The small Italian restaurant next to your parent’s place? That Dutch sneaker brand you like?
Small and medium enterprises (SMEs) make for 99% of EU businesses (source: European Commission): It’s safe to say we spend a lot of time thinking about them in the intelligence briefings that guide Headline’s investment decisions.
For the first time, we compile some of these thoughts and share them. This series is part landscape mapping (let us know about your startup here, if you’d like to see it included!) and part sharing some of our investment theses.
Unlike with most consumer and enterprise software, where the winner takes all or most, SMEs software is so fragmented that there is always a time and place for new players.
We break these downs into six macro-trends that we will share over six weeks, starting today:
🛒Trend #1: Shopify’s growth creates new markets - Below :)
🍉Trend #2: Restaurants fight for independence from delivery and discovery platforms
👋 Trend #3: Work, reinvented
👔 Trend #4: The rise of vertical biz management software
🤴 Trend #5: HR made simple(r)!
👹 Trend #6: Bookkeeping becomes understandable
Hope you enjoy these ponderings. Let us know how can we improve on them!
🛒Trend #1: Shopify’s growth creates new markets
Shopify is a platform that allows anyone to develop and run an e-commerce business.
The company's user base is made of two different types of customers: (i) local shop owners who want to digitize their offline activities and develop an e-commerce offering; and (ii) the new generation of founders and entrepreneurs who wish to develop direct-to-consumer brands (D2C) with a core online presence.
Overall, Shopify empowers more than 1.5 million business owners globally, generating over $100B in GMV in 2020. To give some sense of scale: The largest direct-to-consumer (D2C) shops on the Shopify platform generated up to $1B in 2020. These D2C businesses include the likes of FashionNova, AllBirds,Steve Madden, and BlackRifle Coffee.
2020 has been an exceptional year for Shopify. As shown in the diagram below, the company’s annual revenue growth rate has historically increased progressively over time. Shopify’s accelerated growth in the last two years is a byproduct of two major developments:
(i) COVID-19 has forced many offline stores to digitize their offerings, due to lockdown and quarantine regulations; and (ii) creating a Shopify store became a popular side hustle as the number of self-employed US citizens reached a record high of 30 million people in 2021 (+22% YoY).
So far, so good. But Shopify does not cover the entirety of the online e-commerce experience. Until recently, SMBs lacked the resources to manage various additional aspects of their e-commerce infrastructure. These areas include optimizing the customer acquisition process, the storage and visualization of data, product sourcing, delivery, and workflow automation.
As a result of the above, Shopify opened its ecosystem to external app developers. App developers can now create and provide online sellers with new features in the Shopify App Store. Given its established ecosystem of e-commerce businesses, the Shopify App Store provides businesses with an opportunity to reach a greater market of online business owners. New ventures have emerged over the last few years in the following categories:
Today, SMBs rely on intuitive low-code/no-code analytics solutions that are easy to set up and provide their customers with template dashboards:
⭐ Data warehouse, visualization, and analytic solutions: Glew.io (US), Daasity (US), Polar Analytics (France), Peel (US), Tresl (US), Lifetimely (Finland), Conversific (Hungary), RetentionX (Germany), or Tydo (US) are examples of analytics software that aggregate data from multiple sources (generally ad campaigns and transactions) and display key metrics in visually appealing pre-built dashboards.
The e-commerce customer journey has to be built to maximize the buying experience. Customers are driven through simplified user flows with minimal human interactions. Yet, e-commerce businesses have realized that their customers will be more willing to shop online if they can experience a more pleasing and humanized purchasing journey.
This trend has taken flight in China, where businesses such as Pinduoduo have created a differentiated online shopping experience, mixing social interactions and e-commerce buying. Pinduoduo has deployed multiple features to encourage user engagement within their platform. These include peer-to-peer buying and invitations to access discounts, gamification (to replicate the experience of novel discovery that occurs in offline shopping), and live sales (for authentic sale and purchase interactions).
Even on Shopify, merchants can foster authenticity, reliability, and natural interactions as a means to drive up sales up. With the proper marketing stack, interactions between stores and customers can be personalized with tailor-made messages; customer support can engage in authentic conversation with clients, customers can benefit from a personalized VIP or loyalty program. This allows for a more accessible and fun-based shopping experience for customers.
⭐ Email, SMS, and messaging campaigns: Email's reign has been long-standing as a means of communication and marketing. Incumbents include Mailchimp or Constant Contact: they have been focused on building accessible emailing platforms, where emails could be sequenced to allow users to reach a higher volume of customers.
However, given the lack of moats in the email marketing space, the price of this software is constantly being driven down.
Next-gen e-commerce emailing platforms have since emerged and raised substantial funding. These include solutions such as Attentive (US, raised $863M), PostScript (US), Omnisend (UK), Privy (US), Seguno (US), Edrone (Poland), and Klaviyo (US) which offer their users visually engaging templates and easy-to-set-up emailing sequences. Their main USP is that they directly leverage Shopify data to optimize marketing campaigns. By integrating with Shopify, these companies collect deeper insights on end-users and use them to generate powerful segmentation tools.
Technology-enabled performance marketing businesses either rely on external data sources (google analytics, customer support solutions, Shopify transactions, etc), or internal data sources where the businesses assess customer behavior through their own software.
Klaviyo, for example, is a software solution that is plugged into Shopify stores and can track a wide variety of customer behaviors based on a standardized typology (for example when a customer adds a product to their cart or when they put an item in a wishlist, etc).
Klaviyo's main differentiator is that it collects and processes the data on behalf of its end users, owning the full data assessment process.
The value of these mailing platforms lies in their ability to collect and combine data from a variety of sources, provide deep customer segmentation, and offer a one-stop-shop for marketing messaging in a centralized platform.
⭐ Customer support & Conversational shopping: Gorgias (France / US) and RichPanel (US) are examples of advanced help-desk platforms. They are integrated into stores and allow e-commerce customer support to engage with customers, answer questions and deal with relevant complaints. The majority of customer queries are simple and can be answered automatically through an AI or chatbot interface. These businesses aim to deal with those more complex questions and complaints. They do so by providing customers and support agents with centralized messaging interfaces to provide a more efficient means of communicating relevant and timely responses.
Of course, customer support can also be used to drive further sales. Gorgias provides one-on-one sessions between brand ambassadors and clients to lead sales.
Conversational shopping platforms such as Charles (Germany), Amazd (Germany), Emotive (US), Blueprint (UK), and Recart (Hungary) bring the e-commerce experience into existing messaging apps.
These companies have built their platforms on their own personalized messaging app or integrated via APIs with popular messaging apps like WhatsApp, Messenger, or SMS. Some of them can be connected to Shopify store catalogs and CRMs, and allow a sales team to interact in an authentic way with any customer in a direct conversation.
Customers can browse products, engage with customer support, and checkout through a conversation on their messaging app.
Customer support can also be peer-to-peer, authentic, and fun. For example, Squadded (Israel) has built a social layer on top of major e-commerce brands(and soon Shopify). In just one click, customers can join a merchant's online community through a feed, directly on the merchant's e-commerce website. In this environment old and new customers can share feedback, develop their own communities and directly engage with their favorite e-commerce brand.
⭐ Live-shopping: Bambuser (Sweden, IPO), Hero (UK, acquired by Klarna), Livebuy (Germany), Lisa (UK), Livescale (Canada) are looking to create authentic interactions between sellers and buyers, via a live stream. This trend is already massive in Asia / China and we expect it to develop in Europe.
⭐ Loyalty programs: Yotpo (US, raised $406M), Loyaltylion (UK), Smile (Canada), Gameball (Egypt), or MentionMe (UK) allow businesses to implement their own loyalty programs: with points, referrals, or VIP systems to encourage more sales.
As small and medium-sized shops grow, they expect more control over their infrastructure, their checkout experience, and store design.
⭐ Headless commerce platforms: Nacelle (US), Swell (US), Chord (US), Commerce Layer (Italy), or Vue Storefronts (Poland) bring better performance and scalability to online storefronts. Technically, shops can embrace a headless structure, where the back-end is separated from the front end. Because of this decoupling, the content generated on a specific storefront is raw and can be published anywhere, through any framework or device. It gives e-commerce businesses a greater degree of control on where the content will be displayed.
Website performance is a key tracker for search engines. Now that Google integrates with Shopify to promote items from their search engine, it is essential for brands to monitor their speed, and improve the infrastructure of their website.
⭐ Store design: Most of the Shopify stores are built on a template. Shopify does allow its users to choose from a set of generic visual templates and customize those templates. However, it is often necessary to use some CSS code to make some specific, non-standardized change. To simplify this process, some startups were created to provide drag and drop tools that allow e-commerce businesses to create customized designs for their Shopify store. Examples of these businesses include the likes of Shogun (US), GemPage (Vietnam), Builder.io (US), and PageFly (Vietnam).
⭐ Sourcing: B2B Marketplaces like Ankorstore (France) or Faire (US) allow SMBs to find new products to sell while also allowing them to acquire their products at an efficient price. Oberlo (Lithuania, acquired by Shopify), Spocket (Canada), or Modalyst (US) also showcase new potential products to sell while also providing software that automates their customers’ inventory management and delivery processes.
⭐ Order fulfillment: Bezos (EU), BigBlue (FR), Byrd (Austria), Huub (Portugal), Everstox (Germany),Huboo (UK), Alaiko (Germany), Veeqo (UK) are tackling the fulfillment experience for e-commerce businesses.These fulfillment platforms receive goods in warehouses, store them, pack them, and send them through their network of delivery partners. They bundle multiple warehousing and delivery services, to simplify the process as much as possible for e-commerce business owners.
Shopify has recently acquired 6 River System, a logistics company, to accelerate the development of its own fulfillment business arm. The new fulfillment platform will be called theShopify Fulfillment Center and will be mainly focused on providing third-party fulfillment services to Shopify’s enterprise Shopify Plus subscribers.
⭐ Shipping management: Shippo (US, raised $104M), Malomo (US), or Ingrid (Sweden), Metapack (UK),integrate with existing shipping carriers and provide shipment tracking, notification, and analytics for shop owners and customers.
Store owners can automate repetitive manual tasks with low code and no code Shopify tools. For example, you can send a receipt, notify a supplier or a logistic partner, send promo codes, etc. These tools are connected to multiple services (Slack, Klavyio, ShipBob, etc) to automate tasks related to sales, customer service, fulfillment, and marketing.
⭐ E-commerce automation platforms: Alloy (US), Dropified (UK) are automation platforms. They are used to build automated workflows with an "if this then that" logic. Users can automate basic tasks between major Shopify integrations (Klavyio, Omnisend, or Gorgias amongst many others).
Building apps on the Shopify App Store is a great way for companies to reach millions of e-commerce business owners. However, there are three major risks involved in building on top of Shopify’s ecosystem:
1. A high level of dependency on one platform. Shopify is the judge, jury, and (in some cases) executioner, as they control the Shopify App Store, and own some of the apps themselves. Shopify can extensively promote their own apps (like Oberlo), at the expense of other competitive apps.
2. The market size depends on the continued growth of the Shopify platform itself.
3. SMB stores on Shopify have a significant churn. 77% of stores were leaving the platform before their first anniversary in 2018. There is a strong selection function amongst App developers to only target customers that are highly engaged with the platform and should be long-lasting customers.
Given these risks, app developers should look at expanding towards other online storefront builders such as Magento, Woocommerce, Big Commerce, Commerce cloud, Prestashop, Volusion, Ecwid, Spryker, Gambio, Modified, Zyro, but also towards marketplaces like Amazon, Rakuten, eBay, Alibaba, and subscription-driven businesses (such as those built through Chargebee (US, raised $218M), FastSpring (US), ReChargePayments (US, raised $277M) or Recurly (US).
Coming next on October 26: Restaurants fight for independence from delivery and discovery platforms
Many thanks to Ilan Nabeth for the invaluable research that made this series possible, and to Yusuf Janahi and Anna-Stella Fetha for your contributions!