B2B Financial Technology: How Financial Management and Payment Processing Companies Cracked the SMB Market
11.12.14
Features

There are approximately 28 million small and medium businesses (SMBs) in the United States, with small businesses being defined as having 500 or fewer employees and medium businesses as having between 500 and 1,500 employees. SMBs account for 54% of sales in the United States and provide 55% of the jobs in the U.S. labor market. With these figures in mind, we turn our focus to a key trend within the financial technology sector — the increase in both the quantity and quality of firms that provide SMB payment processing services, and financial management and planning services. These firms provide an invaluable service to small and medium businesses by allowing them to both efficiently achieve their internal financial objectives as well as gain access to technologies that were previously reserved for much larger enterprises. Capital raisings within this segment of the software industry are increasing as well, enabling venture capital and private equity firms to both profit and further the industry.

Financial software for small and medium businesses was initially a market embraced by early adopters and viewed by most executives as unproven in terms of security and the ability to cater to the custom needs of their business. In recent years, however, financial software has expanded to encompass a large share of the SMB market. There are several reasons for this increase in usage. As hosted applications have become more ubiquitous, and companies more comfortable with storing sensitive data on online platforms, we have seen the financial software industry for SMBs move past the hype stage and closer to mass adoption. Adoption also begets adoption as firms that have yet to implement SMB financial software are pressured to do so in order to remain competitive in their industry. Sticking to legacy systems of financial planning, or trying to implement in-house payment processing infrastructure can mean a lot of wasted resources and lost time in getting to market; at best these are seen as competitive advantages, and at worst they are becoming necessities when dealing with external parties such as suppliers, consultants, and investors.

Platforms that have found success in the financial planning and management space specifically come in many different shapes and sizes and have been making an impact in far more than just a company’s finance department. These emerging software and services can include accounting software, payroll processing, supply chain management, revenue cycle management, and even inventory/logistics tracking.

Tidemark Systems is one company that has been able to raise sufficient growth capital within the financial planning and management software space. Tidemark provides analytics services to its clients through its logistics and management analysis software platforms, and it prides itself on offering solutions that greatly outperform legacy providers which are unable to easily and correctly adjust forecasts when new batches of data become accessible. Tidemark’s apps and analytics operate at high speeds and utilize an infographic approach to explaining a client’s ongoing financial and operations projections. Tidemark Systems has raised over $90 million in growth capital through six funding rounds. It has attracted the attention of a multitude of venture capital and private equity firms including Andreessen Horowitz, Tenaya Capital, Greylock Partners, and Redpoint Ventures.

Acumatica, founded in 2007, offers web-based resource planning applications with its product mix of financial management, customer management, distribution management, and project accounting software systems. Acumatica focuses specifically on the SMB market, and its ability to penetrate businesses has allowed Acumatica to raise a total of $23 million, with its most recent $13 million round closing just last month. Investors include Runa Capital and Almaz Capital.

While several companies have been successful offering financial software platforms to the general universe of small and medium businesses, others have achieved great success by tailoring their software platforms to specific industry niches. Zen Planner is one such company; it is the leader in cloud-based business management software for the health and fitness industry. Zen Planner software manages all elements of a health club, CrossFit affiliate, martial arts studio, or fitness center’s business operations, including automated client-billing services and customer relationship management. Zen Planner received $10 million in growth capital from private equity firm Mainsail Partners in October 2013 to be used for personnel hiring, product development, and customer service.

Another major segment of the financial software industry is payments processing, encompassing both invoicing and billing management as well as the actual infrastructure needed to ensure safe, compliant transactions. Many know of industry giants such as Square, which has raised over $700 million in venture capital since its 2009 founding and is now ubiquitous amongst SMBs. Likewise, blue chip firms like MasterCard, which many people consider as exclusively credit card companies, power much of the financial technology infrastructure of the broader system, but this improvement in infrastructure and technology has also led to several start-up and growth stage payments processing companies entering the market and benefitting SMBs in the process.

WePay, founded in 2008, is a payments processing company that targets online marketplaces. The company offers its customers complete protection from fraud risk and devotes tremendous resources to security and protection of its clients’ data systems and information technology. Its software systems and mobile app interfaces are readily accessible, and its ease of use has led to its adoption by many SMBs. WePay has raised over $35 million in five funding rounds from investors August Capital, SV Angel, Ignition Venture Partners, and Continental Investors. Phil Purcell, former CEO of Morgan Stanley and co-founder of Discover Card, led WePay’s most recent round of $15 million in Series C funding in January 2014. This money’s intended use is to expand out WePay’s API which will allow improve its penetration of the software developer market.

Another example of a tremendously successful payments company is Zuora. Founded in 2007, Zuora’s objective is to provide billing and payment services to recurring revenue SMBs, specifically subscription-based businesses. In addition to billing software, Zuora is widening its product mix by introducing new software products that manage other elements of subscription-based SMBs such as analytics and accounting. To date, Zuora has raised $132.5 million in growth capital over five funding rounds, with its most recent September 2013 Series E round of $50 million coming from investors Benchmark Capital, Greylock Partners, Index Ventures, and Next World Capital.

Rapid improvements in information technology infrastructure, the ability to integrate payments processing with online and mobile banking, and the growth of e-commerce, among other political, economic, and behavioral factors, have led to growth in the size and scope of firms that provide financial planning and management and payments processing software to SMBs.

Those unfamiliar with this space may believe there is a high barrier to entry, especially regarding payments processing with industry giants dominating the market, not to mention the increased role of traditional credit card companies and financial institutions in providing these services. Yet, this is not the case, as the ever-growing use of custom data and specialization within niche markets allows for many points of differentiation among software providers to develop the most efficient and effective products for SMBs, and consequently prove themselves attractive investment opportunities for growth investors.

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