Generational SMB digital transformation

"The next decade of economic performance for every business will be defined by the speed of their digital transformation" said Microsoft chief CEO Satya Nadella on earnings call today.

A lot has been written by lots of smart people about how SMBs all over the country and the world have struggled this year because of the pandemic. When a business is predicated on human proximity at a specific place at a specific time, it is not surprising that it will struggle when a pandemic has made the notion of human proximity so risky.

There is no way to overestimate the hardships SMBs have gone through this year. That being said, there is a silver lining. Businesses all over the country are now investing more than ever before in their long term endurance and growth!

What I want to do here is curate statements made by companies to show how an unprecedented wave of digital transformation amongst SMBs across all sectors is underway.

I love to get a sense of what’s going on using bottom-up research instead of top down macro data. I find it more interesting and instructive to triangulate how well category leading companies using software to solve problems for SMBs are doing to get a pulse on what's really going on beyond the headlines.

Why do SMBs matter?

SMBs drive more than 50% of employment in the private sector and account for more than 40% of the American economy.

Let’s dive in

Sheryl Hoskins, CEO of Upserve, an inventory management and point of sale company told Protocol :

• Since early March, our customer adoption of online ordering increased 400%, and the sales our customers were generating online ordering increased a little over 700%

Alex Taussig, a General Partner at Lightspeed Ventures and Board of Director at wholesale marketplace Faire :

• Faire saw its business rapidly bounce back in late Q2. On average, its customers are now growing YoY despite the ongoing pandemic, and Faire’s business more than tripled YoY in Q3. The recovery was driven by the adaptation of Faire’s customers to the post-COVID environment, and by the consolidation of the wholesale channel onto Faire.

From Square’s payments report in September :

• Since the onset of COVID-19, consumers have become less reliant on cash.

• Among payments transacted at Square sellers nationally since February 2020, the share of cash transactions decreased from 37% in February to 33% in April, and held stable at 33% through the end of August, proving that the onset of COVID-19 has affected consumer behavior.

• By comparison, during that same time period in 2019, the share of cash transactions increased slightly, from 39.9% in February to 40.0% in August.

Jeff Wilke, CEO of Amazon Worldwide Consumer, in their 2020 impact report :

• Since the pandemic hit, third-party sellers have had record sales. Their products continue to account for more than 50% of all units sold in our online stores, and their sales continue to outpace our first-party sales.

• During the 12 months ending May 31, American SMBs sold more than 3.4 billion products in our stores, and averaged 6,500 products sold per minute

• American SMBs had an average of $160,000 in sales – up year-over-year from about $100,000.

• The number of American SMBs that surpassed $1 million in sales grew by more than 20%.

• Amazon SMB sellers are based in all fifty states. Forty-seven states are home to more than 1,000 sellers, while twenty-six states have more than 5,000 sellers.

• SMB sellers in Iowa, Washington, and Alabama had the fastest growing sales between June 1, 2019 and May 31, 2020

John Foreman, Chief Product Officer at Mailchimp, told Protocol :

• During the first few months of the pandemic, businesses made that switch like never before, with 60% of new websites built on Mailchimp's tool coming from new users. In April, the average time it took businesses to publish their first website fell by over 50%.

Etsy quarterly earnings in August :

• Etsy saw an influx of 18.7 million new buyers and reactivated buyers - those who haven’t purchased in a year or more.

• GMS growth excluding mask sales for the Etsy marketplace was 93%, up $1.0 billion year-over-year, and 14% of the Etsy marketplace’s overall GMS was from mask sales. Excluding masks, homewares and home furnishings, top category was up 128% year-over year, jewelry and accessories was up 50%, and craft supplies was up 138%.

• 110,000 Etsy sellers sold a total of 29 million face masks worth $346 million

Intuit quarterly earnings in August :

• Revenue for the Small Business and Self-Employed Group grew 16% in the fourth quarter and 15% for the year. Online Ecosystem revenue grew 29% in the fourth quarter, including 4 points of non-recurring revenue from the Paycheck Protection Program and 31% for the year.

• Now seeing recovering trends across our platform including improved retention rates, payments volume and employees paid with our payroll offerings, as customers continue to rely on QuickBooks as the source of truth for their business.

Yancey Spruill, CEO of Digital Ocean, told Protocol :

• According to our recent survey, since the pandemic began, more than 60% of SMBs have expanded or upgraded cloud usage. If that signals one thing, it's that cloud is not only the lifeline these organizations need now, but also the competitive advantage they can leverage to help grow their businesses and power their ideas in the future.

GoDaddy’s global survey :

• The United States (U.S.) has been among the most affected by the pandemic, yet U.S. very small business owners surveyed were among the most likely to exhibit optimism about recovery with 36 percent expecting recovery in three months or less (compared to 26 percent globally). For example, U.S. entrepreneurs were among the least likely to report a decline in revenues (66 percent to 75 percent globally) and were the most confident their businesses would thrive in the future. They were also among the least likely to report receiving COVID-related governmental assistance (76 percent to 68 percent globally).

Hello Alice and GGV Capital’s SMB Impact survey :

• 83% believe their business will perform better in 2021 than in 2020

• 93% plan to hire in 2021 compared to 45% that laid off employees in 2020

• 75% intend to spend more on technology in 2021 than in 2020

This is just a short non exhaustive list of SMB focused companies doing well. It is clear that we are living through a wholesale adoption of technology in a segment of businesses not historically known to adopt technology easily or quickly.

It is definitely not easy to be an SMB right now. The big guys are getting bigger!

But, you would much rather be an SMB during a pandemic this year than any other time in history!

I’ll end with these words of optimism from GGV Capital :

Five to ten years ago, it would have been very difficult for an SMB to compete. Today, it’s a different story. Innovation and scale from SMBTech leaders means new upstarts can deploy and leverage comparable tech stacks on Day 1. Want to launch a new, local authentic pizza restaurant? Create a web site with Wix, offer your customers ordering via the Slice mobile app, POS from Square and online marketing from Hubspot. Not only is it doable, it’s far easier and cheaper than ever before to adopt and leverage technology as an SMB. As a result, we anticipate almost every business started in the post-C19 era will be built on a modern “SMBTech Stack” on Day 1. You’d be crazy to do it otherwise.

Can SMB’s survive in a “big tech / big brand” world? It won’t be easy. But again, we aren’t starting from scratch. Shopify’s annual GMV (gross merchandise sales by merchants on its platform) was $125 million in 2010 – this year it will be over $120 billion. Amazon reported $54 billion in third party provider revenue on its platform in 2019, eBay $90 billion, Etsy’s GMV run rate is $10 billion, and restaurant focused platforms like Toast and Slice are both on track to handle billions in GMV in 2021. Net/net hundreds of billions of dollars in revenue for SMB’s is now flowing through established and thriving platforms that barely existed a decade ago (eBay and Amazon existed, but the SMB portion of their platforms have grown by $100B+ in a decade).