Building A Profitable, Steady Growth Subscription Business: Expensify CEO David Barrett (Part 7)

Sramana Mitra: Why do you need to filter the needs? From what you described, it sounds like the system is pretty self-correcting or self-converting?

David Barrett: It is. Most of our time is spent minimizing the number of times that you will need to reach out to us. For example, it’s possible that we can spend several hours dealing with a QuickBooks connection for some customer that will never pay us because this is just an individual person using QuickBooks. We want to make sure that we avoid getting trapped into spending a tremendous amount of time on people that will never pay us. We do all sorts of things like prioritize incoming messages that gives fast responses to people who are the biggest opportunities. It’s pretty self-optimizing. That’s why engineers are such a critical part of our model. Pretty much everything we do comes down to someone from engineering.

Sramana Mitra: How many engineers do you have?

David Barrett: We have about 15.

Sramana Mitra: What is the size of the company?

David Barrett: There’s two ways of answering that. One is about 120. That would be because one of the secrets behind our receipt scanning technology is that OCR just doesn’t work very well. We’ll go as far as the technology goes, but then we have an army of transcription workers that will just type it in. We have about 35 people here in San Francisco, about half of them are engineers. We have another 40 people in the Upper Peninsula in Michigan. We have about 40 people in the Philippines, and we’ve nine in Honduras. When people think about how big the company is, they’re probably referring to how many full-time employees they have in San Francisco. That’s about 35 for us.

Sramana Mitra: What about revenue ramp in terms of this model of viral propagation? How does that scale?

David Barrett: It has scaled nicely. One downside with our revenue model is that it produces a very different scalability curve than most. Especially, most enterprise startups have years with no revenue and then they will spend massively on growth. They’ll see this big vertical spike of revenue and even greater loss. Eventually the loss will taper off as they get the model working. This massive revenue growth, which everyone sees, is great. But they ignore that it’s coming off of an even massive loss. They get a lot of dollars but for every dollar they get, they spent $2 to get it.

Our model was incredibly efficient form day one. We always had incredibly thick margins. It produces a smooth exponential growth, which at the start is actually very slow like 10% month-on-month growth. 10% on $100 revenue seems depressingly low, but 10% on a $100,000 revenue is quite good. Then, 10% month-on-month growth is actually amazing especially if you’re maintaining strong margins the entire time. For a long time, we were showing steady growth except it was never the vertical growth that people are accustomed to seeing for enterprise startups, because our model was so different.

Sramana Mitra: The question that follows from that is, in my mind, is there any lever to accelerate growth or is this just the nature of the business?

David Barrett: That’s a good question. I would say that what lever there is, I think it’s probably more on the brand and marketing side. We’re already the number one with the keywords. I think that you could do this general awareness campaign that can be cost effective, but it can never be quantifiable. It’s taken purely on faith.

Sramana Mitra: Beyond that $5.3 million, have you raised any other money?

David Barrett: We raised $5.6 million in 2010. We didn’t raise anything again until this year. It’s a small round which is hard to do. It’s hard for a mid-stage company like us to raise a small amount of money.

Sramana Mitra: Based on your business model, you could easily have gotten Silicon Valley Bank to write you $1 million debt.

David Barrett: We did that last year. We did that once, and we wanted $1 million more.

Sramana Mitra: Which Silicon Valley bank isn’t willing to give you?

David Barrett: We had just taken debt from Silicon Valley bank under great terms. Venture debt is great if you can pay your bills. I would say we tapped out our line of credit with Silicon Valley. One thing led to another and we ended up with $3.5 million because they’re like, “I can’t do a million but can you take two.”  Then, it goes to three and then, three and a half.

Sramana Mitra: Who came in?

David Barrett: Two investors. One here in San Francisco who is another super angel, if you will. He heads this firm called Coyote Ridge. They partnered up with a firm on the East Coast.

Sramana Mitra: What kind of level are you at in terms of number of users and revenues?

David Barrett: We have about 6,000 customers. What’s unusual is we have everything from individuals to public companies. We have $5 a month customers and we have $10,000 a month customers. We have a huge range of customers from different industries. We have about a million users. We have hundreds of thousands of companies that basically have users who have installed it and are promoting us internally. That’s why our sales model is weird. We focus on people who are actively trying to get their companies to buy. All we need to do is convert them. All of our focus is on converting all of this interest coming in. I don’t need new companies to ever sign up for Expensify. I just need to convert the ones who have signed up.

Sramana Mitra: Very interesting. Congratulations! I really like what you’re doing. I tend to like companies that are focused on profits rather than pure growth. Thank you very much.

This segment is part 7 in the series : Building A Profitable, Steady Growth Subscription Business: Expensify CEO David Barrett
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