If your startup makes apps for small businesses, you could be in for a rocky ride

The past few years have seen an explosion of startups delivering highly focused apps for small businesses — despite the fact that it has historically been very difficult to attract SMB users at scale.

Many of these startups have entered the space believing they can be part of an ecosystem of specialized apps that leverage the data and connections of large incumbent players, namely Intuit and Xero, to pull in large user bases. The great hope is that small businesses will want to cluster a number of these highly specialized apps around their core accounting system to better run their business.

It’s an attractive idea. But I don’t think it’s correct (even though my company is behind one of those specialized apps).

I think the future of the space will be driven by established players trying to own the relationship with small and medium-sized businesses (SMBs), which will lead to increased consolidation of the right products and services.

It’s a story reminiscent of the battle between Microsoft and Apple in the ’90s. Microsoft prevailed at the time, despite the superiority of Apple’s system, by bundling Windows with commodity hardware and Microsoft Office and reaching customers through a ubiquitous partnership distribution model. In doing so, Microsoft quickly became the go-to operating system for mainstream consumers and enterprises. Its ability to aggregate the “good enough” solutions that made it easier for the customer to do their job helped propel Microsoft to the top.

To realize why an established aggregator of products will win in the market, it is important to understand the typical SMB user and the challenges of serving them. The reality is that the vast majority of small businesses in this country aren’t forward-thinking Bay Area startups, eager to adopt the latest technology. The allure of a superior product isn’t enough to drive them to adopt a solution.

The majority of small businesses will only adopt new technology when they are pushed to do so by an individual or organization they have an established, trusting relationship with. For example, my company, BodeTree, benefits from pursuing distribution channels that include financial institutions and trade associations that have strong, deeply developed relationships with their SMB customers. Through trust, these organizations can drive SMBs to take action.

Still, even with these channels there are huge barriers to encouraging SMBs to adopt new technology. Gaining a significant foothold in the SMB market takes time, the determination to overcome generational perceptions, and most importantly a forcing function to drive decisions. Simply put, it takes the power of a major player bundling together a suite of solutions, wrapping it in a familiar package, and feeding it directly to the small business owner that is already accustomed to what the company offers.

This harsh reality poses a major challenge to the idea of a world where small businesses are comfortable seeking out multiple providers to serve their various needs and managing multiple accounts or logins to reach their goals. I think that the big players recognize this, and that’s why I believe we’ll see further consolidation in the industry. You only need to look to Intuit for confirmation of this trend. In the past year alone, Intuit has announced the shutdown of its QuickBooks Desktop app ecosystem and acquired 10 companies including Lettuce, DocStock, and Check. Why? I suspect that their acquisition spree is motivated primarily by their focus on driving adoption of their cloud-based QuickBooks Online (QBO). It’s no secret that QBO doesn’t have all of the bells and whistles that the company’s deeply entrenched desktop user base has grown accustomed to using. Intuit has identified apps that fill these gaps and is snapping them up left and right to present a complete solution set to its users.

Intuit is using its app ecosystem to horse race solutions and then integrate the winners into its corporate family. On a deeper level, this strategy speaks to the incumbents wanting to monetize as much of the ecosystem as possible and control the experience for their customers. By acquiring and integrating promising solutions early on, they can push through additional product to their users and fill in product gaps.

If this theory is accurate, then the future of the SMB tech market may look significantly different than the latest entrants into the market may hope.

Small business owners are becoming more comfortable with the concept of the cloud, but at a glacial pace. Unless we become comfortable with measuring change in geological time, expect Intuit and Xero (as well as potential outsiders such as GoDaddy) to take a more proactive role in the transition and leverage their scale and reach to drive adoption.

It’s highly likely that the ultimate winner in the small business market will be the player that bundles valuable solutions as part of an entire suite of products, using one platform that seamlessly integrates across all aspects of the business. While independent applications will likely have a place at the table, it will become increasingly difficult for them to carve out a sustainable business for themselves.

In order to survive and thrive in this consolidated future, third-party applications like ours are going to have to find a way to deliver unique strategic value to the big players. For us, our focus is on expanding the universe of potential customers that the incumbent players can work with while developing a suite of solutions that put the small business owner at the center of the equation.

Every developer looking at the space should be realistic about the strategies and goals that Intuit, Xero, and other large SMB providers are pursuing and prepare their company to proactively create value in a future where the landscape may be markedly different than what developers may expect.

Chris Myers is Co-founder & CEO of BodeTree.