It is for this reason that when Xero launched in its home territory of New Zealand, the deal it had secured with a number of loal banks for auotmed bank feeds was just so game changing. Bank feeds are supremely useful, and by spending time negotiating the deal, Xero had given itself an awesome launching point. The global reality however is somewhat different, and it’s fair to say that Xero didn’t have the same success convincing banks outside of NZ to come on board, hence their decision a few years ago to use the Yodlee platform to run their bank feeds. this was a logical decision (Yodlee, now owned by Intuit, is a banking integration platform that already has thousands of banking institution integrated into it Clarification – Intuit’s DOES have a bank aggregation service through it’s acquisition of Mint but it’s not Yodlee).

However, we’re talking about money here and, as is always the case with dollars and cents, a higher degree of suspicion arose. This was especially so given the deftly overlooked fact that, by using Yodlee, a customer is potentially in breach of their banking terms and conditions. This is due to the fact that to use Yodlee, internet banking login details need to be given by the customer to the Yodlee platform – a fact which contravenes many internet banking Terms of Agreement.

But time moved on and, despite some concerns in the odd online forum, customers kept signing up, and enjoying the benefits that automated bank feeds can bring. Which gets us to the announcement from FreeAgent that they too are using Yodlee for their bank integration. It seems to me that, regardless of the reality of a situation, there is a point at which perception gets tipped by critical mass. Clearly using Yodlee is, by the letter of the law, a contravention of a customers internet banking terms and condition. But customers seems to be deciding (either because they are ignorant of the implications, or because they are realistic about the very low levels of risk involved) that it is worth it to achieve the benefits that integration can bring.

It’s completely sub-optimal of course. In any other industry we would be incredulous that a third party site needs to be given full sign on credentials imply to perform a data transfer – but it’s symptomatic of an archaic and compliance-heavy system that doesn’t exactly encourage innovation and open mindedness. It’s a sure bet that both Xero and FreeAgent would be over the moon if a more robust integration was possible on a broad scale, but all things being equal, for the time being they’re happy leveraging the industry default, Yodlee.

And what about the customers, should they be worried? Well I’d suggest that most customers who would balk at using Yodlee for bank feeds would also balk at entrusting their accounting data to a vendor who stores their information in the cloud. But for the vast majority, perception is actuality, and the fact that many vendors, and hundred of thousands of customers have grown comfortable with Yodlee has flipped their perception to one of safety. Let’s hope that a justified perspective.

The other day I was talking to a friend who told me that his retired father has suddenly discovered Xero on the bourse, and is considering investing. This is a reflection on the level of maturity of the New Zealand market and the investing public. It’s also, to be frank, a reflection on the fact that institutional investors and advisers have suddenly decided Xero is a sure bet, no doubt encouraged by the stellar share price growth. They’re buying the stock and advising their clients to do similarly. The day Xero entered the ranks as one of the top 50 market cap companies on the NZX they also suddenly gained visibility within the advisory community – the combination of a stock that isn’t heavily traded with this increased demand leads to an artificially high impact from low volume trades – this is great on the upside but painful on the downside. It’s actually very positive for the maturity of the company that they recently cross listed on the Australian exchange – it brings them a greater level of savvy investors that actually understand the dynamics of a potentially high-growth/high-risk investment. Drury has also signaled a possible future listing on the US exchange – this too would give both some stability and some liquidity to the share price – both positive things.

However this greater scrutiny will challenge the company to find analogues for its business. Drury has regularly pointed out the fact that Microsoft acquired enterprise social networking company Yammer for $1.2B as justification for the sort of valuation Xero is hitting. That might work for new Zealand investors who don’t quite understand the nuances, but Yammer was a very different deal for a couple of reasons:

• It had an exceptionally effective viral user growth pattern that Microsoft needed to learn about as they try and morph their business into the internet age
• It was an answer to the growing attention that social networking within enterprise was garnering – Salesforce’s Chatter product and Tibco’s Tibbr were increasingly making Microsoft look late to the party

For these reasons, and given the massive war chest of cash that Microsoft holds, the Yammer deal made sense. it may end up being a failure as a business division of Microsoft, but as a learning, marketing and corporate culture tool it makes sense.

Others rightly suggest that Intuit, the US’s biggest vendor of SMB financial products, is a potential suitor for Xero (some even going on to suggest that it is Intuit behind the buying that is sending the share price upwards – a theory I discounted). People point to the fact that Intuit acquired the personal financial management product Mint a few years ago and has an appetite for acquisitions that shoehorn itself into this new world. The Mint acquisition was, in my view, a very different deal, in a couple of important ways:

• Mint had delivered an interesting mix of behind the scenes business intelligence. It was mining aggregate data to deliver insights to customers and hence had some very useful technology that could be back doored into other Intuit products
• Mint, like Yammer, had worked out the viral uptake model and, at the time of acquisition, boasted over a million users

While Xero is doing very well from a user numbers perspective, for Intuit to acquire the company, it would have to be showing stellar growth in the only market that really matters – the US. Xero has really ramped up its US presence, the company has shifted into its own space and has ramped up the team significantly, but it’s coming from a relatively small customer base. While I recently reflected on the 100000 customer milestone and suggested that this indicated that Xero had reached escape velocity,  this statement becomes far more nuanced when we look at the joint factors of massive market capitalization and global market share dynamics. I believe that Xero, at its current market capitalization, is yet to become a compelling proposition for a US acquisition. Rather, what a company like Intuit is likely to do is one of two scenarios:

• Wait until someone enjoys meaningful customer success in the US and acquire them for a lofty sum, secure in the knowledge that they’ve gained a path to continuing market domination
• Acquire a company for a far more modest sum that has potential to become the breakout product in the space

The cloud accounting space isn’t a zero sum game however and this creates another difficulty for Xero, it is unlikely that we’ll see a repeat of the emergence of a small number of companies that dominate in the three big geographies (Intuit in the US, Sage in the UK and MYOB in Australasia). Xero is helped by the fact that in the US there is no vendor that has really captured market share – Outright (recently acquired by GoDaddy) and Wave (an interesting company with a free model) are the two best known domestic providers, but potentially more compelling is FreeAgent, a UK based vendor that has recently entered the US market and is a savvy operator.

Xero is executing well and their potential is massive. However potential only explains part of a business’ valuation, does Xero’s potential justify a $1.5B valuation? Not in my analysis – surely it may go higher as market frothiness and low liquidity combine to drive the economics, but eventually an equilibrium needs to be found, one that is based on customer numbers, market growth and eventual profit – we’re yet to see Xero deliver on that.

• Pure-play cloud vendors (FreeAgent, Xero etc) build pure Saas applications and do away with any need for desktop applications
• Hybrid vendors take existing desktop products and “cloudify” them in order to deliver what they believe is a “best of both worlds” solution

I was recently contacted by Levion, a new company that aims to deliver a hybrid desktop/cloud QuickBooks application. According to co-founder Jacob Gotleib, Levion is built to augment the desktop version of QuickBooks for users who need to interact with it remotely or from multiple devices. Rather than the traditional approach which is to integrate into specific functional parts of the desktop application, Levion has created an online user interface which mirrors QuickBooks functionality. Basically a user installs the Levion connector on the Windows PC that has the QuickBooks application on it – thereafter the connector allows users to access the online UI within a browser across various internet connected devices.

I was kind of intrigued by the Levion approach. Initially I was a little dismayed at the approach they were taking to pushing their product;

Getting a briefing from some people explaining the huge risk that cloud based accounting software is. Sigh… #FUD

— Ben Kepes (@benkepes) July 10, 2012

But outside of this FUD, it’s probably a fair comment that for some businesses at least, a hybrid approach to software is optimal. I reached out to Levion with some specific questions about their app.

Q: So you’re a web based UI integrating into QuickBooks right? Is this via the Intuit Partner Platform or what?
A: While we are an Intuit Certified Developer and love working with Intuit, the Intuit partners, and QuickBooks users, we chose to develop our own client program rather than use the Intuit Partner Platform. The reason for this is that the Intuit partner platform does not support many of the features that we plan for Levion. Our program, the Levion Connector, facilitates the integration from the web UI.
Q: How can you integrate with other web apps (e.g. Freshbooks, Zendesk, Taulia) is that via your API or QuickBooks?
A: We do not have any plans to integrate with non-QuickBooks business apps in the immediate future. We are focused on providing QuickBooks customers the benefits of a web based accounting app without having to switch off the desktop version of QuickBooks. We believe that the robust features of QuickBooks desktop, especially the more featured versions, combined with Levion’s online portal provide an unbeatable combination.
Q: Again – if it is a standalone app, what security is there over integration with QuickBooks – what versions do you support, what languages/frameworks are you built upon?? Rest or SOAP API?
A: Levion, later this year, will be offering flexible security roles and permissions. We already offer a robust revision/versioning system, which was built originally for a company to prevent employees from creating two versions of invoices–one version that stated higher prices to the customer, and the other version, changed on QuickBooks, to reflect a lower price that would allow the rogue employee from skimming of the price difference.  Additionally, we plan to give our users security rules that could be triggered if a sale price was lowered by a certain percent, and required a manager to give approval.  The main advantage is that you can have your QuickBooks experience inside a web browser without having to consider complex, and user-unfriendly technologies such as VPN, Citrix/Remote Desktop, etc. We support any version beyond QuickBooks 2007; the Connector/Sync Tool is developed in C#/Microsoft .NET framework 2.0, which communicates to our Goliath server using a push technology called long polling. The web application is built on JRuby using the Rails framework, built on distributed workers with Resque. Our database back end is MySQL, while we use Redis/Resque to handle some of the more CPU intensive aspects of parsing XML. Our app already supports the REST API; at this point, it is undocumented, but when there is enough demand, we will devote efforts to providing support for third party developers for our service.

MyPOV

I’m not against hybrid desktop + clpud solutions per se, but in order to consider them they need to deliver the benefits that pure play cloud solutions can bring. one of the reasons I’ve been bullish about the Intuit Partner Platform (IPP) is that it enables third party SaaS apps to integrate in with the core QuickBooks data – so if I want to use another invoocing, time tracking, project management or other application, I can do so. Levion on the other hand is a great integration with QuickBooks, but that’s all it does. it delivers on one promise of cloud software, the ability to access it remotely via the web, but it doesn’t deliver the true benefits of cloud (integrations, an API, agility etc).

I also worry about a third party application that is a hgihly customized deep integration with a desktop application. There is so much that can go wrong there, and so many ways that the desktop vendor can shut off access in the event they don’t like what the integration does. As such Levion, while an interesting idea, is a dangerous step for customers to make in my view.

• Xero now has 100,000 paying customers – up from 45,000 at last year’s Annual Meeting
• Xero’s first 50,000 customers took 5 years to achieve, the second 50,000 was achieved in 10 months
• Annualised committed monthly revenue has risen to $34.5 million, up from $25.5 million at 31 March 2012
• 57% of Xero’s committed monthly revenue is from offshore markets, up from 51% at 31 March 2012

I’ve been critical of Xero myself in the past, and have had to suffer the displeasure of CEO Rod Drury, someone who doesn’t appreciate criticism, especially not from someone in his own country. As an aside, and having spent time talking with, and questioning other public and private technology CEOs, I would suggest that Xero needs to get a little more used to this side of public exposure – especially as it moves into the more critical US market. Anyway, that aside, the Xero numbers firmly put it into escape velocity, here follows my reasoning.

MyPOV

Many critical commenters point out that Xero has not yet reached profitability and continues to add expense to its business by way of staff hiring. This criticism is unsurprising given that Xero comes from a country which has little experience in high-growth software businesses. To understand the dynamic it is important to understand the accounting software industry where three vendors, MYOB, Sage and Intuit claim incumbency globally. Given this triumvirate, it soon becomes clear that anyone who wishes to break their hold on the market needs to scale quickly in terms of customer numbers – with 100k customers, Xero is now a recognized competitor and this leads it into the territory of the other big software trend, acquisition. This is not a “slow organic growth” opportunity – anyone wishing to challenge the incumbents (and contrary to public perception, Xero has a number of competitors in the space trying to do so – FreeAgent, KashFlow, Pearl, Zoho etc) needs to focus on rapid growth in order to both beat the other new upstarts, and gain the attention of the big boys.

When Xero was first formed, and perhaps in an attempt to appeal to parochial New Zealanders, there were many comments from the leadership about wanting to build a long term New Zealand business. This has softened recently with an admission in the past year from Drury that an acquisition would occur should the price be right (in that instance Drury suggested that his personal metric was a higher price than that garnered by TradeMe, a $700M acquisition). With the market capitalization hovering around the $600M mark now, a close to $1B takeover looks plausible. Obviously the number of potential acquirers reduces as the price goes up but both Intuit and Sage are no doubt putting a ruler across Xero as they realize their own cloud strategies are lacking. There are also a number of other vendors who sell to the SMB space who will be looking at the company – it’s worth noting that Xero competitor Outright was recently purchased by large US hosting company GoDaddy – it’s a natural fit for GoDaddy who has millions of SMB customers, so don’t look past other ISPs, general technology companies, banks or business service provision organizations taking a look at Xero. Given a very low level of liquidity for Xero (share turnover is incredibly slow and the vast majority of the stock is owned by 100 individuals) and the $1 per share initial purchase price at IPO, there could well be some pleased investors who could reap a 5x or more return in the event of an acquisition.

Xero has its share of detractors – many venting their spleens anonymously on New Zealand’s NBR website. Most of their criticism focuses on two distinct areas;

1. Criticism of immature investors who seem unwilling or unable to question the Xero strategy
2. Questions around profitability

The first criticism is probably fair. As I’ve said before most investors seem a little too eager to give Xero free realm to do as they see fit – it’s unusual for this to be the case with public companies and sometimes lulls them into a false sense of complacency which is dangerous when new markets are entered, as an aside it will be very interesting to see what happens if and when Xero lists on the Australian stock exchange where it has neither the home town advantage nor the lower maturity level of investors. I do note with interest that institutional investors are taking more of an interest in Xero now – this should improve the level of debate.

In terms of the second question about profitability – despite being a critic of growth-at-all-costs strategies – Xero is one example where the only option is to scale to size – and in doing so become a target for acquisition – this is clearly what is occurring and, given the fairly large cash reserves, and the positivity and deep-pocketedness of some of its backers (notable MYOB founder Craig Winkler, TradeMe founders Sam Morgan and Rowan Simpson and uber investor Peter Thiel), extra cash injections shouldn’t be hard to come by.

There’s no such thing as a sure bet, and I’ve had some people within the orbit of some of the incumbents in the space suggest that these players are finally going to counter Xero’s rise, in their words “the empire is about to strike back”. It’s hard however to see clearly how any of the incumbents could really do what is needed, which is to disrupt themselves before Xero (or more likely, Xero’s acquirer) does it for them. Xero looks set to make a handful of people a pretty impressive return.

Disclosure - I have consulted for MYOB and Xero and aman investor and director of Connect2Field which is 30 percent owned by Accounting software company Reckon. I am also co-founder of LiveMigrate which provides migration services from desktop accounting software to Xero. I advise many companies (either formally or informally) in the accounting software ecosystem. 

Update – as expected, Xero CEO Rod Drury would not comment on particular acquisitions to be announced but did make a comment in response to an email I sent him about the CCH/Acclipse deal saying;

On the Acclipse deal if you were us you’d see it as a good sign if a competitor decides to be acquired rather than go it alone. Means you’ve hit max value. So that’s a good sign what we are doing Is working. Congrats to Mike though. Not many people successfully exit businesses and he has done it multiple times.

Xero is holding it’s annual Australian conference in Melbourne this week and in keeping with the norm for tech companies, we can expect some important announcements to be made at the event. I’ve received multiple notes from people speculating about potential news including acquisitions – some likely, some less so. here’s a round up of what I’ve heard an my assessment. (Disclaimer – I am co-founder of LiveMigrate, a service that helps businesses migrate from MYOB or QuickBooks to Xero and hence have multiple interests in Xero’s moves).

At the time of publication I hadn’t received any response from Xero about these rumors  – if I do so I’ll update this post with their comment.

Xero to Buy Vend?

A couple of sources have suggested that Xero will be announcing an acquisition of cloud POS provider Vend. I reached out to Vend CEO and founder Vaughan Rowsell for his comment. Recently landed from a holiday in Fiji, Rowsell denied the rumors, but did so in a typical relaxed manner;

Not us, Bula! It’s cold

While any CEO with his salt will deny rumors (or at least refuse to comment upon them) regardless of their veracity. In this case I’m tending to dismiss the chances of this being a legitimate deal. Here’s my reasoning;

• Vend has been spectacularly successful and is gaining customers at a fairly astonishing rate. The investors behind Xero Vend (in particular Point Nine Capital out of Berlin), having invested in other high growth SaaS plays (Zendesk, FreeAgent) will be well aware of the worth of such growth and hence any purchase price could be expected to be very high. Add to that the fact that given their shareholding in FreeAgent, Point Nine would be unlikely to accept a deal that involved stock, and you have a deal that would likely be mainly cash-based. That would be a big ask for Xero, they’re well capitalized, but with profitability still aways off, shareholders might balk at using up free cash to fund a big acquisition
• Making a big acquisition like Vend would be a risk for Xero in terms of shareholder perception. Until now Xero shareholders have been remarkably patient with the company in terms of growth and profitability forecasts. A purchase of a rapidly growing SaaS vendor could be seen as an admission that Xero’s growth projections were a little too positive and could spark a move in that sentiment. Already some people are questioning Xero’s half billion dollar market cap
• Admittedly Xero and Vend share some major shareholders (Rowan Simpson and Sam Morgan) which makes a deal a fairly natural move. My feeling however is that both Simpson and Morgan realize the potential that Vend has and will be unwilling to exit on that potential too early – Vend is only beginning to ramp up on its massive potential and, most importantly, is still an incredibly nimble business – an acquisition by Xero would likely negatively impact on their ability to innovate quickly
• Final word on this topic goes to someone who is very much “inside the tent” with both these companies. That person told me the telling fact that within Vend there is a longstanding joke that Vend is the only Xero partner of the year that Xero CEO Rod Drury can’t actually buy

Xero to Acquire in the Practice Management Space

Sources also tell me that Xero will announce an acquisition in the general practice management space. I’m aware of details but to protect my sources will keep the specifics under wraps. Suffice it to say that the acquisition of practice management and client side vendor Acclipse last week by CCH will have sent some shock waves throughout Xero HQ. Sources tell me that Xero themselves had been courting CCH and the decision of the company to acquire a competitor outright will be seen as a blow.

Xero’s acquisition of WorkFlowMax last year went some of the way to providing accountant practices with a credible end-to-end solution but there are still significant holes in that story, made all the more evident by the sort of product integration that Acclipse CEO Mike Chisholm is talking about. As I said after speaking with him last week;

The final leg in the story of the modern practice however is that of documentation – accountants need to utilize providers of case law, precedents, best practices and standard forms and CCH is a major provider of these sorts of services – a practice solution that ties client and practice-side solutions, and delivers them alongside relevant documentation is a significantly valuable proposition for firms.

When the deal with WorkFlowMax was announced, it was spun as the final part of the practice-side solution. The reality however is somewhat different and while practices I talk to are generally positive about WorkFlowMax as a project management tool, it really doesn’t meet their needs in terms of preparing workpapers, managing documentation and the like. Xero has for a few years now been evangelizing the “modern practice” message. While this is a great aspirational story, practitioners want to see some concrete evidence of a compelling and complete solution for their clients, their practice management, their document management and their actual workpaper requirements. With CCH/Acclipse getting close to being able to deliver this post integration, Xero needs to build up its proposition, and they realize that this is one area in which they need to execute by acquisition or development rather than simply third party integration.

In announcing the deal, Ed Molyneux of FreeAgent says that 60mo will be their entre into the US market, and FreeAgent will leverage the knowledge about US accounting and taxation that the 60mo team have. To fund the acquisition, FreAgent tool on a round of funding from Lightbank, a Chicago based VC.

60mo has now shut down new signups and according to Molyneux is building a US-centric version of the FreeAgent application, in doing so they’re squarely going to move into competition with Xero. FreeAgent intends to backwards-integrate some of the cashflow focused functionality of 60mo into its own product.

MyPOV

This is big news for the SaaS accounting space. UK is a busy market with a number of vendors competing for market share – FreeAgent has arguably the biggest slice of the market there, it’s 20000 or so customers making it close to twice the size of Xero with other vendors such as KashFlow also in the mix. Moving to the US now makes sense since no one has yet gained any real market awareness there. While Xero has been building a local US team over the last few years, it’s safe to say that they are very much still in the initial stages and haven’t cornered the market yet. For the record – since the start of 2011, FreeAgent have grown from 4000 to 20000 customer, a growth rate that puts them at the forefront of this nascent sector – that’s an indication of the validity of their approach, regardless of the fact that ny of those customers have been gained through a low-margin partnership with a UK bank.

It will be very interesting to see the approach that FreeAgent takes with regards their go to market. Xero is strongly focused on partnerships with accountants and the like. In the UK FreeAgent has varied approach that sees them partner with a variety of organizations (accounting firms and banks for example) but is also a strong direct sales company.

FreeAgent has a rabidly supportive customer base in the UK – if they manage to have users as satisfied in the US as those across the pond, it’s going to be super-interesting to watch as they go head to head with Xero.

As things stand today, I reckon that the current crop of pure play accounting vendors (for example) will need to have close on a million paying customers each before they become genuine leaders. Even at those levels they’d likely only be generating £120-140 million a year in revenue based upon today’s average selling prices achieved in the market…The players have always said the domestic market is large enough to support their offerings. I don’t believe that’s true because I don’t believe the market is going that way.

I believe that all of the current crop of SaaS accounting vendors who are gunning to be genuine leaders expect that they can convert a significant proportion of customers that the incumbent providers, MYOB, Sage and QuickBooks hold. In doing so I believe they should theoretically be able to build scale without needing a multi-currency play.

1000000 Customers is Plenty

In Australia/New Zealand, the incumbent accounting vendor, MYOB has around a million customers. This on a platform that is not only antiquated, but doesn’t allow for multi currency. Looking at the million or so businesses who use MYOB, anecdotal discussions suggest that a massive proportion are sole trader or micro-businesses in the service industries. These folks are only and likely will only sell into their home markets and hence have no need for multi-currency. Moving up a tier on the triangle we have exporting business such as one of my interests, Cactus Climbing. These organizations quite potentially sell internationally but have made decisions not to take on the foreign exchange volatility of selling in multiple currencies and instead trade in their own home currency. This is the approach we use at Cactus, selling globally but in New Zealand dollars. At the top of the pyramid are those businesses that need multiple currencies – the software businesses, international consultancies and the like who truly need a multiple currency solution. Again anecdotal evidence would suggest that this is a small proportion of total MYOB customers.

Interestingly, and coincidentally, Acclipse recently announced that they are rolling out a client-side application into the Australian and New Zealand market. This product looks to be a direct competitor to Xero (its UI looks very derivative) but at a much lower price point. While the product is not available to test yet, it appears that the major difference between it and Xero functionally is the fact that iBizz will not have multi-currency. While some of the reason for this may well be the complexities involved in creating a multi-currency platform, part of it is also a determination on investment versus return and a nod to the fact that multi-currency isn’t important, at least when you have a million customer strong incumbent product, and the vast majority of those customers don’t need to go multi.

There’s a World Outside of the US?

Who has bought software from a US-based company recently? Or, for that matter, from any vendor worldwide. The default currency for software companies, and the default currency for a huge number of companies regardless of the industry type, is US dollars. This being the case, one only needs to look at QuickBooks four million or so customers to see that a similar triangle occurs to that in MYOB’s home market. Of those four million customers, a massive proportion have no need for multiple currency functionality and, all things being equal, should be able to be moved from QuickBooks to a SaaS product regardless of the multi-currency functionality that product holds.

Micro != SMB

The vendors who currently serve the freelancer and micro end of the foodchain (FreeAgent, KashFlow, Xero, iBizz) serve customers who generally have relatively simple needs. Multi-currency is, I believe, an outlier requirement for these organizations. Moving up the stack into more mid sized businesses (and the term “mid sized” means different things in different countries) and multi-currency is critical – Intacct, TwinField, FinancialForce and others absolutely need to provide robust multi currency tools.

Does It Matter?

The existing Cloud vendors targeting the micro space are doing one of two things – either focusing heavily on their domestic market (Saasu, iBizz, FreeAgent, KashFlow) or expanding heavily internationally and trying to bulk up over time (Xero specifically) In the case of the latter strategy, multi-currency is more important and it must be noted that Xero has an elegant and robust approach towards multi-currency.

So it really is a case of horses for courses. For the strategy that Xero has chosen, yes multi-currency is important. But is multi-currency an imperative for all SaaS accounting vendors? Clearly not!

Three years later and that business is still using similar systems to what it was when I wrote that post. So I was excited to sit down the other day to talk with Andre Mulvenna, US GM and co-founder of Brightpearl, a solution that I call ERP for the SMB – one that offers eCommerce, Inventory management, Accounting, Order processing, CRM and Servicedesk – and all from one integrated system.

Brightpearl have recently introduced their multi channel offering, which is a really compelling proposition for businesses that follow a multi channel strategy (as my one does) – perhaps selling through eBay plus their own webstore. With this offering, businesses can integrate their ecommerce solution on Magento, a marketplace approach with eBay and all the while have things updated in real time within their core back office system, Brightpearl.

The offering is pretty compelling. Brightpearl was already a product I was very bullish on – it delivers far richer functionality than the other SMB account applications like Xero. Freeagent and Kashflow, but at a significantly lower price than the top shelf SaaS products from NetSuite and Intacct. This multi channel adjunct is a compelling proposition. Of course there is the usual caveat and that is that by tying their horse specifically to Magento and eBay, Brightpearl misses on delivering a strong proposition for the legion of organizations that use other solutions – Shopify and Virtuemart among many others. I put this to Mulvenna who said that they;

we would like to deepen our relationship with eBay/Magento communities before we work on other integrations

It’s a strategy that makes some sense, by going deep with these two channels, Brightpearl delivers very deeply and should manage to capture significant customer numbers from these two channels. it’s also a strategy that seems them pick a couple of key winners and partner deeply with them. But yet, I’d love to see them spread a little broader and support a few more platforms.

While meeting with Mulvenna in San Francisco where he has moved from the UK to open a beach head operation, I was impressed by the traction that Brightpearl is gaining it what can well be regarded as the holy grail of software markets. As I remarked when speaking to him, Brightpearl stands largely unchallenged by cloud applications in the large space between the micro business offerings and the mid sized business products. If Brightpearl manages to execute, they look set to be the only credible alternative to the QuickBooks hegemony for mid-sized businesses.

As I said in my post;

I do a lot of consulting work, and have significant numbers of expenses (both entered as expenses and rolled through from bank feeds) that need to be on-charged to clients. In an ideal world I’d tick a box in either the expense or the reconcile bank account window that would allow that cost to flow through to a client invoice without me having to enter it in two places..

The conversation generated a number of replies, with others suggesting workarounds or agreeing that this is a pain point. The commitment of some users was amazing with one person going so far as to design their own complex workaround with their accountant;

Set up a different Chart of Account for each client as a Current Asset – this will display your rechargeable costs as an asset on the balance sheet also removing it from your P&L. Each time you have a rechargeable cost run it through as an AP and put it against that account. You can also type into the reference box the client name for ease of reference. I apply the date of the cost on the cost date and the date of the expected invoice on the due date. When you invoice the client run a report called “Account Transactions”, selecting the relevant client account as above and the dates between which you wish to invoice. This can then be pdf’d into a nice looking document which shows all the detail in the description, from and dates boxes for every AP assigned to that account.

This pdf can then be sent in as an attachment to your regular AR invoice. Don’t enter the total into the AR as well or you will be double invoicing within Xero. When the money comes in you will then have to pay off each AP.

That’s a pretty intense piece of work for what is a very simple functional need. I’m always a little disturbed when businesses, especially small businesses who are time and resource constrained, have to design their own systems to automate what is, or at least should be a fairly standard process. I asked Xero CEO Rod Drury about this need and he agreed saying that;

[this is an] obvious hole to fill this year. Pretty easy just hasn’t hit the top of the priority list yet.

FreeAgent has beaten Xero to the mark and has rolled out its own solution to this problem. With FreeAgent’s solution, any kind of expense (out-of-pocket, bank transaction or bill) can be associated with a project (for a given client) from a super simple drop-down menu;

When a new invoice is created against that project, there is an option to automatically include any expenses associated with that

project which haven’t already been rebilled. Invoice items will be created for each expense. Once invoiced, the expenses drop out of the system and hence users have the security of knowing that expenses aren’t being charged for twice (or worse still, missed).

Aware that there are some complexities when on-charging expenses, FreeAgent users can also elect to rebill expenses with a certain markup, or at a fixed price, when they associate the expense with the project. And in a final piece of transparency assurance, FreeAgent also gives users the ability to attach copies of the relevant expense receipts when the invoice is emailed.

This is beautifully simple and fills the need of most of the users who commented on the original LinkedIn thread – it’ll be good to see Xero ramp up their development pace to accelerate the roll out of features like this.

Given the funding round it seemed timely to reflect a little on what the emergence of Wave means for the business models of companies targeting SMEs

Traditional Approaches

Led by vendors Sage, MYOB and Intuit, the traditional approach to SME accounting products is to have a dual sales strategy. These three customers all sell boxed software through traditional retail channels but also have an extensive partner network where accountants, bookkeepers and other professionals on-sell their software – either for commissions, margin or as a service backed offering. This has traditionally been an excellent approach, it leverages SMBs trusted advisers and the reach of High Street retailers.

A move to cloud computing however makes this traditional channel difficult. Retailers have difficulty understanding the concept of selling a fully virtual product (as an aside I know of some vendors who actually sell SaaS licenses in a box just to make customers feel they’re buying something real). At the same time professionals are wary for two specific reasons;

1. They tend to be highly conservative and are unwilling to move from a product they know and trust
2. Cloud has the potential to reduce the traditional areas that practitioners have been able to monetize their service, practitioners are naturally nervous about that

Traditional meets Cloud

Led by high profile vendor Xero, but with significant players including FreeAgent, KashFlow and others, this method mixes cloud software with generally traditional sales channels. While most cloud vendors forego direct retail channels, they instead replace this with sales/marketing initiatives such as those shown by Xero who has a sales/marketing partnership with telco T-Mobile. Similarly FreeAgent has a partnership that sees Barclay bank customers being offered the FreeAgent product.

This strategy has paid dividends for many vendors – Xero boasts of 50000 or so customers while the less visible vendors are all clocking up numerous wins as well.

The Brave New World

While consumers have long been accustomed to receiving free services in return for targeted offers (be it via advertising with Google or targeted services from Mint) it is relatively rare in the business world. The proposition however is obvious – micro businesses are very cash poor and a significant proportion of them are likely to be happy to receive special offers in return for free provision of services.

I was pretty impressed to see that Wave is claiming that it already counts some 75,000 small businesses as customers, this only 11 months after its launch. Clearly the average revenue per user that Wave can drive from targeted offers is likely to be less than the subscriptions charged by the paid products. As such Wave is likely to need a much higher number of customers to generate sustainable revenues. That said however I have spoken to a number of businesses who have balked at the subscriptions being charged by the other SaaS accounting vendors. This along with the fact that Wave claims 50% more customers after 11 months than Xero has gained after four or so years – speaks to the potential of an entirely new business model.

Of course that’s not to say that Wave renders the other vendors obsolete – there is undoubtedly a place for a paid SMB accounting application, however Wave, by following both a new delivery model and a new business model, is well placed to become a very important industry player.

How Will Other Vendors React?

In theory there is nothing stopping one of the other SaaS vendors from delivering a low level free product. The reality however is that the investments they’ve made in chasing a channel strategy, and the basis upon which their business has been built make this highly unlikely. Rather I would suggest that another entrant will potential emulate Wave’s approach. The barriers to entry here are low and it comes down more to the ability of a vendor to build the relationships and momentum to gain traction. Wave’s 75000 customers and significant funding round will help get it that momentum.