Expensify: Product-Led Growth at $200,000,000 in ARR!!

Hey, everybody, I want to do a deep dive on Expensify, which recently IPO'd. Expensify is a leader in travel and expense management that many of us have used. It was actually one of the first apps to really break out on mobile back in the day. And Expensify has been around a long time, which is why I want to chat about them. Back in the day, around 2008, 2009, when the iPhone came out, Expensify was just magical. And folks in my little team started using it virally because you could whip out your iPhone, whatever it was back then, iPhone one or two or three, take a picture of your expense receipts, and then magic would happen. Expensify would digitize it, enhance it, put into an expense report, handle it all for you, and almost 14 years later, it still does the same thing and wonderfully and has finally IPO'd. It has IPO'd almost 14 years after founding. It took them quite a while actually to get to 100 million ARR. It took more than a decade and then boom. Covid was an accelerant. Covid was an accelerator. First it hurt them, which we'll chat about, and then it became an accelerant as this entire category of expense management exploded on the web. And as it IPO'd after 13 long years, it was growing 60% at 140 million in ARR, now approaching 200 million with from SMBs, from small businesses, 119% NRR and is highly profitable. So how did Expensify go from an innovative web app on top of mobile to slow and steady growth and then boom, well over a decade to growing 60% at 140 million AR. It's interesting to see because UNL so many of these, sometimes it's hard for us. We don't quite feel like we're snowflake. We don't quite feel like we're a data dog sometimes. But Expensify is a lot like all of us. A great insight, a long slog, and then eventually a rocket ship and a multibillion dollar valuation post ipo. So let's dig into Expensify. So interesting learning one and this is extreme, but for some of you it's doable. At the IPO, they only had 140 employees. This is unprecedented. A million dollars in revenue per employee. We used to see this in the old days, old school softw back in the day could do that. When you ship software on a DVD rom, it could become very efficient at scale. But we rarely see this in SaaS and Cloud and there's some reasons for it. First of all to be clear, Expensify one does a lot of its business self serve so that's more capital efficient or more human efficient. Two it does outsource. It has historically outsourced a lot of things, so contractors and third parties do a lot of stuff that other folks might bring in house. We've seen something somewhat similar at Atlassian where for a long time they really outsourced a lot of their so called sales to their channel partners which enabled them to be more headcount efficient. Atlassian also, while not this efficient, has a relatively high percent of the revenue can put into R and D and has almost always been profitable. But but Expensify did it to an extreme. A million in revenue per employee and it's just a reminder that viral and product led growth is not always rapid, it's not always slack or notion or zoom scale. But it can be very capital efficient if you want it to. And CEO Dave Barrett is a great CEO for a variety of reasons. He wanted to raise a relatively limited amount of capital. In fact, as we'll talk about in a minute, he bought back a lot of the shares from his investors. So arguably he was too capital efficient. We chatted about this briefly when he came to speak in person at 2021 annual but you can do it in many categories. You do not have to burn massive amounts of capital if you don't want to. Mailchimp did not have to. Qualtrics didn't have to. Atlassian didn't have to. And here's the latest one, Expensify it burned a relatively small amount of capital, but in all these cases we'll find often when we compare them to folks that burn more, it did take them a little longer and again expensified mailchimp at lasting Qualtrics. It was a slower burn for a while, but in the end it worked out for them. So a million per employee, it's possible. Point 2 Just super interesting. At scale approaching 200 million in revenue today, 60% of the revenue comes from employees that use the free version on their own and then socialize it to the boss. That use case I talked about way back in the day when I was running Adobe site and Echoesign is still incredibly almost 200 million revenue. 60% of their revenue comes from not just what we call product LED growth today, but the classic freemium model. That's interesting because we've seen a lot of folks where that tapers off at scale. The dropboxes, the boxes and the others, these classic freemium models from a generation back they become more and more enterprise. And that freemium piece either shrinks or if it doesn't shrink like Mongo or others, it just shrinks as a percent of the revenue. Datadog now Datadog for example, the vast majority of the datadog users come from freemium and similar plans, but the majority of the revenue, not the customers but the revenue, is Enterprise. But Expensefice kept it constant. 60% of its revenue comes from employees using the free version. And that may well be because the CEO again is anti enterprise, which is fun to watch. He just never wanted to go up market, even though clearly he could have gone more upmarket with Expensify. Maybe it's a forcing function. He did not want to do what the data dogs and the Mongos and the slacks did and Zoom is doing, which is go up market. But it's interesting. Pretty cool to see that 60% of the revenue to this date again at 200 million comes from not just the free version but employees using it and then going back to their bosses and getting budget. Pretty cool. So it's possible. Point 3 Super interesting. I just love when SMB SaaS companies set out their NRR and GR because a lot of folks obscure it or hide it or they'll cut it off. Even folks that do a decent job disclosing sometimes will hide it in their smaller accounts. Expensefly doesn't share everything, but it's shared a lot for its five plus seat accounts. Five plus seat and again it kind of obscures the tiny ones. But for 5 and up it has 119% NRR and GRR or the customer counter retains of 86%. So that's pretty good. This is a great bellwether metric for you if you sell the SMBs. First of all, it's a reminder to segment segment between your smallest and at least your somewhat larger customers. Everyone does it Zendesk does it expensify? Does it 5 and under? Is it 5 and above is a good way to define slightly larger SMBs. And you know, one to four seats maybe is your smallest. But if you're five and up and you have anything like expensify, aim for 119% NRR. Don't take excuses, don't settle for 100% even if you have to in the beginning. Aim for this type of 119% NRR and 86% GRR that that they have. It's pretty it's pretty impressive. Fourth, interesting piece of expensifying. We saw this with Bill.com and we saw this with Shopify which is that fintech is the engine of growth at scale. It's earlier with Shop with Expensiveye but we saw Bill.com rocket to one of the leaders in SMB SaaS by adding payments on top of their great bill payment platform which we've used at Sastra since inception. Same thing with Shopify. Shopify is the leader in third party e commerce platforms. It's what the dominant platform for businesses especially SMB selling on the web outside of Amazon. But it's not really SaaS anymore. Shopify gets the majority of its revenue from merchant payments on top of this platform and Expensify isn't there yet, but it's fintech piece. It is growing 2 1/2 times year over year. So we should see that escape and grow and become much larger than its SaaS business. So look, you probably know this but it's worth thinking about is there possibly a fintech element to your business? Shopify, Bill.com and Expensify would not be what they were today if they did not add FinTech to their SaaS. It's also interesting that they're doing it internally. We go over to the website builder Space, WIX and Squarespace different approaches to whether to outsource this payments process, which is complicated, right? It has fraud, it has breakage, it has other issues or whether to bring it in house. And WIX and Squarespace came to different conclusions on that and WIX brought it in house taking a margin hit because this business is, you know, the payments are lower margin than software and Squarespace decided to outsource it. As a result, wixpace's margins are lower but they're growing faster. Interesting trade off. Wixpace wants the shopify bill.com and ultimately expensify route. And it's also interesting to bring it in house is hard. And when I did my interview with rene Lacert from Bill.com he commented it took him years to get on top of the regulatory requirements. Build this out, build the confidence to go deep on payments. Same thing with Shopify at ipo it was a small piece of it. It was actually almost none of their business at IPO versus the majority today. And again with Expensify, 13 years on, the fintech piece is just taking off. It took them years to build it but it can be very powerful. You can combine it with SaaS. A fifth main point and then we'll do just a couple more deep dives. Can't think of another SaaS company that was as impacted from COVID and then exploded. Although we'll see more when they ipo. I suspect we'll see something similar with folks like trip actions where travel almost stopped and others but because so much of expensive fat is from travel. It was hit. It was hit. It only grew 10% from 2019 to 2020 actually going into Covid but then boom 60% after it. So wow. If nothing else it's a reminder to never quit the fact that approaching 100 million in AR growth that slowed to 10% some of it Covid related but some of it probably not. And then boom, 60% at 140 million AR just never give up. We've never seen anyone go from 10 to 60 in one year north of 100 million from 10 to 60% growth. It's just pretty incredible. Incredible testament to the team to staying together and sticking through a tough time. 10% growth year is tough and then 60% the next year. Okay, four quick bonus learnings about Expensify Just interesting facts this payments, reimbursements, the whole space is relatively local specific and it's interesting to watch how different players the bills expensifies and newer folks the Brexit ramps, divvies and others how they approach international expansion because it's complicated. It's complicated and build.com is highly concentrated in the US and North America and it's interesting to say the same thing with Expensify. 90% of their revenue is US based. Now they're slowly expanding. It went from 90% in 2019 outside the US to 11% today. But even there it's limited to US like countries the UK, Canada and Australia and this creates opportunities for other countries to create clones and inroads and just financial services and fintech are harder to go global more quickly than pure software. So that's interesting observation. Slow to go international all of this category in many ways.7 Just interesting. How many seats per customer at scale does expense? If I have 12 the answer is 12. The average user is not one seat like in the example at the beginning of this, but nor have they gone Enterprise. They have 53,000 customers. 53,000 after 14 years. That's not that many SMBs but 640,000 paid seats or 12 per customer. So again a bit of a slow but incredible burn leveraging this 110 to 120% NRR to 12 seats per customer and 12 is medium. You can invest in 12 it's a significant amount. It's not a huge amount of revenue, but it's a significant amount of revenue per customer. And interestingly, 95% pay on credit cards. It's really interesting and we'll talk about one related point next, but so many folks push. They push to push people on contracts. Push to push people on annual contracts, folks. That's not always the right answer these days. What is the right answer is to let the customers buy the way they want to buy. It's really interesting. Zoom is well past 4 billion in ARR and half of the customers still pay on credit cards. Even as it goes more Enterprise Expensify is 95% on credit cards. So yes, credit cards are annoying. You have credit card churn, you have chargebacks, you have headaches. They seem nice in the early days because they're easy to integrate, but ultimately getting a year of cash upfront can be wonderful. But don't push it, folks. Even Mongo walked back a lot of annual contracts to monthly for its smaller customers who said, look, we're not just not ready to pay annual. And Mongo's coming up on a billion in ARR and over 100 million 1 million a year customers and it still walked back annual contracts. So just be thoughtful. When VCs tell you to go annual, when other folks tell you how to go. Look, if customers want annual and you're good at collections because you got to be good at collections when it's not automated through a payment portal. But if your customers are happy to pay annual and you get good at it, it can be magical. It can boost your cash flow 20 to 30%, but don't force it. And ExpenseFi certainly hasn't. They've said, Look, SMBs are bread and butter and we're letting 95% of folks pay on credit cards. But there's one interesting change they did make, but they did wait 13 to 14 years, is they don't let you cancel contracts anymore. So you may still have to pay monthly, but annual contracts are no longer cancelable all the way until May 2020. So that's 12 years after founding. You could sign these contracts, but you could cancel them. Whether this is due to Covid, I'm not exactly sure why they made the change. I should have asked whether it's due to Covid or maybe to get ready for the IPO to kind of stabilize some of these metrics. But now annual contracts are no longer cancelable, so maybe they're taking advantage of their brand and their place in the market with 53,000 customers. And sometimes that's the time when your brand is strong. You can be a little more aggressive on pricing in terms you can stop doing pilots in the enterprise and other things when you're the default choice. But it's interesting that that 95% paying contracts and they waited 12 years before saying, hey, you can't get out of an annual contract. And as an aside, personally I think you want customers to be as happy as possible leaving because it's a long journey. Expensifies on its 13th, 14th year. You want them, they may well come back. They'll often come back. So the easier you make it to leave, the easier you make it to come back. And I think Expensify knew this and they waited until Covid and getting ready to IPO to make annual contracts enforceable. And just two more interesting things about Expensify number nine and I just don't see this enough. And it helps that Expensify only has 140 employees. But as they got ready to IPO, they paid cash bonuses to employees to help them buy their stock options. They set up a pool of cash, up to 36 million. And going into the IPO, 9.5 million of bonuses were paid out. And that paid the cost of 45% of their strike prices. So for founders and CEOs listening to this in the very early days, it doesn't matter, right? You get options and the price might be a penny or two cents, but as you grow, especially these days, it can become very expensive or almost impossible. Almost impossible in many cases to exercise options. Now there's tax issues and giving folks some cash bonuses to pay to buy their options only solves some of the problems. But it's wonderful to see this. I used to try to do this. It can have some accounting headaches and others you can work on. But think about this. Think about grossing up folks as much as you can when they go to buy their options so that they don't walk away. Employees that spent years slaving for you don't walk away from their options just because they can't come up with the cash. Or even worse, employees that want to exercise early and get long term capital gains just can't because they don't have the cash. Yes. Are there third party services that do this? Sure. But if you can do this for your employees, it's a wonderful, wonderful benefit. And take a look at Expensify as an example. And just a small note on this question of venture capital. It's really interesting that Dave Barrett bought out one of their VCs, Redpoint, for $43 million in 2018. It's interesting I haven't done the math. I'm sure that Investment would have grown 4 to 5x since then had they held and Dave is great. You can watch several of his chats at Saster if you go to saster.com and search for Expensify or Dave Barrett. We were joking at this Sasser and Dave started we all started when we started together when things were harder in SaaS, markets were smaller, multiples were smaller and many folks became anti VC when the best outcome back in the day might be a billion dollar IPO. Remember HubSpot, Zendesk? These iconic leaders often didn't even quite reach a billion dollar valuation in their ipo. The world's much better and bigger today, but it created a lot of disalignment with VCs a lot of frustration and Dave bought out Redpoint, one of the top cloud VCs. I probably wouldn't feel the need to today, but certainly an interesting use case of recapitalizing your own company. So again expense a great one. A hero company I think in many ways doing it all SMB, doing it the hard way, raising very little money, pushing through a 10% growth year, approaching 100 million revenue and then growing 60% as they approach 200 million and doing product led growth before we knew what it was called by just empowering users end employees to use the product for free. Pretty cool story. One we can't all emulate, but one that challenges some assumptions that some of the stuff can be done. In fact it can.