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State of SMB Software 2017 Edition

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Our second 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 in 2017

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State of SMB Software 2017 Edition

  1. 1. THE STATE OF SMB SOFTWARE A look at 2017’s fundraising and exit trends among North American software companies that serve the SMB market 2017
  2. 2. Private & Confidential | A g e n d a 01 Introduction 02 Methodology and Scope 03 Venture Capital (VC) deals 04 Private Equity (PE) deals 05 Mergers & Acquisitions (M & A) 06 Public Market Activity 07 Takeaways and Recap surepathapital.com
  3. 3. Private & Confidential | Welcome to our second 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 3,700 deals, narrowing them down to 287 venture deals, 27 PE deals, 11 M & A deals, and 2 IPOs representing over $6B in deal proceeds. Venture capital funding captured the most dollars followed by M & A. However, we see PE as a growing category of deals giving companies two bites at the apple – a partial exit today, with significant upside for the future. 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). For VCs, most activity was in front office. For PE firms, the middle office was most popular. While there are some pure-play companies that just serve small business, most companies serve small and mid- market customers. This mirrors our deal practice at SurePath where we work with software companies serving freelancers all the way up to mid-market enterprise. Similarly, despite the intense fragmentation in marketing technology, new fundings and exits remain strong. Marketing is an increasingly complex and technical challenge. Small business owners are getting more sophisticated in their online marketing needs. We hope you find this report useful and invite you to get in touch to discuss it with us. The SurePath team March, 2017 T h e S t a t e o f S M B S o f t w a r e surepathapital.com
  4. 4. S H U B H A M D A T T A D A N I A L S H A I K H M A R K M A C L E O D F O U N D E R D I R E C T O R S E N I O R A N A L Y S T J O S H S C H E R M A N V I C E - P R E S I D E N T T h e S u r e P a t h T e a m The SurePath team has over 30 years of experience in operating, growing, investing, buying, and selling SMB software companies. surepathapital.com
  5. 5. 2017 SMB Software Deals
  6. 6. M e t h o d o l o g y In 2017, there were over 3,700 deals in the B2B software space, globally Of those, 2,252 deals were in North America Of those, 327 deals (287 venture deals, 11 M&A deals, 27 PE deals, and 2 IPOs) involved companies with a clear SMB software offering surepathapital.com
  7. 7. 2 0 1 7 S M B S o f t w a r e D e a l L a n d s c a p e Angel/Seed, $209M Venture Capital, $2,569M PE Growth/Expansion, $837M Merger/Acquisition, $2,090M Buyout/LBO, $526M Total Capital Invested by Deal Type 1. Source: Pitchbook 2. Deal count excludes deals involving accelerators, incubators, crowdfunding and deals with undisclosed values $2M $16M $42M $190M $75M $123M 122 165 20 11 7 2 0 20 40 60 80 100 120 140 160 180 $0M $20M $40M $60M $80M $100M $120M $140M $160M $180M $200M DealCount AverageDealSize(inmillions,USD) Average Deal Size by Deal Type Average Deal Size Deal Count 2017 saw lots of early stage activity with 122 angel and 165 VC investments. Most of the $ volume was in venture capital. As in other sectors, SMB software saw far fewer exits relative to fundraising with 18 outright exits, 20 PE/growth deals and 2 IPOs. surepathapital.com
  8. 8. S M B V e n t u r e F u n d i n g i n 2 0 1 7 1. Source: Pitchbook 2. Deal count excludes deals involving accelerators, incubators, and crowdfunding and deals with undisclosed values $60M $149M $1,011M $1,558M 43 79 109 56 0 20 40 60 80 100 120 $0M $200M $400M $600M $800M $1,000M $1,200M $1,400M $1,600M $1,800M Angel Seed Round Early Stage VC Later Stage VC DealCount CapitalRaised(inmillions,USD) Capital Raised by Venture Deal Type Total Capital Raised Total Deals 127 SMB software companies raised their first funding rounds in 2017. However, the bulk of the VC $ invested in the sector went into accelerating 109 early stage and 56 growth stage companies surepathapital.com
  9. 9. $80M Iconiq Capital $77M CoVenture $75M Sageview Capital and Leaders Fund $53M Norwest Venture Partners $50M New Enterprise Associates $250M Softbank $166M CDPQ $101M Generation Investment Management $100M JP Morgan Chase, Temasek $100M Battery Ventures 2 0 1 7 ’ s T o p S M B S o f t w a r e R a i s e s Source: Pitchbook surepathapital.com
  10. 10. V e n t u r e D e a l s b y C a t e g o r y SMB software companies raised ~ $2.8B across 287 deals in 2017. Of those, companies that helped SMBs grow their business attracted nearly 50% of the venture capital in the SMB software space. 137 112 38 $1,338M $975M $465M Grow My Business Run My Business Keep Track of My Business Outer ring represents total capital invested by category and inner ring represents total deal count by category Source: Pitchbook We track SMB software companies across three broad categories: • Grow my Business: marketing / front office • Run my Business: typically vertical apps to help operate (business management, ERP, etc). • Track my Business: Billing, accounting, etc. surepathapital.com
  11. 11. Combined, companies in the Business management/ERP software and Marketing Tech categories attracted 61% of total venture capital funding in 2017. However, all front, middle, and back office sectors saw deal activity. 80 96 29 21 17 23 7 9 5 $845M $815M $461M $328M $137M $84M $47M $45M $15M Business Management/ERP Marketing Tech CRM Accounting & Invoicing Payments HR Tech E-Commerce Security/IT Ad Tech Source: Pitchbook V e n t u r e D e a l s b y C a t e g o r y ( c o n t . ) surepathapital.com
  12. 12. V e n t u r e D e a l s b y T a r g e t C u s t o m e r Nearly 75% of venture funding in 2017 went to companies with a broad offering for both the small and medium segments of the SMB software space. Relatively few companies served either only the small or medium segments explicitly. This makes sense as it enables software vendors to reach a larger market. 189 79 19 $2,032M $593M $152M Both Small Medium Source: Pitchbook surepathapital.com
  13. 13. V e r t i c a l - S p e c i f i c V e n t u r e D e a l s 27 22 97 6 5 4 4 4 28 $273M $139M $146M $46M $11M $28M $24M $12M $18M $268M Restaurants Real Estate Home Services Financial Services Health and Beauty Cannabis Event Management Legal Construction Other 2017 saw nearly $1B in capital invested across 116 deals involving companies serving specific verticals within the SMB software space. Restaurants-specific software companies attracted $274M (28% of total capital) across 27 deals. Vertical-specific companies tend to achieve higher valuation multiples than horizontal peers. Source: Pitchbook surepathapital.com
  14. 14. # of Investments Investors 6 5 4 M o s t a c t i v e S M B S o f t w a r e V C s We find that most early-stage VCs don’t have a specific focus on SMB software due to high churn rates and the challenges of distribution. That notwithstanding, many firms had multiple deals in the sector last year. surepathapital.com
  15. 15. $59M Silversmith Capital Partners $55M Vista Equity Partners $36M Mainsail Partners $35M Providence Equity Partners $35M Welsh, Carson, Anderson, and Stowe $250M Hillhouse Capital Group $231M Warburg Pincus $230M Clearlake Capital $125M K1 Investment Management $92M HGGC 2 0 1 7 ’ s T o p P r i v a t e E q u i t y S M B D e a l s Source: Pitchbook + Growth Round; * Buyout Note: Squarespace reportedly raised nearly $200M in growth capital from General Atlantic in December 2017. The deal values Squarespace at $1.7B. The deal has not been confirmed by either party. + + + + + + * * * * surepathapital.com
  16. 16. S M B S o f t w a r e P E D e a l s i n 2 0 1 7 1. Source: Pitchbook 2. Deal count excludes deals involving accelerators, incubators, and crowdfunding and deals with undisclosed values Though growth rounds for SMB software companies attracted over 60% of the capital across nearly 75% of the total SMB software PE deals, buyout deals attracted significantly more capital per deal ($75M/deal for buyouts vs. $42M/deal for growth rounds) $526M $837M 7 20 0 5 10 15 20 25 $0M $100M $200M $300M $400M $500M $600M $700M $800M $900M Buyout/LBO PE Growth/Expansion DealCount TotalCapitalInvested(inmillions,USD) Capital Raised by PE Deal Type Total Capital Invested Deal Count surepathapital.com
  17. 17. P E D e a l s b y C a t e g o r y PE deals (buyouts or growth rounds where the fund bought < 50% of the target) grew significantly in 2017. PEs are increasingly seeing SMB as a place to invest and grow large, enduring companies. Middle office (run by business) deals were the most popular. Source: Pitchbook 11 12 4 $608M $553M $202M Run My Business Grow My Business Keep Track of My Business surepathapital.com
  18. 18. P E D e a l s b y C a t e g o r y ( c o n t . ) Private equity investors deployed nearly $1.4B in capital into software companies serving the SMB space in 2017. Of that, nearly $500M of the capital went to companies focussing on business management and ERP systems. Source: Pitchbook 7 2 3 4 6 3 1 1 $495M $268M $167M $166M $119M $84M $35M $28M Business Management/ERP E-Commerce Accounting & Invoicing CRM Marketing Tech HR Tech Payments Security/IT surepathapital.com
  19. 19. P E D e a l s b y T a r g e t C u s t o m e r Over 70% of private equity capital in 2017 went to companies with a broad offering for both the small and medium segments of the SMB software space. Relatively few companies served either only the small or medium segments explicitly. This is similar to what we saw with VC funding. Source: Pitchbook 21 4 2 $998M $317M $63M Both Medium Small surepathapital.com
  20. 20. $128M Ellie Mae $40M Yelp $32M Gannett Company $21M Yelp $17M Zendesk $760M First Data $470M Paysafe Group $340M Intuit $135M Snap Inc. $134M GrubHub 2 0 1 7 ’ s T o p S M B S o f t w a r e M & A D e a l s Source: Pitchbook * SurePath Capital Partners advised SweetIQ in its acquisition by Gannett Company * surepathapital.com
  21. 21. M & A D e a l s b y C a t e g o r y Source: Pitchbook 4 7 $1,584M $506M Keep Track of My Business Grow My Business As with other deal categories, Grow My Business was the leading category by volume. However, the largest exits were in track my business. This was driven by payments-related transactions. surepathapital.com
  22. 22. M & A D e a l s b y C a t e g o r y ( c o n t . ) Private equity investors deployed nearly $1.4B in capital into software companies serving the SMB space in 2017. Payments-related companies saw the largest deals. Source: Pitchbook 2 2 4 2 1 $1,230M $354M $203M $168M $135M Payments Accounting & Invoicing Marketing Tech CRM Ad Tech surepathapital.com
  23. 23. NYSE: SEND NYSE: YEXT IPO Date November 14, 2017 April 13, 2017 Amount Raised $131M at $805M post-money valuation $133M at $958M post-money valuation Age at IPO 8 years 11 years Revenue at IPO ~$96M ~$124M Headcount at IPO 400+ 600+ Pre-IPO Investors Bain Capital Ventures, Sway Ventures, Bessemer Venture Partners Inisight Venture Partners, CrunchFund 2 0 1 7 ’ s S M B S o f t w a r e I P O s Source: Pitchbook Neither IPO in 2017 was a pure play SMB company, but both have a meaningful number of SMB customers. surepathapital.com
  24. 24. The SurePath SMB Index
  25. 25. SMB is our focus Our clients serve SMBs Many other indices The first to see trends Introduced in 2016, the SurePath SMB Index tracks 35 publicly traded companies that serve SMB and their performance against other benchmark indices. Examined 280+ Annual Reports of Publicly Traded Companies Selection of Companies for SMB Focus SurePath SMB Index T h e S u r e P a t h S M B I n d e x Final Selection of 35 Companies surepathapital.com
  26. 26. I n d e x C o n s t i t u e n t s surepathapital.com
  27. 27. S u r e P a t h S M B I n d e x • All 35 companies are weighted based on Market Cap and indexed at January 4, 2016 • 30 of the 35 companies are part of the $1 billion market cap club (a club we expect will grow over time) SCP SMB Index Total Market Cap $257B surepathapital.com
  28. 28. A c l o s e r l o o k a t t h e S M B I n d e x P e r f o r m a n c e SCP Index, 129% S&P 500, 118% Nasdaq, 127% Dow Jones, 124% 95% 100% 105% 110% 115% 120% 125% 130% 135% 1/3/2017 1/10/2017 1/18/2017 1/25/2017 2/1/2017 2/8/2017 2/15/2017 2/23/2017 3/2/2017 3/9/2017 3/16/2017 3/23/2017 3/30/2017 4/6/2017 4/13/2017 4/21/2017 4/28/2017 5/5/2017 5/12/2017 5/19/2017 5/26/2017 6/5/2017 6/12/2017 6/19/2017 6/26/2017 7/3/2017 7/11/2017 7/18/2017 7/25/2017 8/1/2017 8/8/2017 8/15/2017 8/22/2017 8/29/2017 9/6/2017 9/13/2017 9/20/2017 9/27/2017 10/4/2017 10/11/2017 10/18/2017 10/25/2017 11/1/2017 11/8/2017 11/15/2017 11/22/2017 11/30/2017 12/7/2017 12/14/2017 12/21/2017 12/29/2017 SCP SMB Index compared to major indicies in 2017 SCP Index S&P 500 Nasdaq Dow Jones surepathapital.com
  29. 29. LC, -23.8% SSTK, -9.5% SHOR, 4.9% WEB, 5.3% DLX, 6.9% EIGI, 7.7% YELP, 9.8% PAYX, 11.5% FDC, 12.3% ADP, 13.2% HRB, 14.5% MCHX, 18.3% SGE, 22.6% WIX, 28.0% CMPR, 28.5% ANGI, 28.7% INTU, 37.5% MB, 40.7% GDDY, 40.8% GRPN, 45.7% ZEN, 52.9% CARB, 60.9% STMP, 63.7% XRO, 72.5% PAYC, 72.9% APPF, 80.4% QLYS, 82.3% HUBS, 84.7% TEAM, 85.0% NEWR, 93.7% GRUB, 93.7% RNG, 126.7% SHOP, 135.9% SQ, 151.1% TREE, 246.2% -50% 0% 50% 100% 150% 200% 250% 300% LC SSTK SHOR WEB DLX EIGI YELP PAYX FDC ADP HRB MCHX SGE WIX CMPR ANGI INTU MB GDDY GRPN ZEN CARB STMP XRO PAYC APPF QLYS HUBS TEAM NEWR GRUB RNG SHOP SQ TREE M o v e m e n t o f t h e I n d e x i n 2 0 1 7 surepathapital.com
  30. 30. -50% 0% 50% 100% 150% 200% 250% TREE SQ SH O P RN G G RUBN EW R TEAM HUBS Q LYS A PPFPA YC XRO STM PC A RB ZEN G RPNG D DY M B IN TU A NG IC M PR W IX SG EM C HX HRB A DP FD C PA YX YELP EIG I D LX W EB SH O R SSTK LC Annual Stock Movements - 2017 vs 2016 2016 2017 A n n u a l S t o c k M o v e m e n t s – 2 0 1 7 v 2 0 1 6 surepathapital.com
  31. 31. T o p 5 P e r f o r m e r s i n 2 0 1 7 surepathapital.com
  32. 32. P o o r e s t P e r f o r m e r s i n 2 0 1 7 surepathapital.com
  33. 33. Lessons & Takeaways
  34. 34. Early stage funding is alive and well across all software categories: There were over 200 early stage fundraising transactions in 2017. Martech, despite being crowded already, still saw 96 funding deals. Despite this funding activity, we do see consolidation coming in the future. There are just too many point solutions. Most of them will not figure out customer acquisition at scale. Deal activity was broadly distributed across categories: Venture Capital funds (VCs) invested mostly in front office applications that help SMBs grow. Private Equity (PE) preferred middle office applications that help their customers run their businesses. The largest exits were in back office, specifically payments. SMB software companies serve a wide range of customers: “SMB” covers everything from a freelancer to large mid-market enterprise. Most of the companies that transacted in 2017 serve both the small and the mid market. There were relatively few players focused on just one segment of the market. Vertical software is on the rise and attracts healthy valuations: Over $1B was invested in vertical-specific companies last year. The restaurant vertical was the most active. Upserve & Toast alone raised over $200M. Construction/home services is the next busiest vertical. Software and payments are like peanut better and jelly: Adding payments grows revenue per customer, makes the software stickier and completes the solution for the business owner. Few IPOs, but strong public market performance: There were no pure play SMB IPOs in 2017. However, our SMB Index outperformed all major indices. Lending Tree, Square and Shopify were the top performers. Lending Club had the biggest decline. T a k e a w a y s & R e c a p surepathapital.com
  35. 35. To help fund, grow, and exit SMB software companies SurePath maximizes your optionality: We ensure our clients are always in a position to raise more capital or exit profitably Preparing you to raise the right amount of capital from the right investors on the right terms Growth Funding Leveraging our deep operating expertise to ensure your business is on the right plan to create the most value Strategic Guidance Our unparalleled access to SMB buyers helps us position you for an intentional, profitable exit Exits S u r e P a t h : O u r P u r p o s e surepathapital.com
  36. 36. We have been part of some the most successful SMB software companies We have deep relationships with SMB investors and buyers SurePath is committed to becoming the leading strategic financial advisor to the global SMB software market S u r e P a t h a n d S M B surepathapital.com
  37. 37. served as advisor to R e c e n t S u r e P a t h D e a l s served as the exclusive strategic and financial advisor to on its sale to an operating group of surepathapital.com
  38. 38. The Leading Financial Advisor in SMB Software EXPERIENCE Funding, growing & exiting tech companies PEDIGREE Alumni of Constant Contact, FreshBooks, Shopify… ACCESS To Tier 1 investors & strategic partners FOCUS The only advisor with a dedicated focus on SMB Software COMMITMENT Helping our clients and their investors succeed T h e S u r e P a t h D i f f e r e n c e surepathapital.com
  39. 39. Shubham Datta Director shubham@surepathcapital.com 647.972.6834 Danial Shaikh Senior Analyst danial@surepathcapital.com 647.876.5453 Mark MacLeod Founder & President mark@surepathcapital.com 416.843.6004 Josh Scherman Vice-President josh@surepathcapital.com 646.420.0074 Toronto • San Francisco

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