Mike McDerment is the co-founder and CEO of FreshBooks, planet earth #1 cloud accounting specialist for small business owners. He is also the founder of the Mesh conference.
→ What is FreshBooks and why he created it
→ He is the co-founder and CEO of Freshbooks
→ He is also the founder of the Mesh conference
→ His background before FreshBooks
→ How they get the word about FreshBooks
→ What’s been the single most effective thing
→ How important of a brand is to startup in terms of growth
→ His thoughts in SAS
→ How important is pricing
→ How does pricing effect growth
→ And a whole lot more
Bronson: Welcome to another episode of Growth Hacker TV. I’m Bronson Taylor and today I have Mike McDermott with us. Mike, thanks so much for coming on the program. Absolutely. Now, you really don’t need much of an introduction. You’re the CEO and founder of FreshBooks, a startup that’s really become a household name. But the road that you took to grow your startup had a lot of twists and turns in it. But before we get into all that, tell us kind of what is FreshBooks and why you created it.
Mike: Okay. Today, FreshBooks is we’re the leader in cloud accounting for small business owners. We I basically I built FreshBooks for myself almost ten years ago now. I was running a small design consultancy, and I saved over an invoice one day because I was using Microsoft Word like most small business owner to do, actually. And, you know, I got really frustrated and I built something for myself. So, you know, today only Intuit QuickBooks, a $19 billion company, has more customers than us. And, you know, having spent three and a half years in my parents basement trying to turn this into a business, we’re really sort of proud to be number two today. And, you know, we’re a rapidly growing company based in Toronto, Canada.
Bronson: Yeah, it’s great. Now, if I’m not mistaken, it took a year to bring FreshBooks to market. Why did it take so long for you to go from kind of the idea to bring it to market? And would you recommend that other startups move faster than this, or do you think what you did was the right course?
Mike: So, you know, a lot has changed since we started Fresh was founded and, you know, January 23 when I saved over that invoice and in 2003, things like, you know, development frameworks, let’s say for Web technologies like Ruby on Rails and like they didn’t exist. And so it took a lot longer to build stuff back then. I will also say, I mean, I was not a product. You know, there was also there was just a lack of knowledge around how to build a company like ours. You know, the lean startup as a book did not exist, you know, getting real by the guys, 37 signals was not at there. We learned everything basic from first principles. And, you know, things just take longer, you know, when it’s like that. So all of which is to say, you know, I think you can get a product to market a lot faster today. I will also say, I think, you know, it taking so much time, you know, I think we have a very strong foundation in sort of doing customer research and development that I feel like the startups I meet today and some that I mentor are sort of more obsessed with building get something out the door and trying to learn through data than trying to understand by getting to know their customers and so know. I think there’s a balance in here somewhere. You know, we have a very customer centric culture here. I think that year of of, you know, sort of really doing like almost old school research probably played a hand and you know, but by and large, I’d say, you know, ship something, ship is faster, even if it’s not broadly available, get in the people’s hands and then, you know, also try to do the qualitative research.
Bronson: Yeah, makes a lot of sense now after 24 months of it being on the market. Yeah. Again, if I have this right, you had only ten paying customers, is that correct?
Mike: That’s correct. Know that was that was 24 months after us starting. So we were in the market for nine months. Okay. You know, 24 months after I saved over that invoice. And so January 23 to December 24, but still, I mean, two years of our lives. You know, my co-founders, you know, I’m a I guess I’m I left a, you know, a very good business program, but the other two finished and one is an electrical engineer. The other guy’s a good doctor in computer science. You know, for three of us to spend so much of our lives and only get to ten customers paying us $9.99 a month each. You know, I think by most measures, that’s a colossal failure.
Bronson: Yeah. Well, let me ask you about that. I mean, you know, to use the modern term, why didn’t you pivot or just, you know, the old fashioned term? Why don’t you give up? What made you think that, you know, nine months, ten customers. If I keep going, growth is possible. Well, why did you, you know, understand that you could get to where you’re at now?
Mike: I don’t think it’s about understanding because we did not understand. I think it’s about believing. Right. And enjoying what you’re doing. So, first of all, I the word pivot makes me sick. I find it really tiresome. I think the notion of failing fast is also, you know, bullshit in so many ways. Frankly speaking, you know, I think people make mistakes, which they learn from, and that’s okay. But, you know, the notion that you just give up quickly on something to me is ridiculous. And if you go look around the world, you know more. You know, a lot of businesses, they take a while to get going. The other thing was we had month on month growth of people signing up and trying to use our service. We were getting positive feedback from customers. Yeah, it wasn’t turning into dollars immediately. But you know what? Sometimes these things take time. And if you look at a lot of the Web’s most successful big companies, a lot of them had a, you know, a long and glorious history before they became popular, if you will. And, you know, I think we sort of struggled through a lot of those years worth, in my estimation. You know, I believe we’re really still we’ve had a good start, but, you know, we’re still in the starting position for the organization and the company that we’re building and I’m ten years in. So I think, you know, the numbers were small, but the growth was always there and we believed in what we’re doing. You know, I think a key part, too, was that we determined what success was. We didn’t let other people do it. So, you know, if we had some investors who were very impatient, we would have been a failure. But here we are today and it’s a different scenario.
Bronson: Yeah, that’s great. Now, eventually you went from those ten customers to the point that I believe over 5 million people have used FreshBooks to send or receive an invoice. And that is quite a stark difference from ten to millions. So I really want to talk about how you got from 10 to 2 millions of customers, but start kind of give us the big picture. You know, we’re so used to seeing these consumer companies, these consumer facing products that are free. You know, they have this viral growth or exponential growth. And we’re all used to kind of looking at those charts that go up and to the right. What is a growth chart for you guys look like as a SaaS company? Is it completely linear? Is it up and down sporadically? Does it nosedive sometimes? Like what does your growth chart look like from ten to millions of users, you know?
Mike: So. So I showed the garage, I did a presentation to a local it was a presentation to a local incubator. And I was trying to justify, you know, the reason I was sort of taking up their time at the front of the class, if you will. And I showed them the chart and they said, Is that for you? And I said, Yes, it is. It’s the real data. And, you know, it looks like it’s out of your grade and science textbook. Right. It is a pretty smooth and consistent curve. It goes up and to the right. And, you know, I at the end of the talk, I actually went back to that graph and I pointed out that, you know, the graph looks really flat. If you look in the first couple months and years, I like all the growth and all those steep attack patterns in the of years, but really this hasn’t really been that much different. It’s just longer and steeper and the number bigger now know anyway. So no, it’s been very smooth but very consistent and chunky like you describe and basically in a textbook.
Bronson: Yeah, that’s great. So let’s talk about how you kind of got those users, because that’s what the audience here is really interested in, how you actually acquired new customers. So let’s take that moment when you had ten customers and you’re trying to get to a few thousand customers. Kind of the first thing after the initial couple of customers. How did you acquire them? Was it totally word of mouth in those ten? Was it just guerrilla tactics? Was it I mean, how did how did you go from ten to a few thousand, let’s say?
Mike: Yeah. So, you know, as a rule, word of mouth is always been the biggest driver of our business. But, you know, when you launch and no one knows who you are, you got to start somewhere. And so my background before FreshBooks, I guess, was growth hacking on behalf of other people. So I started building websites for people I assumed realized, what’s the point unless people show up. Once I had people showing up, I was like, What’s the point of having to show up? And I say, Do what you want. And what I would do is I would help other people find qualified traffic that they converted into paying customers. So. So that was my DNA and my background. You know, I applied to FreshBooks and, you know, when we launched and nobody like, we flipped on the switch on the Internet and nobody showed up and we’re like, Huh, that’s interesting. Even though I knew that would be the case from all this other stuff. And so we started buying ads. And I remember spending I think it was like, let’s say it was $400 ads and it was $300 ads and email newsletters. Mm hmm. 100% text based. But these were our communities where I spent time. And, you know, the email would go out to these lists. We’d be waiting all week, and, you know, we’d sit by our computer and wait for the, you know, the trials to kind of show up. It was very exciting. But so yeah, we really just started with, you know, writing like a hardcore direct copy email newsletter kind of, you know, kind of ad placements. And, you know, I had to learn how to write, you know, good direct copy to be successful in an email newsletter. And we got pretty good at it. And so we just did lots of little ones like that. You get 30 trials here for 300 bucks then. And you know, all the numbers have changed over the years for what? You should spend a guess that. But yeah, it’s just bit by a bit little spend, you know tweak. We were on to the next.
Bronson: Yeah. So obviously things matured, you know. And my guess is that your advertising now is not just a couple of email newsletters that you probably have quite a marketing mix going on. Talk us through what channels you’re using right now to acquire customers, maybe some of the primary channels you use and all the way down, even some of the ones that you’re dabbling in that you haven’t put a ton of resources into yet. How do you guys get the word about FreshBooks out right now?
Mike: Yeah, we tend to be pretty tight lipped about talking about our channels. No offense and probably what your audience.
Bronson: That’s fine. But tell us what you can’t tell us.
Mike: At the end of the day, we’re in business today because we’ve been able to profitably acquire customers. When I think about the small business space, you know, I describe it like this, like trough of dead companies that thought they could acquire customers profitably and they haven’t been able to do so. You know, I think the unique DNA of doing direct advertising is still largely true. So word of mouth is still by far the biggest driver. And then we spend on advertising. And, you know, I think what I would encourage and this is maybe the not it is not so much the channels as the approach, right? So we took a very virtualized approach to our marketing, right? And so we said, okay, we’re going to go after people like us to start, right. And so as a web professional and you know, we started out with designers and developers and, you know, what? The conferences would reach these people and you got to know that marketplace and our ad spoke to them and and all that stuff. And I think that taking a finding some vertical to focus on and establish yourself before you go and build out is a very like because you only have so few dollars to take a very broad approach is silly you got to find some vertical. In some cases it’s some sales channel, like some kind of sales person that you learn how to get selling on your behalf or whatever it is. But we took a very vertical eyes approach focused on web developers, you know, and you’d be amazed that, like, you know, we still spend there and, you know, we’re ten years in. Yeah.
Bronson: Did you find it that was hard to move beyond that niche or that vertical or did that transition work out pretty easily? You know, how easy was it to go from web developers to restaurants or whatever, you know?
Mike: Mm hmm. So a couple of things there. So, first of all, you know, even when we’re spending, you know, basically all our ad budget, let’s say, against Web designers, for the sake of argument, we were still having other people show up and sign up and use our software. Right. So it’s a weird thing you don’t expect, but, you know, dog walkers were still showing up and, you know, all these other, you know, like butlers and and, you know, plumbers and, you know, all these other businesses that we weren’t actually targeting. And I think that’s what. You know, people when they think about how to spend their marketing, they probably discount like you’re going to reach all these people you didn’t mean to. And that really kind of matters. So that is thing number one. The second part to your question, which is failing me just now.
Bronson: Which was not be very important.
Mike: Well, sorry. You know, sorry. Forgive me.
Bronson: No problem.
Mike: There was a second piece I want to address that. I just. I just it’s escaping me right now. So you’ll come back to me if we can’t keep going?
Bronson: I’m sure you know the good advice of bubble up here. Let me ask you another question, that this might also fall under the trade secret category, but I’m going to ask it anyway, and then you can tell me if it is. What’s been the single most effective thing? You’ve tried to acquire new customers, and if it’s something in the past that you’re not currently doing, maybe you can share because it won’t impact you. But but is there been like one thing that’s been like, yeah, that thing worked very well.
Mike: So you’re asking if there is a silver bullet?
Bronson: Basically, yes. For you at least maybe a different silver bullet for somebody else. But was there one thing for you that was really I mean, I know how I learned about you all. You know, for me, it was listening to podcast and, you know, it was like the were I don’t know if you were advertisers in the podcast or if it was them just talking about you. But that’s how I was introduced. So in my world, that’s how you got to everybody. But I don’t know if that’s the case. You know what I mean?
Mike: So no, I mean, I think so. There really are no silver bullets, right? Like, I think it’s rare when you you build a company and everybody points to, oh, is this one deal with this company or this one this or this one that. And I can just tell you that we don’t have that at all. It’s been a million little things strung together consistently over years and years that have kind of gotten us there. Right. And, you know, I will say we always knew, like our unit economics, you know, for customer acquisition, that came from my DNA as helping other people do this. So we knew, you know, hey, we spend this much to acquire our customer, but we didn’t know until we met advisors. Was is that the right amount? You know, today you can find that stuff on Hacker News or something like that, like basically benchmarks for, you know, customer acquisition costs and stuff like that. So but yeah, I mean, it’s no yeah. I mean, the best thing is word of mouth. You know, I think it really helps to have a great product. Mm hmm. Yeah, but I don’t come from the school that believes that having just a great product is enough. You know, PR is very efficient. Right. And, you know, if somebody is talking about us in on a podcast, it’s probably because they heard about us one way or another. I mean, that’s yeah, the earned media rights or whether it was a great product or, you know, we did something interesting. I think the more time that goes on like our culture is, is a pretty I think, you know, it is relative to the world of companies out there. It’s very different. And it’s it’s an amazing place. And I think that, you know, some of our greatest stories in awareness building have been around sharing the story of our company and how we do things behind the scenes. So I think that’s been useful. But when you’re just getting started as a company, you know, you may not have any of that. What I would encourage you to think about if we’re really talking about startups is, you know, I think I mean, Seth Godin says it like being a purple cow, but like. Find ways to be different. You have to find ways to be different, and that’s in your approach to your product, but it’s definitely in your marketing, right? And you know, I think if anything, I’ve been afraid to be a little more out there over the years. And each time that I’ve kind of rolled the dice and gone out of my comfort zone, it’s pretty much always worked out really, really well. So if anything, if I did it over again, I’d probably do crazier things.
Bronson: Yeah, that’s great. It’s great advice. You’re talking about some of the the less concrete, the less data driven kind of things that really matter and that segways into kind of some of the next questions I have. FreshBooks also seemed that it created a great brand, like FreshBooks meant something. When I saw the logo, when I saw the color scheme, it always had a brand in my mind that not all the competitors that you had, you know, necessarily had. How important do you think a brand is to a startup in terms of growth?
Mike: You know, if you’re asking me, I think it. Yeah, I think so. Yeah, I, I believe, I believe it really matters. But I will say this as we’ve been learning how to build a brand over the years. Right. So a little bit like not knowing how to run or build or grow a product company. The same thing applied to brand. But you know, I have been a little crazy about, you know, my own involvement with it, you know, trying to achieve consistency through all channels and tone and everything. You got to work at it because your products part of your brand building. So all these experiences you develop, whether they be service experiences, because our support team is the core of what we do, you know, product, you know, marketing sales need to achieve consistency and you got to work at it. And I think, you know, one of the critical things so once you decide you want to have a brand, I’ll just throw this nugget in there. For four companies who were trying to do this, you need to bestow somebody, somebody who will listen to other people who has sound judgment. You need to bestow them like design and brand dictator rights. Okay. Because the biggest problems we’ve had over the years are when other people really think that, you know, they have a, you know, like they have a vision for the brand or they know what the brand is, but they kind of, you know, they have their own version of the brand. And that’s what, you know, sort of I find very hard a lot of my time, effort, energy has been into corralling people back into actually, you know, this is where you’re off a little. And let me help you with that and let me help you understand. So next time it’s easier for you. But that’s I mean, I you know, I’ve been very involved in that, and I don’t want to take credit for it because I’ve learned more about brand from our team members than, you know, than you believe. But but, you know, I think it’s really important that one person is kind of the caretaker of it and making sure that things are tidy and tight.
Bronson: Yeah. Do you think it’s best if that person is the founder or the CEO? Because it seems like if you pass it off, they could be a hired gun that doesn’t care about the baby as much as you. You know what I mean? Or do you not think that’s the case?
Mike: You know what, to be honest, I can promise you there’s a lot of founders and CEOs who’ve been no good at it. Right. I think it depends on I think you what you want is you want to find the right individual. They don’t have to have a title. That’s not the point. And so, yeah, I mean, people are going to treat it like your baby. But, you know, there’s a certain sensibility, you know, customer empathy, awareness and critical thinking sort of strategy, all these things, you know, that, that, that that person needs to have. It so happens that, you know, some of those qualities I possess. So, you know, not a bad fit for me in our case, but in another company, you know, it could be the lead designer, right? It could be the head marketer. It could be. And I think that that’s a company by company, you know, it’s almost like personality by personality kind of decision. So yeah, I think.
Bronson: It’s but.
Mike: I have to also say I will also say this. If you have a founder or CEO who really cares about this stuff and I’m guessing that will be reflected in the brand.
Mike: Right. And if you have one that doesn’t and doesn’t kind of get at it, there’s a chance that maybe you don’t end up with as strong a brand.
Bronson: Yeah, no, absolutely. You know, one of the things that startups have to deal with when they’re, you know, in a SAS business is pricing models. How important? Because, you know, I’ve built SAS businesses and, you know, I spend so much time thinking about the price before I put it out there. Worrying about it is I pick the right one. If I make it too high, am I going to scare away people, make it too low? And I didn’t earn as much margin as I could have. Like and you know, we get worked up in a frenzy about it. How important is pricing, do you think? Do we put too much emphasis on it? Not enough emphasis. How does pricing affect growth?
Mike: Okay. Complicated question. There’s about three different ones in there. So I tend to. Too much emphasis. Too little. I mean, it’s both. Right. I mean, you can ring your hands about price. At the end of the day, what you really need to do is test. Mm hmm. Right. And you also, you know, you need to test and you need to make sure that you’re you know, I think there’s a marketing piece to price, which is articulating the value of your product and service in ways that are meaningful for your customer. So I think, you know, messaging and sort of benefits, orientation around pricing is also very important, you know, along with just how much you charge because you’re setting expectations and giving rationale for why something costs the way it does. But yeah, I mean, I can tell you, I mean, we’ve changed our prices four times over the years. We’ve raised them each time, and we’ve always had more people convert when we do. So, you know, it’s it’s it’s not all science. Right. And sort of data sort of speaks with it. Right. So I would I would test some things. Another thing with SAS companies, I don’t know. When I think of SAS, I think of selling to business owners or divisions in businesses or whatever it is. You know, I think when you start, I would encourage you to not have pricing and have people get in touch with you. Right. And talk to them and understand. Never ask somebody how much something should cost, but try to quantify the problem and the scope of the problem they’re trying to solve. You know, because if it’s a division of a hundred people and you’re going to save them, you know, 1000 hours this year. Right. It’s probably worth, you know, a few thousand bucks a month. Whereas, you know, we help people save on average, you know, for, you know, basically 4.6 hours a month. Right. You know, we charge you like $19 month for that. That’s you know, if you’re building out a, you know, anywhere, if you’re really into $20 an hour, you just got 4 hours back for 20 bucks. That’s that’s pretty good. So, you know, just finding ways to understand your value and communicate it and also know this one little thing about pricing. Mm hmm. Know it’s human nature. And I don’t know why it is, but to to undervalue your own offerings and your own service. And so you are going to feel like you’re charging too much. And so whatever that point is, go ahead and double your price and put it out there and see what people say. Because, you know, by your own nature, you will you will want to bring price down and you may find that price is just not as elastic. And I think this is an important concept from economics. If you don’t know, I’d go read about elasticity of demand and in elasticity, but often and I’ve seen this time and time again with software is, you know, purchase behavior is not as elastic or as price sensitive as we as the people building it companies feel that it’s going to be.
Bronson: So it’s a lot of other factors that actually help them push them over the edge, not necessarily just what is the price point.
Mike: Well, and sometimes people I mean, like, you know, we’ve learned also that you sometimes you get what you pay for, you know, and you know. So I know when you’re selling to small business owners, like many of them want to pay for something so they can call you up and say, where is my damn thing? Whereas when it’s free, oh, I lost all your data. You know, you never paid a set. There’s no accountability here. Right. Do you really want that?
Bronson: Yeah. No, that’s great. So, you know, raising a price might actually help you because they want to pay for the you’ve given them peace of mind and you’re giving them kind of insurance to to to follow through and get that customer support they need. That’s great advice.
Mike: What what you are signaling to your customer is that what you do has value. Okay. And for self-respecting. Business owners out there who recognize and value their own time, who recognize that they like to get paid for what they do. It’s not a big leap to say, I’m going to pay for something.
Bronson: Yeah. No, that’s great. Now, let me ask you a few questions kind of about the startup community, because you’re a startup mentor, you’re an educator, you speak at conferences. So I know you interact with the startup community quite a bit. And so here are some questions for the people listening that are in a startup. What pitfalls should a startup avoid when they think about growth? Because you have a unique perspective, because FreshBooks, you just you know, where you did get started so early. You’ve seen a lot in the last ten years. And what pitfalls should a startup avoid, you know, concerning growth?
Mike: Well, I would start with, you know, actually. So it’s a little I was going to say something that. Goes against, I guess, how I behave. So bear with me here 1/2. I think the first thing is to focus on achieving growth.
Bronson: What you mean by that? I don’t pack just.
Mike: A little bit as opposed to worrying about growth, like if you don’t have growth. That’s problem number one. So if you’re getting some traction and you are growing. Mm hmm. You know, I believe there’s more to life than money. Mm hmm. I believe that people value things beyond dollars and cents. I believe that there are a whole host of intangibles that matter in business and in life. And so, you know, I believe in building a company. And to do that, you’re really building a culture. And so my $0.02 would be to focus. You know, I wouldn’t worry so much about growth. I would worry more about culture, focus on building a culture, one that you’re proud of and one that your teams can be proud to be a part of. One that achieves results and celebrate success together, but build a culture. And, you know, at some point, you know, I’m well past this point where, like, I’m not in control of the culture anymore. I’m just like a steward of it. But I think in those early, early days, you know, you’re setting a tone and you’re building a culture that’s going to be with you for a long time. Mm hmm. Okay. And so. So think about that. Just like you design a product. Like, think about, you know, and be a role model for. Right. You can’t just tell people to be a certain way. You got to do it yourself. And they’ll they’ll riff off of that. And then the stories from the past, you know, the history of your company will reinforce that culture. They just think culture really matters. And that’s that’s where I place my focus.
Bronson: Yeah. And your answer may actually be the answer to the next question as well. But I’m going to ask it just to see, you know, you’ve seen companies that succeed and you’ve seen companies that fail in terms of achieving growth and, you know, making it work out as a viable business model. Do you see any commonalities beyond culture that the ones that have succeeded growth have? Is there something they have? Is it they have this kind of person? They have this kind of product? Is there any common threads with the success stories you’ve seen in your life?
Mike: Hmm. You know, I think this the ones that succeed over the long haul have a great set of values. Right. Like, I don’t believe business is evil. Yeah. Right. A business at the end of the day is a collection of people, you know, for the most part, really great, hardworking people who want to take care of customers. And so, you know, again, sort of comes back around to culture and in some respects. But, you know, I’ll put another one out there. You know, you know, most businesses, it’s about marketing. It’s not about technology. Yeah. Right. It’s the better versus videos, better technology, VHS one. So I think, you know, I would encourage you once you have something people are using. Solve the marketing problem. Right. It’s a really hard problem and it’s going to be with you for years. But if nobody knows who you are, you know, you’re not going to have a growth problem and you’re really probably not going to the opportunity to build a culture and you’re going to have to shutter the damn thing. Yeah. So, you know, think about how you really break through in people’s minds, right? Yeah.
Bronson: Yeah. No, that’s great. Well, one last question, Mike. This is an awesome interview. I love having you on the show here. What’s the. Thank you. What’s the best piece of advice that you have for anyone that’s in a startup right now? You’ve been through the ringer, but you’ve had the ups and downs. Well, what’s the best piece of advice you can leave with entrepreneur here?
Mike: All right. So I’m going to go with guidance and then I’m going to give you a, you know, some some food for thought released, some some a little direction, I guess. But here’s the thing. There’s only two things that matter, in my opinion, to be successful in business. Okay. Shared values, which we’ve talked about a little bit. It’s really all about the people. And, you know, people you know, the not the way they look, not the way they talk, but their value is what makes them tick as human beings. And the second thing is alignment, right? Is just making sure all those people shared values are headed in the same direction and understand and want the same things. Okay. So are the only two things you need. Okay. Okay. So that’s pretty. That’s pretty simple.
Mike: All right, great. And and then so the last thing I just say is just keep going. Don’t give up.
Bronson: Yeah. Right.
Mike: Because, you know, you may just, you know, just. Just keep your feet moving. Decide what success is for yourselves. Don’t let any other people do that for you and have fun with it.
Bronson: Yeah, absolutely. Mike, it’s been a great interview. Thank you so much for coming on the program.
Mike: All right. Thanks for having me.
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