Fast Forward to 2007
Markets come and go in cycles. Here’s Peter Rip’s insightful analysis of why Yahoo’s announcement of slowing ad spend is a harbinger to Enterprise 2.0, to be hurried in by the VCs looking for the next frontier in the next 12 months.
The startup market recovered from a prolonged ailment in early 2005 on the wings of a boom in Ad spending. Eyeballs became hot. MySpace’s acquisition by Murdoch launched the social media craze. Skype’s ridiculous acquisition by eBAY brought back valuation-without-revenue as an acceptable business model. VCs who were nervous for the previous 5 years started coming back into the market with a vengeance.
In 12 months, however, this feast will end. Dessert and coffee are already on the table.
Then what?
My thesis has been, for a long, long time, that the next frontier that needs to be cracked is the SME market. Armed with trillions of dollars in spending power, this segment buys everything from IT to Office Supplies, BPO Services to Media.
VCs have so far hated this segment. No worries. They have hated many others at different points of the game … e-commerce was hated, eye-balls were hated, enterprise software was hated, as was entertainment. Their logic changes often, conveniently, and depending on the hype cycle. If you ask Marc Benioff, he will tell you, it hasn’t stopped him from building Salesforce.com.
ALL vibrant economies depend, to a very large extent, on the health and well-being of their SME segments for job creation. Here is a passage from the US Government:
Many visitors from abroad are surprised to learn that even today, the U.S. economy is by no means dominated by giant corporations. Fully 99 percent of all independent enterprises in the country employ fewer than 500 people. These small enterprises account for 52 percent of all U.S. workers, according to the U.S. Small Business Administration (SBA). Some 19.6 million Americans work for companies employing fewer than 20 workers, 18.4 million work for firms employing between 20 and 99 workers, and 14.6 million work for firms with 100 to 499 workers. By contrast, 47.7 million Americans work for firms with 500 or more employees.
See why this segment is so incredibly important?
It will be interesting to see the percentage of contribution to GDP, I guess eventhough they employ more, their combined revenue will pale in comparison to the combined revenue of the big ones. As always, statistics are misleading and you can take different sections of it to interpret in different ways.
Well, for the purpose of this audience (entrepreneurs, VCs, technology executives), the perspective that matters is the enormous purchasing power of small businesses.
All the top ranked technology companies - SAP, Cisco, Microsoft - are courting this audience for precisely this reason.
With the Internet becoming ubiquitous, this audience has become a great deal more accessible than it was 10 years back.
% of GDP matters little for this discussion.
My point was how many of these companies have the purchasing power to buy costly products, for me it is related to the revenue( gdp relates to revenue). Then the question becomes how can firms increase profit by selling low price products to them
Hi Mike,
Only about 20% of business entities have employees, and these firms account for nearly 98% of total revenue - the 80% of businesses with no employees account for less than 2% of total US revenue.
Firms with more than 500 employees represent less than ½ of one percent of all employer firms, but account for about 50% of total US employment. There are fewer than 20,000 firms with employees greater than 500.
There are about 80,000 firms with employees between 100-499, and little over 500,000 firms with employees between 20-99. These segments probably generate a decent range of revenues - enough to be attractive to marketeers.
The 10-19 & 5-9 employee segments, however, may also be attractive. Think about the Professional Services segment - Lawyers, Architects, Doctors, Advertising Agencies, … constitute perfectly viable businesses that buy computers and related products & services in abundance. There are over 600,000 firms of size 10-19 employees, and over 1 Million firms in the 5-9 employee segment. I would say, these 1.6 Million firms are very interesting segments to go after.
Finally, the 3.5 Million firms with less than 5 employees are still using credit cards, buying IT equipment, filing taxes, using telecom services, using accountants, and in short, participating in the “market”. eBAY and Intuit have successfully tapped into these lower end segments.
Hope this answers your question.
Sramana
ps. Some useful statistics:
Employee Size based Segmentation
Largest Employers by Industry
Size of US Markets by Industry
thanx for taking time to reply with useful datal, I appreciate it