SaaS Interviews with CEOs, Startups, Founders
1244 Why Freshbooks CEO was Anti-VC, then Raised $75m
20 Dec 2018
Chapter 1: What inspired Mike to create FreshBooks?
FreshBooks, there you have it, launched back in 2004. It was anti-VC for many years, then realized, you know what?
Chapter 2: Why did FreshBooks initially avoid venture capital?
If I can find people that understand our love of customer support and customer success, I'll raise. He found people that aligned with what he's doing now. $75 million raised, 300 people. You can get started on a free trial or upgrade to 15 bucks a month. Again, collecting your money right via invoice is significantly easier. Forbes reports over 50 million bucks in annual recurring revenue.
He did not confirm or deny that. This is the Top Entrepreneurs Podcast, where founders share how they started their companies and got filthy rich or crash and burn. Each episode features revenue numbers, customer counts, and other insider information that creates business news headlines. We went from a couple of hundred thousand dollars to 2.7 million. I had no money when I started the company.
It was $160 million, which is the size of many IPOs. We're a bit strapped. We have like 22,000 customers. With over 5 million downloads in a very short amount of time, major outlets like Inc. are calling us the fastest growing business show on iTunes. I'm your host, Nathan Latka, and here's today's episode. Hello, everyone. My guest today is Mike McDermott.
He's the co-founder and CEO of FreshBooks, the world's number one cloud accounting software for self-employed professionals and their teams. Built in 2003 after he accidentally saved over an invoice, Mike spent 3.5 years growing FreshBooks from his parents' basement.
Since then, over 10 million people have used FreshBooks to save time on billing and collect billions of dollars via their invoicing product. A Lover of the outdoors, Mike has been bitten so many times it's rumored he's the first human to have developed immunity to mosquitoes. Mike, you're ready to take us to the top. All right, let's give it a shot.
I'm looking at the sign behind you, steeper runs make better skies. There are skiers, there's not supposed to be mosquitoes on ski slopes, so why are you bitten up so much? I enjoy the outdoors, as the bio said there. So I used to do a lot of canoe trips, long canoe trips, like 30, 40 days, and... Yeah, so that would be where I encountered the majority of the mosquitoes in my life. That'll do it.
Well, look, I first heard of FreshBooks because I ended up getting very close with the Rackspace crew. Pat Matthews and Pat Condon, some of these guys were early investors in my first company. I remember them just casually mentioning how impressed they were with you, and I think some of them invested in FreshBooks as well.
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Chapter 3: What factors led Mike to change his mind about raising capital?
So I'm excited to chat with you. Tell us what FreshBooks does and how do you make money? Yeah, so FreshBooks is... ridiculously easy to use invoicing and accounting software so we help folks create and send professional looking invoices uh track expenses ultimately just capture all those transactions that make it you know really filing your taxes and counting at the end of the year easy.
As I like to say, if you invoice, you need fresh books. What makes us a little different is that we're not built for everybody. So we're focused on folks who get paid for their time and expertise when serving other people. So we don't serve restaurants. We don't serve retail. We don't serve manufacturing, really around client service-based businesses, people who who serve others.
And that lets us keep the product simple, available on all your devices, all that good stuff. So that's a bit about FreshBooks. I got to tell you, full disclosure, you guys sponsored the show many months ago. And when I used it, one of the things that impressed the heck out of me was I always hated chasing money.
My least favorite thing is to send an invoice and then have to remind them constantly to pay it. I hated it. And you guys have this nice little lifecycle email. It's very soft push, very friendly. But boy, does it help you collect more money quicker without you having to send those nasty reminders. So I'm a fan of the product.
Give us a sense of what people pay on average to use the tool if someone's listening right now. Oh, sorry. Yeah. So, you know, I won't go into the averages, but I'll say, hey, you can start out with a month for free. And if you find that we save you a bunch of time, which you probably will, we have packages ranging from $15 to $50.
And, you know, we have some folks who have a lot of staff and things like that using things like time tracking or project management that are built out and available through our offering. And so some people pay us hundreds of dollars a month, but, you know, you can start out as low as $15. That's great. Or free for a month. That's right. Actually, yes, that's right. Better, better stuff.
That's great. OK, very good. And then can you keep using it for free or are they forced to make a decision at the end of that trial? Yeah. So, you know, presently our business model is a free trial. So at the end of that period, you would be asked to make a decision. And our hope is that we've saved you an hour or more and that you value your time. And that's generally what we find to be true.
I imagine you've tested this with the kind of cohorts you're working with. You have enough volume to really get clarity on these things. Why decide kind of on this model versus, you know, a free model in perpetuity where once they send 10 invoices a month, they have to start paying or some other model?
Yeah, so there are various models, and we have participated in a variety of them over the years. I'll say we started out rather unscientifically. I will go so far as to say I think there's lots of dynamics around pricing, including... So it's hard to be scientific around it because markets and customer expectations, all these things are changing.
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Chapter 4: How does FreshBooks differentiate itself in the accounting software market?
It's, it's a bet. Like, I don't know, I guess my responsibility gene is if we're going to take it on, I want to want to pay it back. So I guess at this point we've sort of secured over $75 million in capital, um, the U S dollars. Um, that's all equity or was any of that venture debt?
Um, we have, uh, so I think it would be a little over that if you had the affordance of, of, of debt, but you know, it's, it's yeah. Capital. Well, I mean, that's one question I was going to ask you, right. Is, I mean, there's a lot of founders today that shared your same concerns about VC, right?
So what they've done instead is they've just worked with some of these venture debt firms and they're having some success doing it. I'm curious why you didn't go more down that road route, or maybe you didn't, I just don't know about it. Um, I, I guess, um, Here's how I think about raising capital and equity. If you're going to give up, say, 20% of your company, you're going to raise a round.
If you can drive 20% more value, if you can grow the business by more, you're neutral to good, right? Now you gotta be able to return the capital. So you actually need to increase the value more than say 20% and that kind of thing. But I think there's a great alignment. Actually, I'll say this. I got to a place where I felt like the board I had was wonderful.
but you know i kind of left board meetings like geez i didn't get what i wanted out of that um i was ready for professional institutional money i had some great operators like you know one you know both still on the board you know uh and uh one of them runs an 80 000 person company but but couldn't tell me market data like how much should we pay you know executive who does this or like those kinds of things with professional investors like you know they just give you those answers tickety-boo because they're hiring those people all the time
If you guys are like me, it was quite a shock to me when I was building my first company, Heyo, and we reached like 10, 11, 12 people. And all of a sudden I'm going, wait, why am I getting notices from all these states? And that's because I had to file payroll and stuff in these states as we started hiring people from remote locations. It was the biggest pain in the butt. I hated the paperwork.
I hated the payroll. And so now today when I'm launching new companies, hiring new remote employees, I use a company called Gusto. It's very simple. Payroll benefits and HR for modern small businesses. What I like most, and I've timed this, it takes about seven minutes on average for my folks to run payroll. It's got fast, easy to run payroll, including W-2s and 1099s.
I love that they have health benefits and 401ks all built in for nearly any budget. So you kind of just pick what you want. And they've got
expert hr support just to call away so you don't have to hire you know hr people in-house but most importantly it frees up my time so i can go back to my monday.com con bond board print you know plan the next sprint you know put the next spec out on the line and talk to three more customers so
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Chapter 5: What pricing model does FreshBooks use for its services?
And so I don't know that we did the math to say we should do this or we didn't. We just always believe that if your customer is phoning, it's worth it for you to be there and pick up the call. You're going to learn something. You're going to learn why they're leaving so you can maybe stop the next one if you can't stop this one.
You're going to learn what are they looking for in the future, all these kinds of things. I'm a big believer in customer proximity and telephone is one great way still to stay in touch with your customers.
And the insight and the learning you get from that, I believe, you know, helps you be a customer centric company, which helps you find opportunities, adapt to the market, all those kinds of things that are hard to find on any line in a spreadsheet, but actually become total difference makers for your culture, your company, how you go after the market. Yep.
Can you share anything, Mike, before we wrap up in terms of scale you're at today in terms of either free users or total customers you're serving? Yeah. So what we, uh, usually, uh, just we're, we're a little shy of 300 people is kind of the, you know, one benchmark, uh, that, but you know, I, uh, yeah, we, we basically don't disclose, but that's, that's, that's one thing we do.
So where to like, I mean, my research team is really good, right? So they'll, they'll pull data that's publicly available. So like Wikipedia reports, you've got over 1.6 million accounts, not visitors as of like 2010, right? So like, where do they get this data from? If it's not from what you're releasing? Great question. I didn't put it there. Okay. Yeah. same thing with Forbes, right?
So they put your run rate at $50 million. Forbes usually does a very good job justifying numbers they put up publicly. Where do they get that kind of number? I think they said north of 50. Yeah. But where, so where do they get that number? Have you guys put out like minimums publicly at least or no, not at all? No, we haven't. No. Okay. So where do they get a number like that from in your opinion?
Uh, you know, that, that's a, that's a great question. Uh, you know, Forbes is pretty, um, uh, you know, careful about publishing numbers that are accurate or not. I know that part. Um, yeah, that's what I'm asking. Right. So I don't, I don't want to quote that number if it's really not correct, but it is public. So I wanted to ask you about it. So I can give you credit where credit's due.
So I understand you want to, you're private and that's a benefit of being private. You don't have to share this stuff, but, um, look, uh, I appreciate you sharing what you can share, uh, means a lot to my audience. So, um, let's, uh, let's wrap up here with the famous five. So number one, what's your favorite business book? Oh, geez. I have a business book.
You know, what I'm a fan of right now, if you have a team and you're growing and scaling a team is multipliers, which is basically about people building. I go another one for first time managers. I guess it's first break all the rules that it gallops a good one. But both those are great on the people side. But I'm really loving multipliers.
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