Platform tools: the SMB playbook

There is one model of companies that we’ve been particularly excited about over the last few years and where we have made a number of early-stage investments. These companies address the SMB market (Small and Midsize Business) with a playbook that we think will produce some very large outcomes in the next decade. This playbook is emerging due to the convergence of multiple trends: the ubiquity of the smartphone, the access to payments and the growing financial services stack as well as the improvement of data infrastructure. It is the digital transformation of the SMB market driven by economic necessity (further accelerated by Covid but I have decided not to address this topic in this post), technological maturity and the cultural shift of the millennial workforce. The companies that successfully lead this transformation will have a positive impact on our economies and our society.

These companies borrow from multiple internet playbooks: SaaS, marketplaces and even social networks. In some cases, they have already been described as SaaS-enabled marketplaces or B2B marketplaces. These are definitely useful frameworks but the businesses I’m going to mention here don’t always have a SaaS component and not all of them are marketplaces. Plus, these terms mostly speak about their business models. What I’m going to highlight is how they can get initial traction and how I think they can build enduring companies (which of course includes the ability to monetise). These companies start with a self-served productivity tool for SMB employees or owners to perform a key business function, then they have the opportunity to accelerate the growth of their user base through virality. Eventually, they reap the benefits and capture most economic value through network effects. We’re still early in the developments of these businesses so we’ll have to see how they evolve and scale but we’re already seeing that they grow in at least 2 steps or 2 sequences of loops (to use the words of Kevin Kwok in his blockbuster essay “Why Figma wins”) :

Productivity loop: The product starts as a productivity tool that helps the small business perform a critical task by offering a 10x improvement vs the old way. It’s a critical task with high frequency (at least weekly). Successful products quickly see very high retention numbers once the user starts to complete the key action. These tools often fulfill some kind of communication or collaboration functions. The key user can invite one or more colleagues which boosts usage and further increases retention. Even more interestingly, the key action involves, in a passive or active way, an external third-party. This is key. The more they use the tool and perform the key action, the more they seed a network of other users and underlying data. There are usually 2 types of product-market-fit to achieve within this loop. The first one is achieved when the product becomes the default way to perform the key action. The second PMF is to add value to the third-party that is being involved in the “transaction” to the point where they eventually become an active user. This is harder and can take more time. At this stage, the transaction is often but not necessarily a financial one, it can also be an exchange of information.

Network loop: As target users adopt the product and invite more people onto the platform, they build a network through their usage. They are seeding the next loop. If the first loop is the productivity tool helping a small business perform a key action, the 2nd loop is mining the graph that the sum of all the transactions is creating. When this graph reaches a certain scale, the company can start to reap the benefits by unlocking value to the whole network. The value will probably be delivered through multiple “sub-loops” attached to different value-add services. The data that the company has collected and the ability to index that data are critical. One area where the value of this graph is becoming quickly apparent is financial services. The successful tools become ideal platforms to embed a series of financial and insurance products in the network and there is a fast-growing market providing the required infrastructure. Another area where I suspect some companies will be able to add value is logistics because it’s often a data science challenge and the network loop will provide access to a unique dataset.

Let’s look at a few examples from our portfolio:

Breedr: A mobile app that allows farmers to capture and manage their livestock data with precision. Farmers can then set growth rates, boost the productivity of their herd and integrate all critical farm management data. Critically, they can use this to trade directly with wholesalers, end retailers and finance future contracts.

Goodlord: It started as a “CRM” tool to help letting agents manage and accelerate the rental process (collection and approval of documents, communication, payments, etc). In this process, not only the agent but also the tenant and landlords are involved. As they have grown their penetration into the fragmented letting agency market, they can now use their platform to deliver more products and services to all 3 stakeholders.

Libeo (France) and Melio (US/Israel): They both address the account payable process for SMBs. While their solutions vary as they operate in 2 very different markets, the dynamics are similar. First, they have built an easy solution for the businesses to digitise, centralise and pay their invoices. As SMBs adopt the solution, they are also connecting a fast-growing supplier network which will allow them to deliver additional value on both sides.

REKKI: A mobile app helping restaurants to communicate with and order from the best suppliers. They help chefs and their team to send orders via a chat app. As they are building the network on both sides, they have unique visibility on the supply chain and can add value to the entire network. They just published an interesting case study highlighting how their app helped a restaurant grow its profit margin during lockdown.

It’s worth noticing that these products often look like consumer products. This is not only by coincidence or because the level playing field in design has gone up dramatically in the last few years. It’s particularly critical for these tools to behave like consumer ones. SMBs are notoriously hard to acquire and monetise. The productivity loop is mainly about acquisition and retention (minimise CAC and churn). While you can monetise the low hanging fruits in the productivity loop (saas fee, transaction fee), the network loop is where you will have the opportunity to further increase LTV. This is the social network playbook. First, you focus on engagement, retention and low CAC so you can build a valuable network, then you can start focusing on maximising your LTV by increasing your revenue per user. I think it is important to insist on the difference between virality and network effects here. A viral product doesn’t always have network effects (e.g. Gmail is a viral product but has no network effects, Facebook has both) and in this playbook, I think you ultimately need to have network effects to build a very large business.

There has been a lot of discussion (at least in VC circles) around what are the next opportunities in the mature consumer landscape. In a way, I like to think about these SMB products as a “new consumer frontier” . They look like consumer tools, they borrow from the most successful consumer playbooks but they address business use cases and transactions. Their networks could have massive upside potential as the LTV of an SMB is potentially much higher than a consumer. More than an exciting venture opportunity, these companies also fulfill a critical mission: they help bring the “little economy” (SMBs, independent businesses, etc) into the fast-growing internet economy. They create value and make money by making the participants in their network stronger businesses for the digital age. As the little economy is the economic and cultural lifeblood of our society, we think it’s an incredibly exciting and important mission.

This playbook is still being written so please comment and share your thoughts. We’re planning to dig more in further posts. As always, there will be many nuances. From the list of companies I’ve mentioned above, you can already separate the horizontal plays like Melio and Libeo vs the vertical ones approaching specific industries: restaurants (REKKI), lettings (Goodlord), agriculture (Breedr). There are many more SMB segments to bring into the internet economy and we hope to invest in many of them so if you’re building one of these platform tools, please get in touch, I’m at george at localglobe dot vc

PS: if you have an exciting product that doesn’t fit this playbook, you can still get in touch :). My friend Paul @ Northzone has tweeted a good template to cold email VCs.

PS 2: Thank you to my LocalGlobe colleagues who have contributed to this post by making great investments ;)