freshbooks

Mike McDerment has helped kick the Toronto software entrepreneur community in the pants. It’s hard to believe that he’s been doing it for as long as he has been. Three Mesh conferences in the past 3 years, building FreshBooks and a number of successful and not-so-successful DemoCamp experiences. Mike has been documenting his lessons and advice for entrepreneurs on his blog, and .

Mike and the FreshBooks team have done a great job going after a under-served market with a product that solves a costly problem for a lot of small businesses. The FreshBooks product helps companies create and manage invoices. They quickly can show clients how much they can contribute to a companies bottom line. There are even rumors floating about the Interweb that FreshBooks has caused Intuit, the 800 pound gorilla, to change their marketing strategy for Quickbooks Simple Start. Why is FreshBooks a Toronto startup to watch?

Quick Analysis

Management Team

The FreshBooks executive team consists of a number of Mike McDerment, Joe Sawada, Levi Cooperman and Mitch Solway. Mike and Joe successfully built a web design professional services firm, Anicon, whose team includes 3 of the FreshBooks founders. The transition appears to be from a professional services firm doing web design and development professional services to a product company (whose name has changed from 2ndSite to FreshBooks). Mitch is an excellent senior marketer with experience of leading a marketing organization during the critical growth year. His LinkedIn profile indicates that Mitch managed a team of 26 people and grew sales from $3M to over $100M. Great acquisition to the FreshBooks team, a seasoned marketing veteran with experience driving traffic and growing sales.It’s a good team with personal experiences with the invoicing difficulties experienced by web design and development firms in managing the financial interactions with clients.

Market

The creator of Quickbooks, Ridgely Evers, has created a company to create a tool to solve business and financial management for smaller companies, he estimates the market size for the number of “True Small Businesses” at 5.1M in the United States. The business accounting market was estimated at $600M in 2005 with QuickBooks accounting for almost 87% market share. It’s obvious that companies need accounting and invoicing tools, and they are willing to pay for a solution that is aimed at enabling a better view into a business for small business owners instead of bookkeeping professionals.

Product

The focus on invoicing is a great strategy for FreshBooks. FreshBooks is a suite of tools that help customers get paid. This is a painkiller. FreshBooks has been aggressively filling in the product suite with tools for tracking time, expenses and estimates, these features help to refine the product offering beyond just invoicing into truly a financial management tool for service based organizations. FreshBooks has exposed most of their functionality through a developer API. The API offers a great way for external developers to integrate their applications to the provided services and for the FreshBooks team to build internal tools and user interfaces to consume and publish upon. Building on an API service, should help FreshBooks in extending the application going forward, adding features requires extending the API and building a browser based client to add to the FreshBooks web site.

The addition of roll up data analytics to provide customers with performance metrics and benchmarking shows that FreshBooks has been working on market leading features that have helped set companies like Mint apart from it’s peers.

Business Model

People pay FreshBooks to use their software. Check out their pricing. Mike McDerment has written about their experiences iterating through pricing models including the impact on conversion rates. But the business model is very simple get people to pay for your software. There are challenges related to the Freemium Pricing Model, where about 3% of registered users become paying customers. There are then 2 key metrics that the FreshBooks guys should be tracking: reach and conversion rate. Reach – how many people in their target market have had contact with FreshBooks advertising, at a conference, through customer evangelists, etc.? Conversion rate – how many registered users become paying users? Does pricing, features, adoption cycles, integration with other products, what are the pieces that drive the conversion to paying customer? The additional questions around customer retention exist, but lets assume that there is a high customer retention rate.

Strategic Relationships

FreshBooks has begun building some strategic relationships including:

Authorize.Net – Merchant Toolbox
Amazon.com – Flexible Payment System

Both of these relationships are a testament to the speed and flexibility of the FreshBooks offering. Sunir Shah blogged about the experience of integrating with Amazon FPS and compared it to PayPal and Google Checkout. Freshbooks will benefit in speed to market and additional early-adopter marketing once the FPS is generally available.The Authorize.Net Merchant Toolbox is very straight-forward, being on a list of 21 preferred vendors by a leading merchant account and credit card gateway, should help drive traffic and customers to FreshBooks.

One opportunity for FreshBooks is to seek a strategic relationship with third-party accounting and bookkeeping partners. Creating a referral or associates network for bookkeepers, including a set of offline tools that use the FreshBooks API, could help expand the reach of the product and build a strong indirect sales channel.

Competition

Mike provides his thoughts on his competition in an interview with CenterNetworks

“I think there are two classes of competitors. There are traditional accounting software providers. The other group is other startups like BillingOrchard and BlinkSale.”

Crunchbase lists FreeAgentCentral as an additional competitor in the web-based accounting and money management tools for freelancers. Competition from traditional accounting software vendors including Intuit’s QuickBooks and NetSuite’s Accounting ERP solution. NetSuite is probably less of a competitor as it targets SME with an offering that is closer to small ERP than individual provider. QuickBooks is an interesting competitor because of the large ecosystem of accountants and bookkeepers that use QuickBooks to perform the accounting tasks for small businesses and freelancers. The same can be said for other competitors including: Sage; Peachtree; Microsoft Accounting; MYOB; etc.

BlinkSale and BillingOrchard are focused on invoicing. Where Freshbooks has evolved their offering to include many of financial functions that a small business needs including: estimates, time tracking, and expenses. Freshbooks has built a suite of financial management tools for generating, managing and tracking invoices. A better competitor is NetBooks whose offering includes SaaS financial tools that include a wider set of ERP features including sales, invoicing, inventory, and costs. NetBooks appears to be focused on product-based businesses, where FreshBooks feels like it is optimized for services-based businesses.

Barriers to Entry

FreshBooks is a execution play. They have built a product that people want. It solves a very valuable problem. And they continue to add more value to the ecosystem than they take out. There is room for another larger, more established player to use their marketing might to box out FreshBoooks but it more likely that they might try to acquire FreshBooks and integrate it into their product offerings. Here’s what differentiates FreshBooks and provides barriers to entry in the market.

Intellectual property
Just as discussed in the LearnHub analysis, there is nothing to indicate there is an intellectual property protection for FreshBooks. But as John Green points out in the commentary, intellectual property protections are not required to build success market play companies. The intellectual property protections may come in the understanding of the small market business owner and their financial practices and mindset. Having a process to quickly gather, assess, prototype and iterate on changing market conditions along with a easy to customize infrastructure should allow FreshBooks to have an advantage.
Customer loyalty
Customer-centered design is in the DNA at FreshBooks. Adding conferences and generating support, while gathering feedback makes customers love FreshBooks. Check out the feedback on the RoadBurn tour. Understanding the needs, wants, desires and day-to-day lives of your customers lets you build solutions to their problems. It might help explain why FreshBooks had a 99% referral rate. I’m assuming that this means that 99% of existing customers sent a referral message to a potential new customer. I wonder what the conversion rate on referrals is for FreshBooks?
Advertising
FreshBooks has not done a huge advertising spend, but they have been very effective in targeted advertising to the Web 2.0 service firms through placement on key sites (TechCrunch, The Deck, etc.) and by having a strong presence at key web design conferences: FOWA, Mesh and SxSW. The FreshBooks team has made very effective use of their marketing and PR budget to generate buzz and get on the radar of many of the Web 2.0 and startup media players.
Sunk costs
Customers have sunk costs once their financial data has been entered into FreshBooks. However, with the FreshBooks API it is easy for a competitor to build a data migration tool and make an easy path for dissatisfied FreshBooks users to move off the platform.
Network effect
The addition of the benchmarking service may help build additional network effect from participating in the FreshBooks ecosystem. However, billing and accounts receivable are a very individual company practice. There is some opportunity to gain improvements by implementing best practices, however, best practices are not network effects. Unless FreshBooks is able to negotiate lower transactional costs on merchant account transactions or leverage the behaviours of the crowd there is no network effect available.
Vertical integration
This is potentially the most under investigated barrier to entry for FreshBooks. Building an integration with bookkeepers and accountants could offer FreshBooks an indirect sales channel and provide customers with both the tools and professional services.

Summary

FreshBooks is a company that is truly customer driven. You can see the commitment to the user experience with customer dinners when the FreshBooks team visits a city (San Francisco; the Roadburn and New York). They have build a great product that fills a gap in the offering by the 800 pound gorilla. They have assembled a star team of Toronto technology and marketing talent. They have built a successful business by adding value to their customers ecosystem. I have some questions around customer acquisition costs and the lifetime value of a customer including referrals, but it looks like a great business that needs some marketing muscle to grow to be a multi-hundred million dollar a year business.

FreshBooks is hiring and has openings for:

HackTO & DevHouse

FreshBooks – Bill me already