There’s very little that we could have predicted about how the world would respond to the COVID-19 pandemic — and that includes stock exchanges. In March, we saw global markets plummet, but Amazon, Shopify, and other cloud-based tech giants saw their share value soar. And when the market rallied the following month, it was largely due to investors buying up shares from Alphabet (Google’s parent company), Facebook, and other big names in tech.
On the flip side, while these companies continue to thrive, American small businesses are in crisis. The federal government’s Paycheck Protection Program — designed to help these businesses weather the pandemic — has run into hurdles at almost every turn, forcing many owners and entrepreneurs to join the 40 million people who have lost their jobs.
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Why The Big Gap?
If we dig a little deeper, this massive discrepancy isn’t that surprising. Beyond having the resources and necessary infrastructure to operate large remote workforces, these digitally enabled corporations have the benefit of large customer bases they have delighted for years. Companies like Google, Amazon, and Shopify are known for delivering seamless customer experiences that offer almost immediate access to products and services at the click of a button — and that hasn’t been impacted by the pandemic. Without access to the same data and technology, it’s difficult for smaller retailers to compete, particularly as these industry leaders attempt to expand across a variety of service lines and market niches.
In the same vein, while these larger entities can rely on their reputation and their stability to continue to attract investors, smaller companies are currently struggling to effectively engage investors in a way that could support them — and the health of the broader public markets.
At the same time, this landscape offers opportunities for businesses that are willing to leverage these established platforms — and many have been taking advantage. Think about the app developers who launch on Apple’s App Store or Google Play or the artists who can now monetize their creations through streaming services like Spotify. Then there are merchants who can sell through Amazon to established customer bases or set up their own online stores through Shopify, and marketers who use Google Ad Words, Facebook, or LinkedIn to deliver extremely targeted advertising campaigns that are more likely to generate sales and engagement. These platforms offer a tried and tested way for smaller businesses to access revenue and enhance their offerings. They also ensure that large companies maintain their own revenue streams, making it a symbiotic relationship.
The Give-And-Take Between Tech Giants And Small Businesses
As established digital platforms continue to dominate markets, they’re also creating opportunities for developing brands to thrive. By leveraging these various opportunities, smaller businesses can enhance their exposure to a broader customer base, grow their access to capital, and explore additional avenues to financial success. Here’s how:
1. Access To An Existing Loyal Customer Base
By engaging in a partnership with a larger enterprise or adopting an established platform (e.g., small retailers moving online sales to Amazon), fledgling companies can gain access to a loyal customer base without having to invest heavily into marketing and advertising.
In 2000, Amazon opened its virtual shelf space so that smaller businesses could sell directly to Amazon customers. Fast-forward two decades, and more than half of all units purchased in Amazon stores come from these businesses. To say there’s room for growth would be an understatement. In 2018, the number of small- to medium-sized businesses eclipsing $1 million in sales in Amazon stores grew by 20%. This year, in the midst of the ongoing COVID-19 crisis, Amazon’s e-commerce ecosystem is especially vital for up-and-coming businesses as more people are shopping online for both essential and nonessential items.
2. Increased Access To Capital
For small B2B companies that are developing specialized technologies or solutions aimed at larger enterprises, there’s a significant opportunity to increase revenue. In some cases, just adding a single client to their roster can make a big impact.
At the end of the day, these tech giants have the preexisting infrastructure and technical capabilities to quickly adopt new technologies, as well as the necessary capital to buy solutions at scale. They say you have to spend money to make money, and as they continue to succeed in the midst of this economic downturn, giant enterprises might be looking to do just that.
Exemplifying this trend, TSX Venture Exchange-listed Israeli cellular communication systems company Siyata recently announced a partnership with AT&T. The major telecom provider will use its new in-vehicle UV350 device to provide improved service to public safety workers. Other TSX Venture Exchange-listed examples include fintech company Katipult’s partnership with ATB Financial, Canopy Growth’s investment from Constellation Brands, and IMPACT Silver’s agreement to sell silver to Samsung. Deals like these can turn smaller entities into market players seemingly overnight.
Of course, there are roadblocks for smaller tech firms looking to strike deals with larger competitors. Chief among them is that larger enterprises usually have the resources and capabilities to develop transformative technologies themselves, rather than buying them from smaller entrants. Moreover, B2B negotiations can be an arduous process — and in the time it takes to finalize a deal, a small business that doesn’t have the resources to go after many clients simultaneously could easily go bankrupt. Companies listed on an exchange may have the upper hand here, as the levels of transparency regulated by the markets can make it easier for a larger enterprise to assess the opportunity.
3. Potential For Acquisition
Small businesses that attract the attention of a larger enterprise could potentially prompt interest in an acquisition. Established industry leaders often see growth-stage businesses in their sector as an opportunity to access intellectual property and talent that could go on to improve their own offerings.
For example, Amazon is best known as the world’s largest online store, but it also sells advertising on its website, taking market share away from rivals like Google and Facebook. It also competes with Google in the smart speaker space, and has even gone toe-to-toe with entertainment heavyweights such as Netflix and HBO.
Of course, Jeff Bezos and his executives aren’t stopping there. In 2018, Amazon announced that it was buying PillPack, a company that delivers medications to people’s doorsteps, for $753 million. Having recorded more than $230 billion in sales in 2018, Amazon’s acquisition of this smaller venture might not seem like a big investment. However, the value will come when Amazon plugs this delivery network into its giant e-commerce machine and scales it to meet the needs of its millions of customers.
Keeping An Eye On The Horizon
The seemingly perpetual growth of industry leaders in the technology and e-commerce sectors is bound to pull sales and capital away from earlier stage ventures — that’s true. What’s also true is that the trend could ultimately have a negative impact on the health of the public markets. To mitigate this — and to spur their own success — smaller publicly traded companies should explore the possibility of strategic partnerships with these larger entities. Announcements of such commercial agreements can fuel investor interest by helping more people to recognize the value of these strategic transactions and encourage them to participate in the public markets.
The COVID-19 pandemic has made the markets quite volatile, severely dampening the appetites of risk-averse investors and devastating small and midsize enterprises around the globe. Despite this, the public markets continue to provide investors with a mechanism for investing in the Amazons and Shopifys of the world, who in turn are providing small- to medium-sized businesses a way to transition from traditional frameworks to a digital-first mindset. By investing in digital leaders — or, depending on their risk appetite, by supporting small-cap companies directly — investors can actively participate in the public markets and create value across industries.
About the Author
Brady Fletcher is managing director of TSX Venture Exchange, the world’s leading public venture capital market.