least ten times better than its closest substitute in some important dimension to lead to a real monopolistic advantage. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market."
Peter Thiel
And to many Founders and VCs, distribution is the key to success.
"The cold and unromantic fact is: a good product with great distribution will almost always beat a great product with poor distribution...the growth factor of distribution is as or more important to company success as the product itself—without distribution, it is difficult to reach the tipping point."
Reid Hoffman
Most startups quickly realize that they need both a superior product AND superior distribution to win a big market. For SMBs, this realization is especially acute given the fragmented nature of the "long tail."
The long tail is complex because to succeed, you will need to acquire tens of thousands of customers to generate $100M in revenue. Given the number of potential businesses is in the hundreds of thousands or millions, your target customers tend to be very different from one another, existing in disparate geographies, sometimes across multiple verticals, and all with unique ways of doing business.
You're not just solving one problem when you build and sell to the long tail, so you find yourself competing with dozens of other products and solutions. It's a moving target.
To complicate things further, the long tail of businesses—SMBs— are small, as the name suggests. They are always tight on time and tight on cash. That's the nature of running a small business. If they have never heard of your product, they have zero interest in learning about it and little appetite to try something new.
They started their small business because they are great at cooking, hospitality, or fixing broken stuff in homes. They don't care about your SaaS product or marketplace.
For these reasons, most SMBs are reluctant to buy via self-service. So your team has got to be great at Sales, but before you focus on selling, you must set up the Sales team with a compelling message and value prop.
Building a Cohesive SMB Strategy
Given the enormous challenge of selling to SMBs, my advice is simple.
The combination of your product, marketing, and sales strategy must create an "unfair advantage" that somehow makes the impossible (convincing tens of thousands of small business owners to use your product) possible. This combination is your playbook. It is unique to your company and your market.
If you are able to make the impossible possible, to capitalize, you must recruit an incredible team that builds, executes, and iterates upon your playbook.
Each company's playbook for creating an "unfair advantage" is unique. However, there are commonalities that enable your sales team to break through to SMBs, who are often unwilling to learn about new products/services and give them a shot.
Here are three keys to building your Startup's unfair advantage:
The product is no risk or free, with a lot of upside.
The product is easy to implement
SMBs have heard about your product via word of mouth (from other SMBs or customers)
Examples of Startups with an "unfair advantage"
Let’s look at a few examples.
Yelp
The product is no risk or free, with a lot of upside.
Founders often ask me what made Yelp successful with SMBs (I helped build the sales team that scaled annual revenue from $1M to $750M). To answer their question, I point out that Yelp had the largest freemium model in the history of local businesses. Every business was on the platform, and most were getting new customers from locals finding them on Yelp— without spending a dollar. Cold-calling businesses and selling them advertising was incredibly challenging, but the "freemium" model made it possible.
The product is easy to implement
Unlike Yelp's offline competition (radio, TV, print advertising), all businesses needed to do was provide a credit card for payment and sign a simple agreement. At the time, digital advertising was new, but easy to implement, and handled by Yelp’s team.
SMBs have heard about your product via word of mouth (from other SMBs or customers)
SMBs often heard about Yelp from their customers, giving the company instant credibility. Consequently, business owners paid attention.
Square
The product is no risk or free, with a lot of upside.
Square sent out its card readers to thousands of businesses at no cost. They then paid a percentage on every transaction. The product offered a lot of upside as many merchants were unable to accept credit cards before Square.
The product is easy to implement
Just plug it into your iPhone or iPad.
SMBs have heard about your product via word of mouth (from other SMBs or customers)
Many SMBs learned about the Square reader from other SMBs when they used Square as a consumer. As former COO Keith Rabois shared, "The more readers shipped, the more signups increased. We now have an actual viral loop in the real world."
DoorDash
The product is no risk or free, with a lot of upside.
Only pay per order. Cancel anytime.
The product is easy to implement
DoorDash's significant innovation was providing delivery as a service. This innovation enabled millions of businesses to offer food delivery without hiring delivery drivers, making the product easy to implement for restaurants and even enabling DoorDash to add restaurants to the platform without their consent.
SMBs have heard about your product via word of mouth (from other SMBs or customers)
Unclear, although I'm confident DoorDash's sales team used case studies and examples of nearby restaurants as social proof when pitching new partners. It is also likely that restaurants were hearing about DoorDash from customers "Are you on DoorDash?"
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Let's look at this framework with Sunday, the fast-growing payments App. Keep in mind; I have zero information about the company outside what I found in this article and on their website.
Sunday
The product is no risk or free, with a lot of upside.
No risk. Only pay a % of transactions when customers use the product. Their website touts a 12% increase in the average basket (revenue per table).
The product is easy to implement
Sunday's implementation appears to be a critical part of their competitive advantage and go-to-market strategy. Crucially— restaurants can use Sunday without changing their POS/payments solution. Sunday layers on top of a company's existing system, and there is no hardware required. Each table leverages the app through a QR code.
SMBs have heard about your product via word of mouth (from other SMBs or customers)
Unclear, although, like Square, I'd expect the product's awareness to grow as SMBs see it out in the wild. Like Yelp, the consumer side of the business is likely growing through WOM.
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Once your startup can create an “unfair advantage,” this leads us to my second piece of advice.
If you're able to make the impossible possible, to capitalize, you must recruit an incredible team that can build, execute and iterate upon your playbook.
Competitors will copy pieces of your playbook. Selling to SMBs is a grind. Churn is naturally high with SMBs because they go out of business. New innovative products will launch, with innovative new distribution strategies. The list goes on.
It is important to remember— all of these products and playbooks are built by and for people. If the startup can leverage its competitive advantage to create momentum and have initial success. They can then use that momentum to build and retain a great team. And in time, your team becomes your unfair advantage.
That's when you are off to the races.