- Investment won’t be spent on chasing market share
- Practice management software next – could be built within a year
- Focus on profitability, not size
After topping a review of cloud and desktop accounting programs, readers emailed BoxFreeIT asking whether Saasu was prepared to raise a bucket of money and take on its much larger competitors. The little Australian, with under 30,000 clients, has been in the market for longer than any of the other players. But did it have the funds to compete in a market crowded by billion-dollar giants?
I put the question to Saasu CEO Marc Lehmann. His response was surprising.
BoxFreeIT: Can Saasu go the distance without raising money?
Lehmann: The first thing there is that people mistake revenue for credit worthiness and they’re completely unrelated. I only know this because I used to analyse credit for my career. The viability of a business has got nothing to do with revenue. It’s all about cash flow. you can have a tiny cash flow and be much more viable than a big company with significant revenues that’s about to go under. Viability is about your ability to maintain and de-risk your cash flow profile. So I think that’s a common misconception.
BoxFreeIT: What was your previous job?
Lehmann: I used to run credit risk trading positions at Deutsche Bank. I used to buy and sell the debt of companies like Qantas, Fosters, Westfield and the banks, and look after the issuance of debt for those organisations. And I also used to trade credit default swaps which is all about credit risk and the survival of a business. Because that’s what default swaps are all about, the risk of business going under .
BoxFreeIT: But don’t you think it’s safer to be bigger?
Lehmann: I think it’s another misconception that size is safe. I think that is true in the banking and insurance industries only, I don’t think that extends to software companies. I can’t see that there’s a relationship there either.
BoxFreeIT: But what about Microsoft? It can make many mistakes and not matter because it’s so big.
Lehmann: That’s quite a different beast though. If you look at Microsoft that’s basically a hedge fund with a tech company attached to the side of it. They are that cash flow rich that they could afford to sustain three or four decades of severe trauma because they had no debt. They have no debt and they had massive cash reserves.
So as Google came along they were always going to sustain for decades even if they got it wrong. And that’s why they can keep going, keep muscling through when you have that kind of cash behind you.
If you’re kicking off a company and you’re running at a loss and you have limited capital to call on, you have to keep going back to the market. That’s a different type of business proposition. That’s higher risk. It doesn’t mean you can’t keep doing it, but you couldn’t compare that business model to a Microsoft. I’d argue that Apple is now in the same situation as Microsoft, it’s so cash rich now they can’t actually spend their cash now. They get to a size where they can’t actually buy enough stuff to spend it.
That’s quite a different proposition to what we and Xero and Freshbooks and all the other little guys. No-one is in that situation.
BoxFreeIT: Apart from Intuit?
Lehmann: Intuit and Sage are different beasts, they are massive and they have a lot of cash. if you look at market cap relative to your total cash and assets that probably better defines those business with a bigger safety net. Whereas if you look at market cap versus cash reserves, Xero has a year and a bit to go before they go back to the market. Sage and Intuit don’t have that.
The only reason we don’t have that pressure is that we’re self-funded. We make enough money so that we’re profitable but we grow slowly as a result by comparison.
I’m not saying one model is right or wrong, it’s that they’re different. Our strategy is to match big 300+ employee companies like Xero, MYOB and Reckon with a smaller 50-100 person team. Much like 37 Signals’ strategy and grow slowly through profit and not through investment dollars.
BoxFreeIT: What is the 37 Signals’ strategy?
Lehmann: We look at the business as self-funding through its growth cycle, not relying on new capital to grow. And when you do take capital it’s not about accelerating the business growth it’s about carefully using those dollars to expand the business but still keeping it profitable.
Quite often business will take capital and they will go and use it on marketing and sales straight away and burn it really quickly to buy market share. And they cause themselves to go into a loss-making situation. Our model is when we take capital we use it and attempt to stay profitable through the use of that capital. It’s a lower risk strategy and that’s good for the investor because it derisks their investment.
We have made it pretty clear to people who have approached us to invest in us that we want to do it along that methodology which then furthers their interest because we become a low risk investment for them. We are out of our risky phase.
BoxFreeIT: So how do you measure success?
Lehmann: We want to run a small team that’s able to produce big revenue. Google and Amazon run at $1 million per employee. Companies like Xero run at $100,000 per employee so they’re a lot less efficient. We want to run at $500,000 – $1 million per employee. 37 Signals are about $1 million per employee.
Freshbooks are at $250,000 per employee so that’s not too bad, it’s still twice Xero’s performance. It doesn’t mean Xero is not performing, it highlights the maths that Xero is using its capital to raise market share.
BoxFreeIT: But what about the network effect from two Xero-using businesses connecting directly, or the channel effect from winning over the most accountants and bookkeepers, or the bigger budget to fund faster R&D? Doesn’t that let you control the market in some way?
Lehmann: There is always that element of thinking that if you do everything you’ll win the whole market but I think there are plenty of industry examples of where that doesn’t happen. Just look at the success of Dropbox versus Google Drive. That completely blows away that theory. I don’t buy into it.
I can see some merit in the idea of having lots of different capabilities to offer a customer and thinking they will be loyal because of that but I think people at the end of the day will still migrate to a better product. Just because Seven-Eleven has everything it doesn’t mean you’re going to shop there all the time. I used to think it was super important but I don’t think it’s as important as the software companies think it is.
Also it has an inherent risk in that you get defocused off what’s really important because you’re trying to cover so many different areas and you end up with a huge critical mass supporting it and you end up with a big ship that’s hard to turn. That is a risk you add in with that strategy. I think it’s not as clear cut so we haven’t rushed into doing everything.
BoxFreeIT: Would Saasu take on more investment?
Lehmann: We have started considering capital for the first time in years. We have been getting constant interest from investors lately but if and when we take capital we will be very fussy about who it’s from and how it’s spent. Our main competitors have very high acquisition cost funded by recurring capital raisings or internal investments. You have to demonstrate rapid client growth to get the next round of capital but at some point that fails and the bubble bursts. We just don’t like that capital model so we will do something different with new money if we take some.
BoxFreeIT: What would you spend it on?
Lehmann: For us we’ve decided we’d like to get into practice management as one of our next steps but we’re not going to rush off. We’ve got a strategy around tax which we haven’t been able to get started on yet. But we think we should do one thing at a time and do it well.
BoxFreeIT: What is the time frame for practice management?
Lehmann: We haven’t one yet. We’ll treat it as a separate business and it’s own R&D exercise so it doesn’t interfere what we’re doing with the main client app. That’s what we would use an investment for. We think it’s something that we can do pretty quickly and get a same-year return on the investment dollars which is required to keep the business paying its way.
BoxFreeIT: You could build something from scratch within a year?
Lehmann: Yep. We know how to build software. I’ve looked at what else that’s out there and it’s all super complicated. I think software companies inherently build too complicated systems. Even Xero is getting complicated now. If you go into the help system and look at the help item for adding a sale it’s absolutely massive. It’s much bigger than MYOB or QuickBooks.
BoxFreeIT: What’s happening with the Saasu Mk II rollout?
Lehmann: We have our interim app out now and that’s been really well received. We’ve had 98% positive feedback so we’re pretty stoked about that. the final Saasu mark 2.0 is about getting our current design to work really well across all our devices and platforms so it’s quite a technical aspect of the build.
We don’t want to be dealing with a native iPhone app and one on Android and keeping them up to date. Typically they get out of line with the main web app which becomes a major problem because you’ve then got multiple lines of code you’ve got to keep enhancing and they’re not coming out at the same time so you have differences between the systems.
Notoriously the native apps are lobotomised versions of the full web app so you end up driving users back to the full web app because its missing features in the mobile one. So we’re trying to deal with those two big problems with our approach.
So it’s not like a D Day where the next version all comes it out, it’s coming out in stages. There are some screens which are now much better than previously because they handle devices better and they scale better. The plan is to have it completely out in the next 12 months. We are back to building features right now. They are unique so we are keeping them secret.
BoxFreeIT: What’s happening in the UK?
Lehmann: We are establishing core partners around the UK to refer our business clients to. We’re getting close to 500 clients over there which is good given we’ve never been in that market. We’re only just getting started there and we want to get it into the thousands as fast as we can.