Small Business Will Drive the Next Billion for SaaS with Kabbage

Hi everyone. Thanks so much for being here. It's always nice to be in sunny Northern California in the Bay Area, but when I landed the other night, there was rain and hail and snow, and I was wondering where I was, and I started thinking about produce. I was thinking, how do avocados and kale deal with, like, all of the frozen weather? Are they going to survive? And if they don't, what is everybody here going to eat? But luckily it's not frozen. We can all have lunch later on. I am here not to talk about produce, but to talk about small businesses and why they're such an important part of our economy and how we can all be part of that. By a show of hands— and I can't see you because that light's really bright— how many of you have bought something from a small business in the last year? Probably most of us. How many of you have someone in your family who owns a small business? How many of you have a side hustle or would like to own your own business someday? So few. So, and how many of you work for a company that has fewer than 20 employees or had fewer when you joined? A lot of us. Those are all small businesses. So whether you're aspiring to be a small business owner or you support them personally or financially, they impact all of us and it's an important part of our economy. So today I'm going to talk to you a little bit about the impact. That small businesses have in the U.S., the complexities involved in serving small businesses as a technology provider, their most important resource, which may surprise you, and why this talk should really be titled "The Next Tens of Billions," not just "The Next Billion," and how you guys can capture it. So there are 30.2 million small businesses in the U.S. That's according to the Small Business Administration. Now all of the data I'm gonna give you, we got it on the intertubes, and we can tell you exactly what the sources were later on. If you wanna give us a call or an email, we'll be happy to share it with you. There are 99% of all U.S. businesses are actually small businesses, which is really surprising and important. 47.5% of all U.S. jobs are at a small business, and two-thirds of all new jobs are created by small businesses. And 50% of our U.S. gross domestic product, nonfarm, is generated by small businesses. As this room knows well, small businesses are already adopting cloud technologies at a pretty rapid pace. Largely because it's hard for them to get access to the big tools that big firms provide to big businesses. So it's a neat opportunity for them to get access to the tools and services that previously were unavailable to them. But reaching them can be really complicated. There are different needs across geographies and industries. It's not like small business owners coalesce in certain places. You can just go to the local small business meetup to find a bunch of customers. Um, they also don't hang out online. There's no congregation where a bunch of small businesses are that you can find them. My cofounder Rob, who's sitting over there, He likes to say there are 1,000 shitty ways to acquire a small business customer and you have to be good at all of them. And it's true. And we've been bad at a lot of them too. But we've had to figure it out over the last 10 years to understand how to find these small business customers. Multiple platforms are buying for their business, largely providing the same solutions. And they're all after the same market opportunity, which is $186 billion in technology spend that small businesses are going to, um, to spend in, in 2019. And that's according to an IDC report. So they project that small businesses will spend more than $600 billion globally on technology. That's obviously a huge business, and many of us here serve businesses not just in the US but also abroad. The leading purchases are gonna be cloud-based systems, things like CRM, collaborative technologies, communications, outsourcing. And the question is, how can you capture the lion's share of this market? You really have to just solve one thing for small business owners. They're looking for time. Give them some of their time back and they will be a loyal customer for life. Kabbage recently polled 500 small businesses inquiring about their work-life balance. And what we found is that one-third of small businesses work more than 50 hours a week. 86% of them work on the weekends. 66— 60% of them only take one vacation a year. And when they do take vacation, they're still working. They just lack the time and the resources to take a minute. And their lives are really busy. They're doing all the things that we're doing at our jobs plus more, plus all the jobs, and they're running their personal lives as well. 89% of small businesses in America have fewer than 20 employees, which is why I asked that question earlier. They're stretched really thin, and as I mentioned, they have to do do all of the jobs. Their day is filled with all kinds of things from managing their cash flow to buying inventory to hiring people, managing payroll, sweeping the floors and resolving customer disputes. And all of this is taking away from their actual job, the thing that made them get into small business in the first place, the actual trade or craft about which they are excited, whether they are a baker, whether they're a dry cleaner or a landscaper, whether they're an attorney or a physician, running a business takes a lot of time away from doing the thing that they really care about and for which they're trained. None of them are trained to manage cash flow, for example. The companies that allow entrepreneurs to take back control of their schedule and have more time in the day to focus on their business are, are the best positioned to win, especially when they face the brunt of a lot of the economic challenges that happen in the U.S. These challenges, you know, range from weather crises to oil price changes. You name the challenge, but I'll talk a little bit about one that's happened recently, the government shutdown. The Congressional Budget Office predicted that the recent shutdown cost the economy $11 billion and that $3 billion has been permanently lost. There are lots of unintended consequence to this particular shutdown that severely impacted small businesses. The Wall Street Journal wrote an interesting article talking about how businesses that were around national parks were really impacted by the government shutdown because whether it's a hotel or a restaurant or an outfitter or a tour company, they didn't have any customers because nobody was working at the parks. And it's not like they can get that business back because the tourists who were going to be there the second week of January aren't going to be there the second week of February. They just aren't taking that vacation. And the small businesses don't have a big pad and they still have to do all the things to run the business. They still have inventory. They still have to clean their hotels and heat them and cool them. They still have to pay their employees. And that's a huge hardship for them, not to mention, for example, the sandwich shop outside the government office or the business that couldn't get an SBA loan or the accountant that couldn't help their customer file their taxes. But there are a lot more opportunities. And SaaS solutions can help these businesses weather those economic storms. You can capture more of this $186 billion market opportunity by giving small businesses modern solutions. Help them adapt to their customers' evolving expectations. Powering new solutions like automating communication, mobile shopping, data analysis and management, and more is going to be critical. Small businesses have a huge market opportunity, in particular with younger generations. 38% of millennials, which is the largest generation in the US today prefer to shop small. By 2020, they'll account for 30% of US retail sales valued at $1.4 trillion, and that number continues to grow. But the question becomes, how can you help them get access to that $1.4 trillion? One of our co-founders always liked— his dad told him that you didn't really want to be a miner, you wanted to be the guy who sold the equipment to the miner. So that you had a replenishing source of customers. And this reminds me of that a little bit. So how can we help them? 68% of millennials say they would pay more if they could have a more personalized service. That's a really important thing to younger generations, personalized services and experiences and things they can remember. And so we have to make sure that we help our business customers personalize their experiences. So the focus is personalization. Personalization or even delivering goods to the doorstep. This has all changed dramatically over the last 5 years. And the way small businesses need to market to those customers to help them do that is changing as well. So milk delivery, for example, used to be a thing. Right at your front door. And I— my parents say that they had a milkman. And it's interesting, that changed just because grocery stores opened up and refrigeration happened and now you didn't have to have a gallon of milk delivered to your house every day because you could go to the store to get it and you could store it yourself in your own home. And the same thing happened with healthcare. The house call used to be routine. The doctor came to you, you didn't go to the doctor. But now that we have pharmacies and clinics and Dr. Google, as I like to call it, people are going to the doctor. The doctors aren't coming to us. But we're seeing that this is all changing. Changing. And now it's coming full circle. And milk, in fact, is coming back to us. I have a— I have two children, the youngest of whom is two. And for the first year of his life, I was traveling a lot and still nursing. And it was really stressful for me to get milk back home whenever he wasn't with me. So I found this great company, a small business called Milk Stork, that delivered boxes to wherever I was going to be. And I was able to cool it and ship it and get it home so I didn't have to stress out about going through security or having enough cooling stuff in my bag. And it was really a fantastic experience. And that small business was able to personalize their experience for me because of SaaS services that they use to manage logistics and CRM in order to keep their customers and do it cost-effectively. Small businesses are making a comeback from virtual doctor visits to local microbreweries. And they're distributing products all over the world. Main Street America is going to have a resurgence but only with the help of technology systems that allow them to scale personalization. But more personalization also means more data. And this is where everybody really needs to focus, in this room and everywhere else. We as an industry have to do the heavy lifting for privacy matters for small businesses. They just don't have the time, and they don't have the resources, the humans who understand how to do it. But yet they still have a lot of data about their customers. Currently nearly 30 states have drafted privacy legislation in the United States since there's no national framework for privacy like GDPR in the European Union. And that seems like, well, that's okay, there's 30, maybe we'll get 50, that'll be fine. But when you think about managing that infrastructure, when you think about having to follow up as a small business with every privacy rule in every single state, that's just too much for them. They can't do it, they can't keep up. It's almost impossible for them to be compliant. And I think it's a great opportunity for SaaS businesses to help small businesses take care of their customers' data. They want to do it. It's on us to empower small businesses with the best practices for how they store, manage, and even delete customer data. But this is also going to be pretty expensive. The challenge is small businesses seeking less than a quarter of a million dollars in capital have a really hard time getting it. It's one of the reasons Cabbage and others like us exist, in fact. It's not that banks don't want to serve them. All of our customers have a bank account. They just can't get a loan from their bank. And the banks aren't jerks. They just don't have the tools and the technology to automate that process. It costs them the same amount of money to originate a $50,000 loan as it does a $5 million loan. So they do the $5 million loans. And who can blame them? They pay underwriters, risk officers, loan analysts, administrative fees. All of these are very expensive and manual tasks. And so therefore it makes it difficult for small businesses to be served. And this is not a new problem. Many will say that it's because of the recession. That's when small businesses became strapped for cash. But the fact of the matter is big banks have had a hard time serving small businesses forever. And in the past businesses just didn't seek capital. Maybe they could get a loan from a family member or from a local bank if they played football with the guy in high school. But mostly they just couldn't do it. So they used personal credit to run their business. They put their homes on the line. They lost their homes. They lost their families if things didn't go well, and that's extra stressful. Most of us who get paid by somebody, if we make a mistake at work, we don't lose our homes. So it's a lot of stress for them. New online solutions are driving down lending costs along the line of cabbage, and they're making a big impact with small businesses. So a report by the ETA and NDP Analytics found that a dollar in working capital provided to to a small business creates almost $4 in economic activity. What that means— and the money stays in that community. What that means is a company borrows a dollar and they use it to buy a product that they sell and they also use it to pay an employee who goes to the grocery store and buys some groceries and goes home or maybe they pay tuition or they pay a babysitter, whatever those things are, that economic activity is far greater than the dollar that goes to the small business because they are generating revenue from that dollar and it turns into more money. And again, it serves the communities where the businesses operate, and that's really important. We're really excited about the fact that we're participating in that particular part of the economy. We've deployed $6 billion, or more than, to small businesses, so it's $24 billion in economic activity. Another study done by a competitor of ours, actually, found that for every billion dollars that's deployed to small businesses, 22,000 jobs are created, which means, again, we're really proud of being the participant in creating 132,000 jobs in the U.S. over the last 8 years or so. The preponderance of these businesses, of course, have fewer than 20 employees, the same types of small businesses we've been talking about the whole time. And banks are really realizing the marketing opportunity associated with this. Large banks are turning to technology to fuel small business lending. Cabbage partners with large banks internationally to automate small business funding for their customers. A Cabbage customer comes to the site and gives us access to data that they use to run their business. And this could be banking data. It could be accounting data, payment processing data, social data, shipping data. We use this to understand business performance. And in less than 10 minutes, they have an answer. They know whether they qualify and for how much. And often they actually have funds in their account in that same period of time. So what we are doing is giving customers back their time. We are asked all the time, hey, do your customers, are they really Are they that desperate for cash? And the answer is no, they're just desperate for time. And these big banks realize that they need to provide their customers that user experience. User experience is becoming more and more important to large institutions, and that's why they're turning to fintechs. And even large platforms are recognizing the opportunity to provide financing at the point of sale, like Alibaba. We recently announced that we're partnered with Alibaba. So when a small business goes to Alibaba.com to buy products, products and merchandise that they're going to use here. Um, Cabbage is powering the pay later program that is offered at the point of sale. The reason Alibaba likes it, of course, is because that entire experience happens at Alibaba.com in less than 10 minutes. The customer never needs to leave Alibaba. And it means that when the customer wants to buy something else, they're more likely to go back to Alibaba because they know that they have access to capital they can use to buy that merchandise. And it's going to be a great experience because they don't have to leave and they don't have to go get a credit card and pull it out and enter the numbers and it's all a seamless experience. And that's why Alibaba and, and platforms like that care about this. So in 10 minutes, again, their customers can get access to capital. It's new financial products like this that are simplifying access to capital for small businesses. And before, it would have required multiple visits to a bank, arduous paperwork, and weeks or months for an approval. Another unintended benefit we found to using data in order to make these decisions is it democratizes access to capital. What that means is that more businesses are getting access to capital based purely on business performance. We found that we have twice as many women and minority customers in our portfolio as exist in the general business-owning population. And there are a couple of reasons we think this is the case. One of them is that the anonymity of the platform process. If you're a woman or a minority and you walk into your local bank branch, you're probably gonna sit across from a 55-year-old white guy who's gonna make a decision not just about your business but also about you, or at least that's how it feels. So we think that these business owners are more likely to turn to a process like Cabbage's where they're not being judged for what they look like. They're being judged on business performance. And so I think this— that's sort of the positive selection. I think the other side of it is that we're actually making —better decisions because they're unbiased. We're actually using the data about business performance to determine whether or not somebody qualifies. And it turns out those guys are running great businesses too. So we're excited about how we've been able to give more folks access to capital and participate more in the SMB ecosystem. So just to recap, 30.2 million small businesses spending upwards of $186 billion on IT in cloud solutions, trying to capture for themselves a $1.4 trillion market opportunity with younger folks in the United States, and they need more time, scalable solutions, personalized offerings, data and privacy management, and of course capital. And that's your small business market opportunity. Thank you. I'm happy to take any questions if anybody has some. We have some time set aside for Q&A, and I think we have— Maybe some microphones to help you do that. Yes? You can just yell. I'll repeat the question.

[Speaker:MAN] Hi. What are some of the go-to-market strategies that you found successful in the SMB space?

[Speaker:JENNIFER] So the question was, what are some of the go-to-market strategies that we found successful in small business, in the small business space? So we started out, we were fortunate. We started out making loans to e-commerce businesses. So we started with digital. And whether it's SEM, SEO, display, display advertising placements, things like that. We found that that works depending on what you're offering. You know, find something else that you think that they're buying and see if you can follow them along that way. But we've also tried radio. We found that to be pretty effective in a number of markets. We've found that having spokespeople is really useful. It catches people's eye— or ear, I guess. More to say, direct mail has been a channel for us. A great channel for us is partnerships. So there are lots of other businesses that serve small businesses, and partnering with them— it's lending, we're kind of lucky because partners want to work with us. They know that the rising tide lifts all ships. And so if a customer has access to working capital and they're growing their business, then they're growing their spend with our partner. And that's been a really great opportunity for us as well. But, you know, it's hard. We're all startups. And when startups work with startups, it's really hard to make that happen. So you have to have a really focused concerted effort. One of our partners is UPS. They've invested in Cabbage many times. We have spent a lot of time and a lot of meetings. They're a huge organization. So if you want to work with a big company, you have to be really patient. Any other? Oh, we just launched a TV commercial too that's pretty funny with Gary Cohn, if anybody wants to watch that.

Yep. How do we become a partner of Cabbage?

How do you become a partner of Cabbage? Well, I mean, we're right here. You can come talk to me afterwards. What is your company?

[Speaker] So it's a prize. We help SMEs access economic incentives from the government. So kind of like the Cabbage for—

[Speaker:KATHRYN] That's cool. So accessing economic incentives from the government. That's a great partner. No, just send— I'm katherine@cabbage.com. Rob is rob@cabbage.com. So just send us a note and we'd love to talk to you because It's amazing how many players there are in this ecosystem, and most of us aren't competing with each other, so that's good. Anybody else have any other questions?

Yep. [Speaker:MAN] How do you manage revenue retention focusing on small businesses, given that small businesses just naturally have a chance to go out of business a lot more quickly than bigger businesses?

[Speaker:KIM] How do you manage revenue retention knowing that businesses are more likely to go out of business? This is kind of another area where we have a unique advantage. And it's because when you're providing working access to a company— working capital to a company, they're more likely to stay in business because they have the capital that they need. Another thing we do that's unusual is we provide a line of credit. That means that our customers can borrow when they need it for as long as they need it. It's not one-time access to capital. And that means that they stay with us for a long time. We have customers who borrowed from us in May of 2012, that are borrowing more today than they did then. So I think offering a product that makes them wanna stay with you is important, and making sure that they can accommodate the fees of whatever it is that you're providing is important too. We use real-time access to data to understand how businesses are performing, and that same type of data may also be available to your business depending on what it is. It's easier when you're in the money business. Anybody else? All right, well, thank you guys so much for your time. Have a great afternoon.