Stop Building SaaS for SMBs—Buy Them Instead
Stop Building SaaS for SMBs—Buy Them Instead
On why building SaaS for SMBs is a tarpit, and why you should pursue a venture-backed buy-out strategy instead.
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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.
Let me explain.
Why Selling SaaS to SMBs is a Mistake
Building B2B SaaS has been a tried and true method for founders to build large, scalable businesses. However, things are much harder now than they used to be. The enterprise market is oversaturated with SaaS—by now, there is vertical SaaS for virtually every niche. TAMs are getting smaller and the field is becoming more competitive. Enterprise software founders are now competing with:
Large horizontal incumbents (including OpenAI itself, Google, Microsoft, etc.)
Post-product market vertical-focused incumbents
Hundreds of early-stage startups
Their customers themselves—many enterprises are increasingly choosing to “build in-house” given the decreased barriers to shipping software.
In response to this trend, many first-time founders are choosing to go “downmarket” to SMBs, seeing it as the next frontier. SMBs have largely missed out on the SaaSification of the enterprise world, and some claim AI will solve this.
However, I think this is a mistake in most cases. While it is true that SMBs are much less “tech forward” than their larger counterparts, there are strong reasons for this:
Low ACVs: SMBs have much lower Average Contract Values (ACVs) with way fewer seats to sell to (i.e. you need more customers to get same revenue)
Long sales motion: despite lower ACV, you will likely have the same, if not longer, sales motion as with regular enterprise deals. Extra kicker that many SMB owners will want to meet in person or want your local presence. They are not used to doing deals over Zoom.
Reluctant Tech Adoption: 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.
Hard to Reach: SMBs are hard to get a hold of—many are not on LinkedIn, don’t regularly check emails, and don’t trust strangers on the internet, making scaling your GTM motion very hard.
So, if you plan on selling to SMBs, you will suffer from both low contract values and a grueling sales motion. 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. You spend a ton of time finding design partners, doing pilots, iterating, and finally having something workable.
A typical IT business that generates $5M in revenue and has 10 on-call IT staff spends about $1M/year on that labor. At 50% automation, you could deliver ~$500K savings per year, for which the SMB would be willing to pay ~20% of that for your software—$100K a year ACV (unusually high for SMBs, but let’s go with it for the argument sake).
But here’s the thing… 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. Finding the right design partner who’s willing to provide regular feedback and iterate with you will also be very hard. 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.
Now consider an alternative.
You decide to acquire said IT business for 1x revenue—$5M. Of that, you would typically pay $1M in cash, and the rest will be split between bank debt / seller note / equity roll for existing owners.
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: Maintain the current staff and focus on growing revenue per FTE (roughly $200K/employee, so with 50% automation you could do $1M more in sales).
To put simply, for a cash investment of $1M, you will receive a $500K-1M return per year (5-10x more than in the SaaS route). Additionally, you will have the roughly $1M/year of cash flow that the business had before any automation. In other words, you will own a business that makes $5-6M in revenue and $1.5-2M/year in operating profit. In the SaaS scenario, you would be making only a few hundred thousand, and most likely still be unprofitable.
Needless to say, you can reinvest the cash flow your business generates to acquire a second, third, and Nth IT SMB business. As long as you can find suitable targets, money will not be a problem. You can scale your tech-enabled business to $100M in revenue in a matter of just a few years, if done correctly.
Advantages of Acquiring SMBs
Easier Revenue Growth: Growing a business from $5M to $6M in revenue is much easier than growing a business from $0 to $1M in revenue (no cold start).
Proprietary Data Generation: You will generate valuable proprietary data to handle and automate edge cases, achieving even greater levels of automation in the future.
Larger TAM: Your Total Addressable Market (TAM) is now the IT services space itself, versus the software spend * number of IT SMBs.
AI Progress Benefits: As a consumer of AI progress, your business will be able to achieve better and better margin structure with GPT 5, 6 etc.
Increased Valuation: At scale, your business becomes increasingly more valuable. Your first few businesses can be acquired for 1x revenue, 5x EBITDA. If you do 10 of these acquisitions:
You will have invested $10M in cash / $50M in purchase price.
You will have $50M in revenue / $15M in operating profit (assuming no other operational synergies or growth in revenue).
All of your future acquisitions can be funded from internally generated cash flow plus debt (no future equity raises required).
You will own a profitable business worth about $100-150M to a private equity buyer. Of course, you will not stop at 10 acquisitions—there are thousands of potential IT services businesses you can acquire. The sky is the limit.
All of this from investing just a few million bucks from your seed raise! 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)
Splash - tech-enabled swimming pool cleaning (led by Asymmetric)
Stress Free - tech-enabled auto repair (led by Forerunner)
Metropolis - AI-enabled parking platform (valued at $1.7bn)
Generalizing the Playbook
A VC-backed rollup strategy will work if the technology can drive either:
Increase in Revenue per FTE: Deliver more work due to automation or unlock a better/more scalable GTM motion through automation.
Decrease in Opex per FTE: Cut costs through automation.
For this type of strategy, look for large, highly fragmented industries. Bonus points if they have some type of recurring revenue and a software TAM that is too small for a VC-backed company. Outside of IT, you can consider businesses like the following (by no means an exhaustive list):
Business process outsourcing (call centers, medical billing, data entry, debt collection, etc.)
Insurance (title, claims adjudication, etc.)
Accounting & tax
Health care (primary care, dental, etc)
Third party administrators
The interesting thing is you don’t have to build everything in-house. Build internally only the most critical tools that nobody else has created in the marketplace, and buy third-party software for anything non-core (e.g., tools for automating outbound sales, creating marketing content, etc.). The benefit of having a services business is that not everything needs to be perfectly integrated for the end customer—you are your own customer.
A Few Words of Caution
M&A is Not Easy: Finding the right targets, diligencing the business, and structuring the deal are non-trivial undertakings. Ensure you have at least an ex-private equity/investment banker/corp dev person on your team to maximize your chance of success.
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.
Service businesses are valued differently - you cannot expect a juicy 10x ARR multiple here - your business (at scale) will likely be valued at 10-20x EBITDA - which means to get to a $1B valuation, you’d have to acquire / grow your way into $50-100M in cash flow - but my argument is that it is much easier to do so under this strategy, than getting to a $100M in ARR with pure SaaS. And you will most certainly not have to raise as much money - especially after you do your first few acquisitions, since future growth will be funded with your own profits.
Conclusion: Is Acquiring SMBs Your Next Move?
As you consider the path forward, ask yourself:
Are you struggling with low ACVs and high CACs while selling to SMBs?
Do you have unique insights into how technology can transform a traditional service business?
Could you capture more value if you just used your own software to deliver the service your end customer provides?
If you’re pondering about any of these questions or stuck in the SMB go-to-market hell, I’d love to hear your thoughts and experiences.
Reach out to me—I’ve talked to hundreds of SMB buyers at this point and I am happy to brainstorm / discuss how we can help you systematically find and acquire the right strategic targets.
At OffDeal, we already partner with numerous private equity firms and VC-backed rollups pursuing this strategy.
As always, pushback and feedback always welcome. Twitter DMs always open @leveredvlad
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Well said! Baton (https://www.batonmarket.com/) is a great discovery platform for this. (Disclosure: I am a small investor).