Empowering Underrepresented Entrepreneurs Through SMB Tech

By Claire Biernacki, BBG Ventures

The gap in technology for underserved workers, including deskless workers, small and medium-sized business (SMB) owners and freelancers, is central to our future of work thesis at BBG Ventures. Closing that gap represents a massive opportunity for venture capital, as the vast majority of investment is still focused on knowledge workers. Less than 1% of venture funding goes to software for deskless workers, who are often SMB employees.¹

We began investing in SMB tech in 2016 with Mighty Networks, which enables creators to run full-service businesses. More recent investments include Topline Pro, the AI-powered all-in-one business platform for service pros; Norby, which launched with community-management tools for creators; and Icon, a portable retirement plan that makes it affordable and easy for SMBs to provide retirement savings opportunities to employees. In this post, we’ll cover why now is the right time to invest in SMB tech; the biggest problems SMBs face; and where we see investment opportunities.

Why Now is The Right Time to Invest in SMB

SMBs are the backbone of business in the United States — 33M SMBs represent 99%+ of all businesses and are credited with 2/3 of new job growth from 1995–2021. There are a number of thematic accelerants that make SMB tech compelling:

• COVID Fueled Small Business Growth and Tech Adoption: A record breaking 5.4 million new business applications were filed in the U.S. in 2021. When COVID hit, SMBs prioritized building out their tech stacks to stay in business. Today, SMB owners are more tech savvy than ever before. Toast is a well-known example that benefited from restaurants’ fast adoption of technology, seeing 100% YoY growth in June ’20, growth that ultimately positioned the company for a strong IPO ($20bn).
• Next Gen SMB Owners Will Take Advantage of Tech: Nearly half of all small business owners plan to retire in the next five years. The rising generations that take over those businesses are more likely to adopt tech vs. relying on spreadsheets or pen and paper. Cloud, mobile, social media and payments have also all evolved to better support SMBs.
• Gen Z as a Digitally Native Customer: Gen Z represents $360bn in disposable income and prioritizes convenience. They are accustomed to a tech-driven experience, further driving the need for SMBs to incorporate a tech-forward approach.
• Pressure From Macro Environment: Small business optimism hit an 11-year low in April ’24 . Increased economic uncertainty creates the need to better manage SMB costs, made worse by workforce turnover as retailers and restaurants continue to struggle to hire and retain enough workers.
• Massive Opportunity for AI to Free Up Time for SMB Owners: Perhaps most importantly, AI will be a significant accelerant, with 58% of SMB owners intending to make an investment in AI-related technology. SMB owners often wear every hat — from marketing to HR to finance. While the first wave of tools and tech created efficiencies, SMB owners are still ultimately responsible for the execution. The AI opportunity creates promise for owners to run their business end-to-end rather than just assisting with point solutions.

SMB Facilitates the Next Generation of Diverse Entrepreneurs, Both SMB Business Owners and Founders Building in SMB Tech

In addition to the market opportunity, investing in tools to support SMB owners (often women and/or Black/Latinx) can help diverse business owners and new generations build financial security, by optimizing the value of their business.² Many of the best founders in vertical SMB come from the industries they’re building in or have families in those industries, making them well-positioned to win. As an example, the founder of BBGV portfolio company, Formally, which is building legal workflow software, starting with immigration, grew up with an international background and immigrated to the US from Austria for high school. Amelie founded her company after seeing challenges with the US legal system firsthand, creating a platform that enables law firms handling immigration cases to serve people faster and more successfully³. As our friends at Harlem Capital pointed out, many diverse founders come from immigrant backgrounds or have faced adversity, either from their upbringing or economic circumstances, which brings urgency and resilience that fuels entrepreneurship.

SMB Owners Feel Overlooked and Overwhelmed

BBG Ventures surveyed over 2000 Americans across different races, genders, ages, jobs, incomes and geographies to better understand how age and race impact priorities — across health, work, finance, climate and community. Look for the full study later this fall, but these takeaways highlight the opportunity for technology to transform how SMB owners run their businesses:

1. SMB Owners Feel Overlooked, Especially Those With Limited Capital: When compared with other worker groups, SMBs with <20 employees felt the least served and prioritized by government, the economy, and society, with almost half (44%) of SMB workers earning under $100k saying they feel severely underserved. When asked what would have better prepared them for the workforce, 47% of SMB owners with <20 employees pointed to an understanding of finance.
2. SMB workers are overwhelmed by their workload and their mental health is negatively impacted. Excessive workload is the most common driver of burnout across all worker types, however it was a clear standout at 44% for SMBs with <20 employees. Of all worker types, SMBs were second highest in pointing to workload as the reason for burnout. Excessive workload was also cited by SMB owners, followed by chronic stress as the second highest reason for burnout (29%). Likely because of the stress of balancing workload, SMBs with <20 employees had the 2nd highest percentage of all worker groups saying that mental health is their top health priority (45%).
3. Hiring, employee retention and training are top pain points. When asked about top priorities for the business right now, hiring was the biggest concern, with 31% of SMB owners with <20 employees saying it is a top priority, followed by managing finances at 18%. SMBs also need support with upfront training and continuous learning, likely because of the pace of innovation coupled with limited team resources. 36% of SMBs with <20 employees said that upskilling programs were a top priority and 33% are seeking support for learning on the job.
4. Investing in SMB tech creates impact: Of the SMB survey respondents, 57% were Black or Latinx and 43% were women. The diversity of SMB owners is also reflected in SBA loan data that shows roughly half of SMB owners are women and at least 20% are minorities. Furthermore, Women of color are founding businesses at a faster rate than women in general — 42% of newly created women-owned businesses are started by Black women and 31% started by Latina women.

Areas of Opportunity for SMB Tech Right Now

Based on our survey learnings, market dynamics, and companies we’re seeing in market, we’ve identified three core areas of opportunity:

1. SMBs Lack Access to Capital: Opportunity for Platforms that Leverage Unique Datasets for Underwriting
Pain Point: At least half of SMB owners do not have the personal capital to fund their business before achieving profitability.⁴ Historically SMBs have struggled to access capital given the challenges associated with underwriting a small business. With limited, sometimes inconsistent, performance data, SMBs are perceived as higher risk. The limited data available for underwriting SMBs also leads to bias in the underwriting process, — 47% of black-owned businesses that apply for a loan are denied.

How to Win: Build New Differentiated Datasets for Underwriting: We have seen a wave of companies leveraging AI advances to consolidate existing SMB datasets, creating a more comprehensive picture of a businesses’ health. Examples of this approach include Worth AI (general SMB), Shubox (CDFI lenders), and Bonside (brick and mortar). However, in order to create a moat, we believe companies that are building new differentiated datasets to inform underwriting, rather than aggregating existing SMB datasets together have an advantage. It may require time to build a new dataset before a startup is positioned to offer financing products. For example, Hansa is selling their financial assistant tool to SMB owners, with the goal of creating a large dataset to build a superior underwriting model. Another example is Prime, which was spun out of Enigma, leveraging the SMB dataset Enigma has been building since 2012 to provide lending as a service for community banks.

2. SMB Owners are Stretched Thin: AI Facilitates the Next Wave of “Business in a Box”
Pain Point: 44% of SMB owners attribute excessive workload as the reason for their burnout — they are strapped to balance all that they have to do.⁴ SMBs operate in resource-constrained environments, in which data is unstructured and messy. The stress of balancing workload creates a toll on mental health — SMBs with <20 employees had the 2nd highest portion of all worker groups saying that mental health is their top health priority (45%).

How to Win: Next Wave will Leverage AI to Do the Work End-to-end: The first wave of vertical solutions to help SMBs manage workflows were a step forward, creating productivity improvements for business owners. Examples of early SMB winners include Mindbody ($2BN, fitness/beauty), Toast ($14BN, restaurants), Service Titan ($10BN, trades). Now, AI has the potential to create standardization of data and workflows. From lead generation to scheduling to automating training — winners in the next wave will offer a comprehensive “business in a box” platform that gives time back to SMB owners while providing them with data-driven insights. With AI, business in a box technology has the ability to provide significant improvements in efficiency, creating higher ROI and therefore higher willingness to pay — ultimately offsetting challenges with unit economics that have historically plagued SMB tech. Examples include companies like Moxie (medspas), BBGV portfolio company ToplinePro (home services) or EngineEars (musicians). We also see potential for a “business in a box” player to add on financing (Area of Opportunity #1), with the advantage of having first gathered company-specific data.

Bonus Opportunity: The bulk of mental health platforms for workers today are horizontal, with many pursuing employer models (Spring Health, a BBGV portco, is a good example, as well as solutions that started B2C such as Calm, Headspace,). But we see opportunities to build mental health solutions or community resources specifically dedicated to SMBs. We’ve been interested in peer-to-peer models such as Forum and believe this model could be especially relevant for SMB, given the similarities in challenges faced and the opportunity for resource sharing. With limited budgets, the right model to support SMB mental health may come as part of a broader business in a box platform, where the broader platform delivers a clear ROI.

3. Hiring and Training is a High Priority Challenge for SMBs: Opportunity for Vertical Marketplaces That Provide Training
Pain Point: Hiring was identified as the top priority for small businesses, with 31% of SMB owners with <20 employees saying this is one of their top areas of concern.⁴ Service businesses also struggle with retention, with significant turnover in the current macro environment.

How to Win: Verticalized Marketplaces for SMBs + Training: The first wave of SMB recruiting software included companies such as Workable and Ashby. We’ve also seen a wave of companies that incorporate AI into the hiring process such as Tezi. We’re excited to back verticalized hiring marketplaces, which can add greater value to the hiring process by identifying talent that is familiar with industry-specific workflows. Curated vertical solutions have the potential to establish attractive unit economics as they can demand a higher mark-up for talent. Vertical solutions are also more easily added to other products over time, increasing ACV potential. For example, Liftoff is a social recruiting platform that enables companies to find talent through people they trust and compensates networks for referrals. Upwage, a BBGV portfolio company, leverages AI to recruit hourly workers, creating value on both sides of the marketplace — for workers, it brings transparency, flexibility and simplicity to finding a better paying/better fit job; for companies, it dramatically lowers cost, automates screening, and reduces time to hire. Neither of these companies are focused on SMBs today, but their approaches could be adapted for SMBs in the future, when a self-serve version is launched.

Verticalized marketplaces can work especially well in legacy categories that require improvements in the labor market. Examples of this have existed for deskless workers, such as Incredible Health, which helps hospitals hire nurses, or Traba, which helps with shift-based workers in warehousing, logistics and other industrial sections. Providing workers with the training needed to transition into a new industry (which can also allow for wage progression) addresses the hiring challenge by increasing the supply side. For example, Stepful provides training for home health workers. Interplay Learning and MT Copeland provide training for construction. These industries and other skilled trades are well-suited for short-term training to increase supply given that the training is standardized and time-bound. We are excited to see companies combining training with a marketplace approach under a single platform. Once a company makes a hire, retaining them is critical — companies that offer benefits that are often requested by workers, such as our investment in Icon, which offers a portable retirement plan — can be a valuable add-on.

Industries with Market and Impact Potential
To identify industries with the greatest potential, we looked at several inputs:

• Size of market opportunity
• Industries that over-index for diverse founders
• Number of addressable SMBs
• SMB revenues high enough to support software purchases

Below are the areas we identified, the number of addressable SMBs, as well as some examples of interesting companies in each. Of these, areas like beauty and restaurants have the highest representation of diverse business owners, with over a third of entrepreneurs being Black, Latinx and AAPI folx. In many of the other categories, the representation of Black, Latinx and/or AAPI entrepreneurs has increased over time — but we would expect advancements in SMB tech to further accelerate this by making entrepreneurship more accessible.

Healthcare — Independent Physicians:

• Physicians (~360K): Joyful Health streamlines finance management for private practices. Abstractive Health provides clinicians with medical-grade patient summaries. M7 is a scheduling platform for nurses that matches them with career opportunities that align with their goals.

Future of Work:

• Single Family Housing Construction (~355K): Briq helps automate workflows for construction companies. Mbue automates architectural review processes for construction companies. Symbium enables contractors to efficiently get building permits for energy upgrades.
• Real Estate Agents (~350K): BBGV’s investment in Max Home, automates the transaction coordination process for agents.⁵ Luxury presence provides website design and marketing for agents.
• Full Service Restaurants (~320K): Toast is the incumbent, providing restaurant point of sale, ultimately enabling restaurants to improve their operations. Burnt automates restaurants back of house operations.
• Plumbing, Heating and Air Conditioning (~180K): Service Titan is the incumbent, offering a platform for contractors to manage all of their jobs. Avoca leverages AI agents that handle calls to help boost HVAC, plumbing and electrical business revenue.

Community — Beauty and Wellness:

• Beauty Salons (~245K): Glossgenius is building software for spas and salons to manage their business end-to-end. Upkeep provides an easy way to book and pay for medical treatments.

We believe each of the core needs outlined in the Polycultural Future of America study referenced earlier are relevant to SMB tech — from work and learning, to healthcare, community, and environmental safety. And within each of these, we see opportunities to layer on financial security products over time in most categories, in line with vertical saas playbooks. Below summarizes how we think about SMB tech at BBGV, with examples of representative companies, both within our portfolio and others we admire.

The team at BBG Ventures is excited to back the next wave of diverse founders building in SMB tech. As we continue to develop and iterate on our thesis, we would love to connect with great founders building next generation technology for SMBs or other investors looking into SMB tech. If this is you, drop us a note: claire@bbgv.com

Footnotes
¹ The top 8 deskless worker segments are Agriculture, Education, Healthcare, Retail & Wholesale, Hospitality, Manufacturing, Logistics, and Construction. All of these industries are 90%+ SMBs.
² Women of color are founding businesses at a faster rate than women in general. 42% of newly created women-owned businesses are started by Black women and 31% started by Latina women.
³ Formally’s Magic Docs product is accessible to SMBs today, however the majority of the customer base to date has been enterprise, with SMB as a future focus.
⁴ BBGV Polycultural Future of America research coming this fall
⁵ Note: Max sells into brokerages, however users are similar to SMBs given agents run their own book of business.