Building A Profitable, Steady Growth Subscription Business: Expensify CEO David Barrett (Part 6)

Sramana Mitra: At that point, you said you were charging subscriptions. Was anyone paying for subscription?

David Barrett: That’s interesting as well. At that time, we weren’t charging. In fact, we didn’t intend to charge for a long time. We raised our million dollars, did our pivot and were doing expense reports. This business was going to be so easy. It’s a classic enterprise play. We raise a lot of money and spend it on ads. Those ads were going to power a marketing theme that gets leads to the sales team. However, we soon learned that it just didn’t work that way. We did a whole lot of things, but we just couldn’t get customers. This is when the second really important thing happened.

Because of the receipt-scanning vision, which suddenly became plausible when the iPhone got an autofocus camera and with Apple pushing the app store at the same time, we were on the top of the receipts category in the App Store. This led to a huge range of employees installing the Expensify app without the permission of their employers. They sign up wanting to use us so badly that they force their companies to investigate us.

It became the business model that we have today. It’s what we call the bottom-up adoption model where we focus on the employees first. Then the act of submitting expense report is inherently viral. Every time you submit an expense report, you submit it to someone more important than you. We basically took this zero marginal cost, massive lead generation channel through the mobile app stores. Then, we made it into this viral upsell into the company. It worked fantastically. It works so much better than all of the paid channels. We’ve had so many users signing up through the app stores. Now, we don’t do any advertising. We have zero dollar ad budget. We don’t really do marketing. We stumbled onto this highly unusual model.

Sramana Mitra:  For the lead generation process, what did it entail to convert them into sales? Did you have to have a telesales person calling these people?

David Barrett: No, not even now. Initially, we didn’t charge at all because we just raised a whole lot of money. It was just me and Witold. I actually hired two more people. So there were four of us. There’s years of runway in the bank. That’s not really the time to be optimizing your business model. The reason we started charging was also the number one complaint we were hearing, which is that we’re free. They couldn’t promote this product to this company. They had concerns such as, are they going to be around? We’re giving them the user name and password to our bank account, are they going to steal our money?

We had to charge in order to overcome our top objection to becoming a user of Expensify. Our business model was odd at that time. We just changed it two months ago. The first model we launched with was free for up to two submitters a month. That’s because at that time, we were going after 10-person companies. We know that in a typical company, about 25% of the company will submit expense reports. By giving the two submitters for free, it ensured that the product was exactly as free as before, but we had this larger companies paying for us.

As we launched this model, all these larger companies started buying. We had no salespeople because the sales model doesn’t need salespeople. The only reason that you would reach out to Expensify is because you want to buy. Everyone reaching out to use is in the process of trying to buy. We never actually get into a situation where we’re trying to convince someone to pay. We only deal with inbound.

Sramana Mitra: What’s the pricing?

David Barrett: It’s $5 per active user per month. You only charge for people who use this service for a particular month. It’s very simple.

Sramana Mitra: How long after you raised that million dollar of financing did you arrive at this?

David Barrett: We started charging six months later. We just shifted around our pricing a couple of months ago.

Sramana Mitra: In 2009, sounds like you have your million dollars. By the end of the year, you also had your pricing model validated and now you are in revenue. What happens in 2010?

David Barrett: 2010 is when we raised our second round. It was a $5.6 million round. It came out of the blue. The consumerization of IT became this popular thing. The notion of using a mobile app to acquire employees inside of companies and using those employees to sell into the decision makers is so radical. Even today, there are few users that use our model. Our model is actually highly-attuned for the expense reporting market. I don’t know if it’s transferable, but it really works well for us. We were approached as a poster child for the consumerization of IT. There’s Dropbox and Expensify. We always get lumped into that crowd. We raised around then and then we had even more money in the bank. We hired a bit more. That was led by Red Point.

Sramana Mitra: You had $5.6 million in the bank in 2010. What’s the next major milestone?

David Barrett: I would say the constraint of Expensify is that there have never really been any, because we don’t pay for our growth. As in most companies, their growth depends upon how much they can spend on buying leads. We have a lead filtering problem. We have so many incoming leads that our job is to handle the incoming volume efficiently.

This segment is part 6 in the series : Building A Profitable, Steady Growth Subscription Business: Expensify CEO David Barrett
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