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Technology and COVID: How Small Businesses Are Proving Their Resilience

29th March 2021

In April 2020, we set out to prove a thesis: small and medium-sized businesses (“SMBs”) – those with fewer than 500 employees - would respond to COVID by accelerating their adoption of digital technologies.

Since then, SMB software providers, including Melio (accounts payable software), Podium (customer engagement tools), Squire (barbershop software), and Fivestars (marketing and payments solutions) have all received significant investment. It has been a similar story with publicly-listed SMB software and technology companies such as Shopify, Square, Bill.com, and others, which have traded to all-time highs.

Our initial thesis was predicated on the following:

  • COVID-19 has been devastating for most SMBs, but those with access to capital will invest in software and tech that will reduce costs, create more diverse revenue streams, and improve the customer experience
  • SMBs will make better use of technology and reassess their existing software – there will be a replacement cycle as businesses upgrade to the current best-in-breed solutions
  • There will be an opportunity to consolidate SMB software solutions

It is clear that despite COVID, the SMB end-market represents an exciting investment opportunity.

SMBs represent a massive share of the US economy. They account for 99.9% of US businesses (~31 million), 47% of US employees (~60 million), two-thirds of net new job creation and 44% of GDP.  89% of businesses in America have fewer than 20 employees.

Our initial reporting in May reflected that 31% of owners / managers closed their businesses due to lockdowns and social distancing. The situation was worse for hotels, cafes, and restaurants (43% closed) and wellness, grooming, fitness or other professional services (41% closed). Per Facebook’s State of Small Business Report, their biggest challenges were access to capital / cash flow (28%) and customer behavior / lack of demand (20%).

Even now, COVID continues to take its toll. The number of “Main Street businesses” (e.g., restaurant, food & beverage, retail, services) open at all and number of employees working is at a volume ~25-30% lower than the January 2020 benchmark as of February 2021, according to https://joinhomebase.com/data/.


However, we are optimistic that survivors and businesses in markets with COVID tailwinds can thrive, especially if they implement software solutions that provide them with previously unrealized leverage and efficiency gains.

SMB response and resourcefulness

Pre-COVID, SMBs were already embarking on digital transformation due to several trends:

  • Availability: The cloud transition has made technology increasingly affordable, modularized, and consumerized
  • Generational turnover: Ownership transitioning to millennials
  • Customer expectations: End customers expect ease, convenience and value

These have accelerated through the pandemic; 51% of businesses increased online interactions with clients and 35% of businesses that have changed operations have expanded the use of digital payments, according to a Facebook survey. We expect this transition to continue.

SMB Software Framework

SMB software falls into three broad categories – tools that help to track, operate and grow businesses:

Track & Optimize Results: These are tools that improve monitoring and deliver access to better data and suggested actions based on that data. Financial applications have long served as the system of record for SMBs, and as these tools become more integrated and more insightful, they better enable business owners to make decisions. Using data (AI) to automate processes and inform decision-making will further enable business owners to focus on customer-centric efforts. As transactions / interactions move online, SMBs will increasingly focus on security given the importance of trust in customer relationships.

Streamline Operations:

New technologies offer more integrated functionality and open platforms to enable new applications to integrate with core software. Examples of integrated ecosystems include Shopify’s platform or Duda’s app store. Integrated functionality ranges from payments and financial services to online commerce to contextualized communications. Developer-first solutions such as Twilio and Finix allow independent software providers to leverage their communications and payments infrastructure, respectively.

As newer SaaS solutions proliferate, we also expect to see a replacement cycle for the first wave of SaaS1.0. The first movers like MINDBODY enabled analog industries to move online, but “SaaS 2.0” technology is replacing outdated systems with more intuitive user interface/experience, more reliable infrastructure and better integration. Finally, we also see some industries digitizing for the first time as both analog (pen and paper industries) shift to software and those using legacy on-premises solutions (law firms, accountants, healthcare) gain more comfort with the compliance and security aspects of cloud-based offerings.

In addition to improving business processes, SMB owners are also having to adapt to growing staff expectation for remote/flexible working, and they need flexible payroll solutions to manage this.

Find and Delight Customers: In an SMB Group survey, business owners perceived customer-centric initiatives as the highest ROI technology spend. Solutions such as Shopify, Facebook and Amazon allow small businesses to add sales channels, personalize and improve the customer experience, and enter new customer markets. Business owners remain focused on nurturing relationships with their existing customers (using companies like Podium to integrate reviews and omnichannel interactions), and contextualized communications  solutions enable consistent omnichannel experience and support. SMBs continue to invest in web presence management (mobile, social, analytics) and customer acquisition tools (CRM, marketing automation, AI). While vertical marketplaces help SMBs expand distribution, business owners have become increasingly savvy to vendor model, customer data access, and loyalty considerations and tradeoffs.

We expect software providers across all three segments will experience significant growth over the medium-term.

Apax Digital seeks out exceptional entrepreneurs in industry-leading enterprise tech and consumer internet companies for minority, growth equity investments and buyout opportunities. Apax Digital partners with management teams to accelerate their path to scale, drawing on deep sector expertise, global insights, and operational value-add to help companies realize their full potential.