Mike McDerment on Bootstrapping FreshBooks from Zero to $1B

0:00The founding of FreshBooks goes, I was running a small design firm, I accidentally saved over an invoice. I decided to build like a simple web application, start billing my clients that way. That's where we began. How did you do it? I didn't build it to build a business at the start, I built it to build my clients. And then I realized, oh, other people would like this.

0:16Alex Chisnall:Mike McDermott, co-founder and former CEO of FreshBooks, the cloud accounting software that started in his basement, scaled into a billion dollar Canadian tech unicorn. I had moved out of my parents' business before founding FreshBooks. Interestingly, ended up moving back in to house it for them for what was going to be two or three months early in the FreshBooks story. It ended up being three and a half years that we stayed and worked out of my parents' basement. Welcome to this special bite-sized episode of Screw It, Just Do It from our back catalog of over 550 past episodes. If you like what you hear, don't forget to follow the show and grab your free two-day pass to the Festival of Entrepreneurs this October.

0:55Alex Chisnall:Just head to festivalofentrepreneurs.co.uk to claim yours. And don't forget to dive into the back catalog. Now open for this year's Festival of Entrepreneurs. Join us at the NEC in Birmingham on October the 8th and 9th for two game-changing days with 200 plus speakers and thousands of ambitious founders. Get your free limited two-day pass at festivalofentrepreneurs.co.uk or click my personal link in the show notes. So Mike, I've only got one question for you. Then we're done. How did you do it? I'm still working on it, Alex. That's the truth. It's funny. I will say this. So we've had the good fortune to have a lot of success, but it's taken almost 20 years to get to where we are, and there's a long way ahead.

1:38And I think the short answer is by doing lots of little things.

1:42Alex Chisnall:That's a good answer. I'll take that. And what do you think, I mean, whether you get time to reflect back on this because you say you're still building it, but what have been some of the keys to the success that you've had, you know, so far over the last, what, 17, 18 years? Yeah. For me, I, you know, where do you start with something like this? And, you know, for me, if an inspiring entrepreneur or whatever it is, where do you begin? And I really believe it begins with the customer, you know, finding and identifying a very specific customer and then going and understanding a problem that they have.

2:24And those sound like simple words, but I think if you're really doing it right, you get very deep in understanding that customer and their pain and their problem to the extent where in many ways you become an expert such that you can articulate it, you're more familiar with it than they are. They're feeling it every day. And you understand that the parts of it that are really the ones that matter and the ones that don't in the domain space. So I think that's the kernel. That's the first thing. And without that, I don't think you get too far.

3:01Alex Chisnall:and do you think over the years like when you started out did you have an idea of um you know one ideal client avatar and that's changed over the years to multiple different client avatars or is it still very much focused in on you know one specific type of customer so great great question um and there's just interesting dynamics at different time parts of a business so uh the story, the founding of FreshBooks goes, I was running a small design firm. I accidentally saved over an invoice as you word in Excel to build my clients. And instead of, you know, taking a box of software and loading it into my, uh, taking the CD out and loading it into my computer, cause this is like 2003, I decided to build like a simple web application, start building my clients that way.

3:47So that's, that's where we began. And I tell you that because what happened was as we started building it, first of all, I realized, you know, we did, I didn't build it to build a business at the start. I built it to build my clients. And then I realized, Oh, other people would like this. And, and that then turned into a very interesting thing. Cause then I had this like entrepreneurial mania where I was like, well, everybody needs this thing. Everywhere I went, I was like, that person needs invoicing and that person. And, and like, I'm in a cab and you've got a receipt and everybody's got to have it.

4:18And so I had this, I had this, you know, expansive, uh, like, dare I say, almost like manic sense of like how this was needed everywhere. And that's a very dangerous place to be. So my point is, once you get going and you kind of catch the bug on building something, you're creative, you start to think, hey, I got a hammer. Everything looks like a nail. Everybody needs this thing. And so I had the good fortune to have a retired business person around me. And he instilled in me the importance of kind of having a niche and a target customer. And so, you know, the consequence of that was, first of all, it was very hard for me to go from seeing how everybody would love and want this thing, because it was sort of my baby, to, okay, let's narrow it down and narrow it down, narrow it down and narrow it down.

5:10And what we ended up doing, which is interesting and I think has a lot of value to people starting businesses is we narrowed it down to one particular customer vertical, and that was web designers.

5:23Alex Chisnall:If you're enjoying this conversation and thinking, I need to be around more people like this, then I've got the perfect solution for you. The Festival of Entrepreneurs is where 5 to 10 ,000 ambitious entrepreneurs come together to learn from the people who've actually done it. It's on October the 8th and 9th at the NEC in Birmingham, and I'm giving my listeners free two-day passes. Real entrepreneurs, real stories, real strategies, exactly like what you're hearing right now, but live and in person. Go to festivalofentrepreneurs.co.uk and get your free two-day pass before they're gone. And it was literally just web designers for the first seven years.

6:01All of our dollars, all of our marketing, everything went to targeting web designers. And like, oh, that market's so small and all these things. But that's not how marketing works. And that's not how having a niche in business works. We focused all our efforts serving that customer, but those customers were happy and they told other people. And so while we spent all our time trying to attract web designers, I'd say like 75 % of the people who came and tried our software and ultimately became customers were not web designers. And that's just like a funny thing about marketing. And by the way, like why does that work so well?

6:37it's because while you're very focused and you're targeting this small group and you're doing a good job serving them and then they're kind of so happy so we really understood their problems we built for them and then they took care a lot of the marketing for us a lot of the word of mouth so that's that's um you know so i guess my point there is um you know it has changed over the years from you know everybody needs it down to one person needs it for seven years and at this point in the business we now have what we would call like a you know a series of segments that we serve in different ways to different degrees and we're constantly refining our offering to better serve those segments.

7:12And by the way, it's not all of small business. One thing that makes FreshBooks difference is we actually choose to serve what we call service-based businesses. So we don't do retail, we don't do restaurants, we don't do high inventory or high POS style businesses. We focus on the more than half of the small business market, people who like a marketing agency who builds their clients or a law firm or an IT professional. That's our core focus. And we just try to be better than everybody else for more than half of the market. And so far, that's served us very well.

7:45Alex Chisnall:Okay, interesting. And was it just you at the start, as I read earlier, that there was three of you, but was it just you and then two other people came on? How did you kind of grow that side of things? Was it you doing literally everything at the beginning, bootstrapping? So the quick answer to this is I saved over that invoice. I built the first version of the thing in two weeks. I then had somebody who was doing contract work for me in my agency take an interest in it. And the two of us started working on it for about a year. And then after that, and we still hadn't launched yet, but about two months before we did, another gentleman, Levi Cooperman, joined.

8:21So there were three of us. And that team just proved to be a good team because we had really complementary skills.

8:27Alex Chisnall:uh yeah okay and what's the belief you've gone on to raise something like over 200 million dollars back in 2003 2004 out of the gate were you bootstrapping from from day one and how long did that go on because i believe it wasn't until maybe a decade later that you you looked to to raise money that's right so we we launched in uh well so we i saved over the invoice in 2003 We launched in May 2004. We then went 10 years before we brought on institutional capital, raised our first round of$30 million from a syndicate of really great investors. So we went that decade. And in the interim, we did a couple of things.

9:12We, first of all, we bootstrapped because I had my agency. I could feed myself and I could feed the startings of the team. The three founders put in the$10 ,000 we might have saved or borrowed to put in there. My parents put in 10K. And we had a couple angels around us. We raised like 50K or 40K. And these numbers seem insignificant to what entrepreneurs, and especially technology entrepreneurs, are able to raise these days. But we raised in small amounts. Then we got a quarter million dollar check from an angel, one of the founders of Rackspace. And that was kind of our fundraising story for the first year.

9:49and then get to 2014. And then we started to really take on capital in larger and larger quantums.

9:57Alex Chisnall:Okay. And what did bootstrapping look like in real terms for you back then? Were you still at your parents, working every hour in the day, surviving on pizza and beer? How was it? How did it kind of look like? Well, I had moved out of my parents' business before founding FreshBooks. out of the house. I'd done kind of undergrad and all this stuff and moved out. And interestingly, ended up moving back into house sit for them for what was going to be two or three months early in the FreshBooks story. It ended up being three and a half years that we stayed and worked out of my parents' basement. So by the time we left there, there were six people showing up every day to work on FreshBooks.

10:41So that's, you get a picture of we were all in one room. There were actually three of us at one desk. We went and got like a good phone system, like a Nortel Meridian thing and had that in the basement so we could do a good job answering calls and all this stuff. But it was a very, you know, very, you know, very humble beginnings. And then we moved out to our first office, which was, you know, 2 ,400 square feet. And I couldn't even believe that we'd ever fill it. And then, you know, inside of 18 months, we were spilling out over it and packed on top of each other and all that stuff.

11:10Alex Chisnall:So it's, you know, real estate and startups is another whole thing.

11:40Alex Chisnall:for inspiration, education, and connection. Don't just listen to their success stories. Go meet the people living them. Grab your free pass now because the biggest risk isn't taking a chance. It's missing the opportunity entirely. From accidental founder to tech unicorn, Mike's story proves that the best businesses often start from scratching your own itch and having the courage to chase it relentlessly. For me, getting Mike on my show ultimately led to his company, the Canadian Tech Unicorn FreshBooks, sponsoring this very podcast. Something that I didn't set out with the intention to do, that was never the intention of getting him on the podcast, but it's something that came about through our conversation.

12:22Alex Chisnall:So it means quite a lot to me as well, this one. When I chatted to Mike, he was up in the Canadian lakes, a log cabin, canoeing, and that's how I spend my childhood. I moved to Canada when I was less than 90 days old. I was less than three months old. Father, grandparents were all Canadian. Look, I hope you enjoyed this episode. As always, if you want to listen to the full episode, dive back into the back catalogue and listen to the full episode.