(2024-06-18) Stop Building Saas For Smbs Buy Them Instead

Ori Eldarov: Stop Building SaaS for SMBs—Buy Them Instead. TL;DR: Many founders have become excited about building software for the “untapped” SMB market, grossly miscalculating the difficulty they will face in both GTM and adoption. In this post, I will make the case that founders interested in SMBs have a way bigger (and less risky) opportunity in front of them—they can just acquire SMBs and build their dream tech around them. In fact, most Tier 1 VCs are already doing this in stealth. (He's talking mostly about people wanting to start an AI-based product company.)

The enterprise market is oversaturated with SaaS—by now, there is vertical SaaS for virtually every niche.

In response to this trend, many first-time founders are choosing to go “downmarket” to SMBs, seeing it as the next frontier.

However, I think this is a mistake in most cases

despite lower ACV, you will likely have the same, if not longer, sales motion as with regular enterprise deals (sales cycle)

SMBs are often operated by the older generation (average age of SMB owner is 60+), making them particularly unlikely to adopt tech or learn new tools. Most SMBs want the work done for them; they don’t want to click around in some app or talk to a chatbot.

But what if there was a bigger opportunity hiding in plain sight?

Why You Should Consider Buying SMBs

Let’s say you want to automate the work of on-call IT support specialists. You spend a year building and testing a fancy new AI platform that can reliably automate 50% of the work.

the sales motion for a contract of this size and a major change to how the business operates will take many many months, if the owner even agrees to entertain the idea.

To get to $1M in sales, you’ll have to find 10 of these. Let me assure you—it will be a grind, and will probably take longer than you think.

You decide to acquire said IT business for 1x revenue—$5M. Of that, you would typically pay $1M in cash

You just acquired yourself a zero-churn customer. As the new owner of the business, you can quickly iterate on the tech and achieve the said 50% automation

You have two options now:

• Capture Savings: Capture the full $500K in savings per year into perpetuity; or
• Grow Revenue

It is no surprise that pretty much all of the top-tier VC funds are now pursuing this strategy in some shape or form (most of them are currently in stealth but listing a few publicly announced):

• Crete - tech-enabled accounting & tax rollup (led by Thrive Capital & Bessemer)
• Roofer.com - tech-enabled roofing business (backed by Soma, Asymmetric, Mucker)

A Few Words of Caution

M&A is Not Easy (M-and-A)

Service Business Management: Owning a service business (especially if it touches blue-collar work) is very different from working at Meta, Blackstone, or McKinsey. Ensure you have what it takes to work with that type of labor force.

Founder-Market Fit: Founder market fit still matters—ideally, you have some unique insight into how technology moves the needle, and you are using M&A to acquire distribution. You need to be able to develop best-in-class SOPs/playbooks.