The intersection of Small Business + Venture Tech

Small business trends in the US

There are 28.8 million small businesses (defined as companies with fewer than 500 employees) in the United States, according to the Small Business Administration, accounting for 99.7% of all business in the US and 44% of all US economic activity. Those businesses with fewer than 100 employees account for 98.2% of all businesses, and those with fewer than 20 employees account for 89% of all businesses in the country.

In addition to their contributions to national GDP, small businesses are also a huge driver of job growth by employing 47.3% of the private workforce in the US. The office of advocacy sites that small businesses added 1.8 million net new jobs in 2019 with the top three industries for US small business employment being (1) health care and social assistance, (2) accommodation and food services, and (3) retail trade.

Statistics from SalesForce suggest that these numbers will only increase as Millennials and Gen Zers are 188% more likely to start their own business, compared to Baby Boomers or traditionalists. It’s also interesting to note that millennials and Gen Zers are 48% more likely to start businesses because they have an idea they’re passionate about bringing to the marketplace.

Small business trends specific to minority-owned businesses and underserved communities

According to the SBA, minority-owned businesses (defined as ownership of 51%+) accounted for 20% of all employer businesses in the US in 2019, employing 8.7 million workers at a total annual payroll of $280 billion and amassing $1.3 trillion in total annual receipts.

From 2014 to 2016, the overall number of minority-owned employer businesses rose 11%, while the non-minority figure rose only 1%. Latinx and Black-owned businesses accounted for the highest growth rates at 13% and 12%, respectively.

Out of all racial and ethnic groups, Black-owned employer firms had the greatest share of female owners, at 39% and over the past two years Latinx-owned employer businesses saw the highest revenue growth rates, averaging 25% per year, while white-owned businesses grew year over year revenues at 19% on average. According to Stanford’s 2020 State of Latino Entrepreneurship report, Latinx-owned businesses in opportunity zones saw annual revenue growth rates of 24% compared to 13% annual revenue growth rates of those not located in opportunity zones.

Leading industries for Black and Latinx-owned businesses with the highest growth rates include 1) Construction, 2) Healthcare and Social Assistance, 3) Transportation and Warehousing, 4) Real Estate, 5) Accommodation and food services and 6) Educational Services.

These numbers suggest that entrepreneurship and business ownership present a real opportunity to drive stability for marginalized communities and to begin to correct the racial wealth gap by creating financial prosperity for both minority business owners and the people they employ. According to McKinsey, the wealth gap between Black and White Americans will cost the economy $1 trillion to $1.5 trillion per year by 2028. This includes a $290 billion opportunity to grow overall wealth by achieving revenue parity between Black- and white-owned businesses. Similarly, Stanford estimates a $1.5 trillion+ opportunity gap for Latino-owned businesses.

Challenges facing the small business ecosystem

1. Access to capital — Banks are inherently risk averse and cannot lend to many small businesses because the risk is too high. Of the $20.8 billion loaned through the SBA’s 7(a) program in 2019, 32% went to minority-owned businesses, yet only 6% was loaned to Latinx-owned businesses and 3% to Black-owned businesses. This is in part due to the fact that 44% of small businesses don’t have a lending relationship with a commercial bank and these are more likely to be Black and Latinx business owners. But for those that do, the average small business seeks financing of $100k and report only receiving 40% of what they ask for. Fintech companies like Square have stepped in to fill this financing gap with revenue-based solutions, but there is still a gaping opportunity for debt and equity-like financing structures to fill the $25k — $250k financing gap for small businesses.
2. Access to talent and skilled employees — Not only do small businesses lack the robust resources to create job-specific training programs, they also face barriers to offering high salaries and comprehensive benefits that are crucial to attracting top talent.
3. Integration with Technology — Connecting on a personal level with customers is often times a small business’ competitive advantage over large corporations. Technology such as payment processors, pricing optimization software, e-commerce platforms, marketing automation, digital accounting services, data analytics platforms, etc. help owners squeeze out efficiency and productivity from their existing resources allowing them to dedicate more time to focus on growing and serving their customers in unique, personal and convenient ways. There’s not a shortage of technology options to choose from, but small business owners still struggle to integrate new technologies, suffer from a lack of data privacy and security to prevent cyber attacks, feel that 3rd party systems often have poor customer service, and lack the knowhow to interpret and use the influx of data that’s being collected by new technologies.
4. Regulation — Whether its tax reform, new permit requirements, inspections notices, changes to state licensing requirements, or overtime rules, the constantly changing regulations require ongoing monitoring and the resulting increase in the cost of doing business disproportionately impacts small businesses.

Market size of small business software

Statista estimates cloud-based IT spending by SMBs on business applications, collaboration tools, cyber security and remotely managed IT services at $165B and on-premise solutions at $76B in 2019. They project that spending on cloud-based solutions is forecasted to grow strongly through 2023, reaching $252B and on-premise services to remain almost flat at $79B.

If we take a bottom up approach to sizing the market and we estimate the average small business spends $10k on technology per year, the market size for technology solutions serving the 28.8 million small businesses in the US can be estimated at $288B annually.

Capterra reports that 54% of small businesses reserve budget for finance and accounting, followed by cloud computing (48%), data security (47%), digital marketing (45%) and HR software (43%).

How ventures are innovating in the small business space

I’m seeing a lot of opportunity at the pre-seed and seed stage for venture scale technology to create growth opportunities for small businesses. Most of the solutions are B2B or B2B2C solutions that help small businesses to optimize their own internal resources, reach more customers, and expand their markets to ultimately drive top line revenue. Here are some of the interesting companies I’ve seen recently and what’s great is that most of these are founded by Black and Latinx founders. Hope you enjoy!

Data Analytics and security:

Cyber Popup — On-demand cybersecurity services for small businesses powered by vetted and highly skilled freelancers.

Payments, Insurance and fintech solutions:

Purple Ant — Subscription-based property monitoring platform.

Pocketsuite — Booking and payment platform for freelancers and gig workers.

E-commerce and Marketplace:

EnvironXR — Immersive retail platform for e-commerce targeting the streetwear market.

Black Owned Market — A curated online shopping destination and subscription box that makes buying from black-owned brands convenient.

Atelier — Home design app that allows you to source items from local retailers and small businesses.

Playback AI — Live wholesaler events where retailers and brands meet each other live.

Optimize marketing and advertising:

Beam.City — Multi-channel ad platform, that helps you publish online ad campaigns in minutes.

Gini — Data-driven brand building platform to grow and enhance your business.

(Un)Stuck —Brand builder to foster deeper customer relationships using AI.

Value add services:

Go Logic — Enhance revenue opportunities and efficiently manage delivery and pickup operations for small businesses.

Blitzsen — Customer focused last mile delivery partner for retail and online apparel.

Oja Express — Online multi-cultural grocery store and delivery service for hard to find ethnic ingredients.

Optimize operations and efficiency:

Workchew — Turns your city’s most dynamic hotels & restaurants into safe workspaces with discounted eats.

Renly — Matching small business owners with short-term and long-term sub-renters.

Route — Digitizing the sales and bidding process for the cleaning service and field service industry.

If I missed your venture, contact @tessaflippin on twitter to be featured in the next article.