Shane Wilson's Blog

Having introduced the inspiration and opportunity set for AI startups focused on SMBs (US-based companies with <500 FTEs) in a previous post, here I’ll sharpen pencils on the market size for leading sub-segments.  While there is likely a huge value to SMBs for solutions that help reduce headcount for FTEs, here I have focused on the opportunity to reduce spend with external business service providers.  This distinction better aligns with startup segmentation, targeting and positioning and will allow for a more targeted analysis on where investment opportunities may exist.  

Admittedly, we take a few shortcuts to size the opportunities.  First, we leveraged ChatGPT asking “What traditional service providers do SMB’s outsource to?” to determine which markets to size.  Next, we use existing market-size data for service categories (IBIS World + others) as a baseline TAM for all businesses in the US.  From there, we assume an even distribution of these costs across all businesses, then slice the market based on the percentage of businesses across 4 SMB buckets by headcount.  Crude, yes, but quick-and-dirty enough to keep the conversation going.  

Company size by headcount is overwhelmingly skewed towards small businesses of less than 20 employees (86% of all Businesses).  It’s safe to assume that the cost-per-service is likely higher in these small businesses as service providers should cost-in higher margins to account for the fixed costs of opening small accounts.  We’ll ignore this nuance in our TAM sizing as it distracts from the big takeaway: Startups attacking service providers for truly small businesses (>20 people) are in markets with 85% of total value.

Adjusting for large-firm value capture

In the previous post, I made a quick-and-dirty pass to answer the question “how much value in this segment will be captured by large firms?”  As you’ll see below, slice the market between >500 FTEs and <500 FTEs means that the aggregate market size favors the small companies.  While there’s evidence that firms increase their focus on Enterprise customers as they scale, it’s foolish to assume large players will ignore this segment entirely.  In fact, I predict they’ll capture most of this segment thanks to distribution, brand, and scale advantages.  I’m adopting a very rough “28%” to describe the value left on the table after the big dogs eat derived from a cursory analysis of revenue distribution between large and small customers of today’s publicly traded software companies. 

We’ll double-click on these market segments with posts unpacking how startups are providing value in these sectors and key gaps that new founders could exploit. 

IT Managed Service Providers/MSPs ($141B)

Services: Network setup, helpdesk, endpoint management, cybersecurity.

Popular Providers: Electric.ai, local MSPs, freelancers on Upwork.

To estimate per-company spend on IT MSPs, I am backing out figures from 2 sources:

• Statista estimate for IT Service Providers market size: $564Bn [1]
• NAICS, Business Counts by Headcount (Total # of US Businesses: 17,769,699) [2]

	# of Companies (US) [3]	%age of all Companies (US)	Implied TAM per segment
0-20 Employees	15,211,237	85.60%	$482,795,891,365
21-99 Employees	561,370	3.16%	$17,817,560,106
100-249 Employees	89,573	0.50%	$2,842,995,371
250-499 Employees	33,612	0.19%	$1,066,825,499

This implies a TAM for SMB IT Services of $505B.  Again, adjusting for 28% of this market translates to $141B for SMB-focused providers.

Marketing & Growth Agencies ($120B)

Services: Paid ads, SEO, social media, email/SMS marketing, content creation

Popular Providers: Growth agencies, freelancers, MarketerHire, Fiverr Pro

To estimate per-company spend on Marketing Services, I am backing out figures from 2 sources:

• upflip.com estimates Marketing Services market size: $481Bn [4]
• NAICS, Business Counts by Headcount (Total # of US Businesses: 17,769,699)

	# of Companies (US)	%age of all Companies (US)	Implied TAM per segment
0-20 Employees	15,211,237	85.60%	$411,746,141,395
21-99 Employees	561,370	3.16%	$15,195,472,360
100-249 Employees	89,573	0.50%	$2,424,611,300
250-499 Employees	33,612	0.19%	$909,828,129

This implies a TAM for SMB Marketing Services of $430B, $120B for SMB-focused providers. 

Legal Services ($104B)

Services: Contract review, incorporation, compliance, trademarks, employment law.

Popular Providers: Local law firms, LegalZoom, Clerky, UpCounsel

To estimate per-company spend on Legal Services, I am backing out figures from 2 sources:

• IBIS World estimate for US Law Firms market size: $418Bn [5]
• NAICS, Business Counts by Headcount (Total # of US Businesses: 17,769,699)

	# of Companies (US)	%age of all Companies (US)	Implied TAM per segment
0-20 Employees	15,211,237	85.60%	$357,816,813,104
21-99 Employees	561,370	3.16%	$13,205,212,986
100-249 Employees	89,573	0.50%	$2,107,042,669
250-499 Employees	33,612	0.19%	$790,661,451

This implies a TAM for SMB Legal Services of $374B.  Adjusting for capture from large players (72% of market), SMB-focused solutions should capture $104B.

Accountants and Bookkeepers ($36.2B)

Services: Tax prep, payroll, financial reporting, cash flow management

Popular Providers: Local CPAs, Bench, Pilot, QuickBooks ProAdvisors

To estimate per-company spend on Accountants and Bookkeepers, I am backing out figures from 2 sources:

• IBIS World estimate for US Accounting Services market size: $145Bn [6]
• NAICS, Business Counts by Headcount (Total # of US Businesses: 17,769,699)

	# of Companies (US)	%age of all Companies (US)	Implied TAM per segment
0-20 Employees	15,211,237	85.60%	$124,123,057,177
21-99 Employees	561,370	3.16%	$4,580,755,701
100-249 Employees	89,573	0.50%	$730,911,930
250-499 Employees	33,612	0.19%	$274,272,513

This implies a TAM for SMB Accounting Services of $129B.  Multiplied by the 28% overlook factor established above, it’s reasonable to say SMB-focused solutions should capture $36.2B.

HR & Payroll Services ($8.4B)

Services: Onboarding, benefits admin, compliance, pay stubs, employee handbooks.

Popular Providers: Gusto, Justworks, Rippling, TriNet.

To estimate per-company spend on HR Services, I am backing out figures from 2 sources:

• People Managing People estimate for high-end of HR Service Providers market size: $33Bn [7]
• NAICS, Business Counts by Headcount (Total # of US Businesses: 17,769,699)

	# of Companies (US)	%age of all Companies (US)	Implied TAM per segment
0-20 Employees	15,211,237	85.60%	$28,248,695,771
21-99 Employees	561,370	3.16%	$1,042,516,815
100-249 Employees	89,573	0.50%	$166,345,474
250-499 Employees	33,612	0.19%	$62,420,641

This implies a TAM for SMB HR/Payroll Services of $30B.  This leaves $8.4B for SMB-focused providers.

Tax Preparation Services ($3.64B)

Services: Annual filings, quarterly estimated payments, entity-specific deductions.

Popular Providers: CPAs, TurboTax Business, outsourced tax firms like Town or BenchTax.

• Ibis.com estimates Tax Preparation Services market size: $14Bn [8]
• NAICS, Business Counts by Headcount (Total # of US Businesses: 17,769,699)

	# of Companies (US)	%age of all Companies (US)	Implied TAM per segment
0-20 Employees	15,211,237	85.60%	$11,984,295,176
21-99 Employees	561,370	3.16%	$442,279,861
100-249 Employees	89,573	0.50%	$70,570,807
250-499 Employees	33,612	0.19%	$26,481,484

This implies a TAM for SMB Tax Prep Services of $13B with $3.64B left going to SMB-focused providers.

[1] Statista- It Services United States

[2] NAICS- Business lists, counts by company size

[3]  Pew Research: A look at small businesses in the U.S. Article provides %age based buckets for a total sample of 6,000,000 Businesses from 2021.  Article published April 2024

[4] Upflip.com, Small business marketing budget statistics

[5] Ibis World, market size Law Firms

[6] Ibis World, United States Accounting Services market size

[7] People Managing People, payroll software market size

[8] Ibis World, Tax Preparation Services in the US – Market Research Report (2015-2030)