Interview with Michael McDerment, President and CEO of Freshbooks

October 2, 2006 in An interview

Freshbooks (an online billing service company) recently announced that they have more than 80,000 users. Not a shabby accomplishment for a "web 2.0" company with an active and working revenue model. CEO Mike McDermont agreed to share some insights with us about their success.

1. So Mike - tell us a little about how you got started. What prompted you to start Freshbooks?

Carson, I think my story is not unlike many other web 2.0 start-ups in that it all started with my web design and internet marketing consulting business called Anicon. One big difference from many others is that we were around before this whole Web 2.0 phenomenon started (our service was released to the public in early 2004, around the same time as Basecamp, but that’s a little known fact). 

I started doing consulting gigs in 1999, and after a few years struggling to keep up with my invoicing I desperately needed something better to manage my receivables.  I hacked something up online for myself and to show my clients that this could be done online and that we were "eating our own cookie".  After showing it to my co-founder (Joe Sawada), he asked it he “could play with it”.  Shortly thereafter Joe started coding and the two of us working part-time managed to get the first edition of FreshBooks up and available to the public as a web based online invoicing service.  The rest shall we say, is history...

2. You recently announced that FreshBooks crossed the 80,000 subscriber line. Congratulations! You're facing more and more competition as the web 2.0 mania gains steam, what do you feel has been the strongest factor in helping you achieve your growth?

Thank you for the props, we are very proud of our growth to date. The biggest factors in achieving our growth has been word of mouth, organic search, blogging and spending in strategic online advertising. This has been limited to banners on targeted sites and newsletters and well as Google and Yahoo pay-per-click.  From very early on, we made a decision to have a budget available for spending on online marketing.  We have had varying degrees of success, but even when the conversion results were low, we took solace in the fact that at the very least our brand was gaining awareness. 

For those of you out there who are thinking about launching a web app, blogs and word of mouth are a great way to generate buzz, but I strongly recommend building visibility with some targeted marketed spends… trying to reach people who have not heard of “Web 2.0”, but who do know they want to save time invoicing… there are many more people like that out there than there are people tracking Web 2.0 and I think it can be easy to overlook that fact.

3. You've also done a smart job of marketing using your blog and other outreach like your current free tele-seminar series - how well do those work at bringing you new business?

To be determined!  Blogging at FreshBooks is something we only got serious about this spring, and we have seen a lot of positive impact from it (readership growth, and increasing number of comments).  I love blogging though because it lets us give back to and add value for our users. 

Giving back to entrepreneurs is a core value for our business.  We have a policy in place where we direct 1% of our profits to support entrepreneurs in the third world.  Giving back is also why we are doing things like the “Build Your Business Fall Tele-seminar Series” where we have invited experts with knowledge that web professionals need (as they make up the majority of our users). Topics like advice on Pay-Per-Click advertising and getting the most out of web analytics are topics that are relevant to many web professionals.  In many cases this knowledge is not only useful for our clients and their business, but also to their customers’ businesses.  We really want to see other businesses succeed.  That is one of our core aspirations and we help anyway we can. 

4. What advertising or marketing efforts have been less successful than you anticipated?

Last year we embarked on a PR campaign with a well established technology PR firm here in Toronto.  Although we learned a great deal from the experience (I like to say Levi and I earned our Masters Degrees in Communications), and it really helped us focus and strengthen the message we want to portray, we were certainly not ecstatic with the results.

5. What can you tell us about the technology behind FreshBooks, how did you build it? What approaches/philosophies drove/drive your development?

Our product has been developed very organically over a number of years.  From day one, our user community was given the chance to use it for free (although we also had paying users shortly after releasing) and we had a very open feedback loop for everyone to provide their ideas and comments on the product. 

The technology we are using is Linux, PhP, MySQL.  We chose this technology early on because it is open-source, and it has a good reputation for performance, stability and ease of use.  For example, Flickr is built using the same technology. 

On a side note, last year after seeing a lot of new and exciting products pop-up, we almost decided to re-architect FreshBooks using new technology like Ruby on Rails.   As it turns out I am glad we decided against this because it would have been a mistake for us.

6. Are there any mistakes you've made that we can learn from?

One mistake we can share with you is our approach to a referral program.  We put a lot of design and development resources into building a referral program right into our product.  Our mistake was that we miscalculated what those people who use our product would want as a referral incentive. We thought by offering cash incentives (25% of the fees your refer) people would want to refer our service and we could also attract professional affiliates that were strictly interested in making money referring FreshBooks. 

What we have since learned is that our customers don’t care about the money – they just want to refer us because they love the service.  And the professional affiliates are either far fewer than initially thought, or not interested in referring a service like ours where each referral had a relatively small monthly value to them. 

In hindsight we should have designed a program that gave our real users (not professional affiliates) the ability to tell their friends about FreshBooks and get a simple reward for it, such as a month of FreshBooks for free.  That is not to say our affiliate program was a waste of time, because we actually get a lot of value out of it as we use it to track our marketing indicatives these days.  But I think that if we were to do it again, we would focus on giving our users a break on their fees if they refer us to a new paying customer.  Right now we give people the choice.  By default we send them money, but before we cut a cheque we send them a note and see if they’d prefer to get a discount on their fees and that is what most people choose.

Another obvious mistake was our brand name.  You may or may not know that our product used to be called 2ndSite.  Now, at the time we chose the name, it seemed very cool, and with our initial intentions of the product, to be a second website for a small business kind of like their own intranet, it was fairly well named.  However, right away we struggled getting a dot.com for the name and quickly realized there were far too many ways to spell 2ndSite (secondsite, 2ndsight, secondsight, ...).  As much as our original branding was a mistake, the decision to re-brand and the way we went about it (check out www.brandmurder.com) was a big win for our business.

7. What pithy advice can you give other aspiring web-software-as-a-service moguls about getting their offering up and going?

• Build What You Know – for authors it is often said that to be successful with your first novel you should “write what you know”.  When building a business, the same rule applies.  Build something you already have an intimate understanding of.  Solve a problem you already have and “scratch your own itch”…it makes decision making much easier. 
• Observe the Holy Trinity (of Web Services that is) – product support, development and marketing are all interrelated with web services…they feed one another.  Be sure to include a good feedback loop in your product so your users can tell you what they want.  Build what your users want and they will market you through word of mouth.  At some point you may choose to develop a feature you believe has a significant “vision” behind it like we did with our ground mail service …then selling that vision will become part of your marketing and in this scenario your marketing drives your development.  You get the idea.  Support.  Development.  Marketing.  The holy trinity of web services.
• Collect Advisors - we have a great set of advisors with extensive expertise and experience, and we are always on the look out for the “next one” to further round out our resources.
• Finesse Your Pricing – getting your pricing right is vital to your success and to ensuring you promote uptake and don’t leave money on the table.  Don’t be afraid to rejig it over time.  We are on our third pricing model and we have increased our rates every time and each time we do more people sign up and pay more.  Here are two articles (one, two) with more of my thoughts on pricing.
• Invest Your Time in the Design of Your Product - in this age, design and usability really do matter - don't let the ugliness of myspace.com fool you.
• Don't be afraid to Make the Leap of Faith - if you are building your product part-time, there will come a day when you think about dedicating someone on your project full time.  Make the leap and do it.
• Get Some Love Money if You Can - don't squander it on overhead, find a relatively inexpensive office to operate out of, and spend the money on salaries and marketing exclusively if you can.
• Search Out Government Grants and Funding for R&D - they are out there.  Find them.  Get them.
• Expect to Have to Pay for your Paying Users, but not Your PR - don't expect a blog or great website to carry you through.  Yes there have been success stories, but the reality is they are few and far between and that is what the Web 2.0 hype tends to leave out of the story.  The blogosphere is a great place to generate buzz and get free PR, but most of your potential customers are not tracking web 2.0 – believe me.  So, find a marketing mix that works for you. Even if it’s only a $1,000 per month, spend it somewhere smart and closely track the results.
• Measure Everything – read this article for some tips on how to track your success.
  
• Think big (…in terms of your Market) - go after a big consumer market if you can. Our market is big, but the amount of people who need our service is actually a very small percentage of all potential consumers out there.  Think about it.  Everyone is a consumer, but only a small percentage of people actually own and operate a business.  A smaller percentage of those are the very small businesses FreshBooks serves.  With a consumer facing service…adoption will be even bigger and faster, like Flickr or FaceBook.  That said, everyone is talking about serving a niche these days.  That is what we have done and it’s a good strategy too.

8.  As a successful entrepreneur and businessman, you have many important demands on your time, yet you still manage to get stuff done. What's your secret to time management? What methods/tools do you employ to manage your time well?

Thank you Carson.  I’ll tell you sometimes I feel like I’m treading water, but you just have to push through those times. I can recommend a few things. First of all, don’t burn the candle at both ends.  We work a very regular day about here.  Granted I usually go from about 8:00 AM till about 7:00 PM, but I almost never work a day that is longer and we never (well did once) work on weekends.

Another big thing I think helps my time management is knowing what I do and don't do well, admitting it and passing it off to others.  For example, writing...often I spend too much time on writing assignments, generating documents etc. Whenever possible I pass those tasks on to Levi, he writes really well and he is much more efficient at it than I am. 

Another important thing I do is I constantly decide what not to do.  I spend a lot of time deciding what not to do because not all opportunities are equal - and we have passed on some biggies.  By passing on opportunities (about 80% of those that come up I’d say) we have remained focused and we have been able to free up the time we need to do the other 20% of activities that are worthwhile pursuing (like writing this interview :) ).

9. Are there any books/magazine/blogs that inspire you that you would recommend?

Here’s a great reading list (not unlike yours Carson!):

• Unleashing The Idea Virus – Seth Godin
• Positioning – Al Ries and Jack Trout
• Creating Customer Evangelists – Ben McConnell and Jackie Huba
• Crossing the Chasm – Geoffrey Moore
• Built to Last – Jim Collins and Jerry I. Porras
• Getting Real – 37Signals

Thanks Mike, I really appreciate your time and willingness to share.

Mike has agreed to answer any questions you may have, in the comments to this thread.

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Great post. You mention that switching to Ruby on Rails was a mistake. Could you elaborate on the reasons? I am considering converting my web app to Rails, from Coldfusion.