CIBC Innovation Banking Podcast

Michael Hainsworth:

This episode was recorded in the summer of 2019. Since then, Expensify has launched its corporate card that also donates part of interchange to charities, launched a virtual assistant for business travelers that’s COVID aware, and has expanded partnerships worldwide. And this is the story of how it got to where it is today.

Announcer:

Today on the CIBC Innovation Banking podcast, expense management app Expensify was never your typical innovation economy start-up. While CEO David Barrett focused on profit over growth, he's achieved both all without giving up control of the company he founded.

David Barrett:

Fundamentally, the differentiation of Expensify is not just our functionality and so forth. All of that will get copied inevitably. Our real long-term differentiation is how we acquire customers and that we do it in a way that is dramatically lower cost of sale. It really has no cost of sale because we don't spend anything for customer acquisition. It's 100% organic. As such, we're able to reach parts of the market that no one else can.

Announcer:

On this episode of the CIBC Innovation Banking podcast, we turn the Silicon Valley business model on its ear. Here is Michael Hainsworth.

Michael Hainsworth:

David Barrett is a Maverick CEO. As start-ups flooded Silicon Valley, he built his more than a thousand kilometers away in Portland, Oregon. When MBAs told him Fortune 500 companies were his target clients, he targeted small to medium-sized business. While venture capitalists worshiped at the altar of growth, he built his temple out of profit. We began our conversation by talking about how he never intended to get into the expense management business in the first place.

Michael Hainsworth:

Let's rewind the clock to 2008. You've described filing expense receipts as super-boring, tedious work. Why on earth did you ever want to go deeper down that rabbit hole?

David Barrett:

The funny thing is actually it was kind of an accident. My last start-up got acquired. I lived in the Tenderloin in San Francisco. I wanted to build some platform to help distribute secure money to the homeless where it couldn't be spent on alcohol and drugs, because San Francisco has great facilities, but only if you show up sober. I started building a platform around prepaid debit cards, basically around just giving a debit card to the homeless that would charge back to my credit card in order to give out money and help people out.

David Barrett:

But I went to the banks with this idea. They're just like, "What? No, we're not going to help you build this weird platform to give up money." I'm like, "All right, I need to sound low risk. I need to sound boring." I'm like, "What is the most boring application of these cards I can think of? A-ha, expense reports." That's actually how I got into it. I'm like, "Yeah, forget all that. This is going to be a card that business owners give to their employees. They can specify spending limits on it and then every purchase made by the employee goes back to the business owner's credit cards so they can get the miles."

David Barrett:

It's the same exact technology, but presented in a way that banks could understand. They're like, "That sounds safe and boring. I hate my expense reports too." I just kept saying yes to everything. They're like, "This sounds great. Do you export to my accounting system?" I'm like, "Yes, of course I do."

David Barrett:

"Does it scan receipts?"

David Barrett:

"Yes, of course." I just said yes to everything. People seemed to really like this expense reporting system. I should just do that. That's how I got into it.

Michael Hainsworth:

It's funny you say the phrase the really appeals to me as someone who he himself has jumped into the entrepreneurial waters. I've considered a lot of my success to come down to saying yes to everything. That's exactly what you did.

David Barrett:

I completely agree. I mean, there's the whole sort of attitude of collaboration. It's the being a, "Yes, and," versus a, "Yes, but," person. I mean, I think in so many cases people are obsessed with experts. It's like you want to always hire the expert. You don't have to reinvent the wheel sort of thing. But if you can't invent a wheel, why would you think you could invent anything better?

David Barrett:

I think that the problem with experts is they can only be an expert in the past. No one's an expert in the future. If you want to be able to figure out the future, that means you need to just get comfortable with learning and making mistakes and your own. I think definitely just moving forward and just charging forward without really waiting around for permission or really asking the best practice, just charge your own path and figure it out as you go.

Michael Hainsworth:

That was one of the most interesting things I learned early on about the entrepreneurial world is that the word mistake is not a bad word.

David Barrett:

Oh, yeah. In fact, I was talking to one of my teammates today. She was asking about like, "This particular thing, it didn't work out as we thought it was. Would we count it as a failure?" I'm like, "That's interesting." I don't think about the idea of failure. If you're climbing a mountain or something like this and you're climbing up, you're moving, you find a different path, you're exploring and eventually you find a way to the top. Was there any specific step that was a failure?

David Barrett:

It's like, well yeah, maybe not all of them went exactly where we wanted them to go, but in the grand scheme of things, everything's just moving forward. I think this idea of mistakes or failure or all of this, I don't know if they really make sense to me. So long as in the aggregate you're always moving forward, these are just lessons learned.

Michael Hainsworth:

We've got start-up, growth stage and late stage. Since you were founded in 2008, you're well past the start-up stage. What's the difference as far as you see it from going from that start-up phase to growth?

David Barrett:

First, I would kind of challenge that framing because that suggests a start-up is just a matter of age. I think it's more of a matter of attitude. It's like, do you think your best days are ahead of you or behind you? I think that our best days are definitely ahead of us. I think we are every bit as innovative or start-up-centric as before.

David Barrett:

Certainly in Silicon Valley, I think there's sort of this mythos that a company starts off, it's a couple, kids and garage, things are really awesome. But then eventually you hire some older people and they bring in the experience. Sure things grow, but things slow down. It's not as fun. You get a board in place. Then they make a bunch of sort of boring decisions. The business grows, but all the innovations behind it and all your best people leave. There's kind of this notion of like start-up entropy where you start off really dynamic and then you end up just kind of really boring.

David Barrett:

I've really pushed back on that. I would say that only happens if you let it happen to you. Gross profit is not the same as net profit. Expensify is actually profitable. We put cash in the bank every month. As a result, we're not really beholden to the Silicon Valley sort of norms that you always just have to be raising money and spending money and so forth. We just control our own destiny. That means that we can hire who we want. We can grow how we want. As such, I think that we have far more control and a far greater appetite for risk now than ever before. I think from a start-up perspective, if it's tolerance of risk, if it's enthusiasm for the future, now is a much better time to be at the company than ever before.

Michael Hainsworth:

Yeah, but how many start-ups do you know that are profitable? I can't imagine there were a lot of two kids in a garage scenarios looking at you, considering you in their category.

David Barrett:

I mean, I agree they probably aren't, but that doesn't mean they shouldn't. This whole idea that start-ups can't be profitable, it's like, "Oh, yeah. Profit is anathema to growth." I'm like, "What are you talking about? The largest companies in the world are also the most profitable." I think people choose the wrong companies to model themselves after. Sure if you just model just after the start-ups out there that are just hemorrhaging cash than shocker, you're going to hemorrhage cash too. But I've always taken my inspiration from the real businesses that have been around for a long time and will be here forever.

Michael Hainsworth:

You didn't take on the big boys in the space when you launched. Venture capitalists might argue, "You should have been knocking on the doors of the fortune 500 companies." Tell me about the entrepreneurial strategy of finding big growth helping little companies.

David Barrett:

Actually I would say like most things, I wouldn't claim there's a lot of genius foresight into it. It's really just about paying attention to what's working, even if no one thinks it's possible. When we started off, we were going after the little guys just because that's all we knew. But because we were kind of the standard for Silicon Valley, some of our little guys became big guys really fast. We've always had a policy of we're not really going to go after anyone because we don't do any marketing. We don't do any outbound calling. It's 100% inbound. We just take whoever comes. Some of those companies just grew very large. As a result, we ended up building an enterprise product. We can support pretty much anyone in the Fortune 500 if we choose to.

David Barrett:

We found it's like, "Wow, we have this enterprise product that we just didn't really expect to build. Now we've got these large Fortune 500 companies reaching out to us." We're like, "That's great. We'll take the call." Problem is Fortune 500 sucks. That's just like a ton of work for very little revenue because it's so competitive up there. Everyone knows how to find them and everyone's competing for them. All of your margins just fall apart. As a result we were realizing, "Wow, we can just make way more money on a customer half the size in absolute dollars. Why would we talk to this larger customer that is just going to be so much work and require a tremendous amount of management and engineering and things like this. I can just get so many more customers and so much more raw cash at much higher margin by going for a mid-sized customer."

David Barrett:

I would say actually a mid-market to SMB is really our sweet spot because that's the place where classic business models kind of fail. I think that fundamentally the differentiation of Expensify is not just our functionality and so forth. I mean all of that will get copied inevitably. Our real long-term differentiation is how we acquire customers and that we do it in a way that is dramatically lower cost of sale or really has no cost of sale because we don't spend anything for customer acquisition. It's 100% organic.

David Barrett:

As such, we're able to reach parts of the market that no one else can. I think I kind of maybe have a different view of the market. We have something like 80,000 customers. Let's say the sum of all of the competition combined has maybe another 80,000 customers. Let's round up. Let's call it maybe 200,000 companies in the entire world use any form of expense management. But there are 20 million businesses in the US alone. I think that every single one of these businesses has some kind of expense problem because every business has expenses, not all of them have revenue. Certainly most of them don't have profit, but all of them have expenses. Literally every business on the entire planet has this problem in a vanishingly small fraction, it's scratching the bare surface is the entire expense management industry so far.

David Barrett:

When we went into this industry, we're like, "Why is everyone so obsessed with these incredibly unusual and low-margin customers at the top when 99% of the opportunity is actually very simple, has very basic repeatable requirements and is willing to pay an insanely high margin to get it?" No. I just think everyone's missed the boat on the big opportunity because they have a business model, or more importantly a customer acquisition model, which is focused on just the Fortune 500 because those are the people that are easy to find. They get to look a bit harder and have a business model that can reach the rest of the market if you want to capture the rest of market.

Michael Hainsworth:

You said something interesting back there. You said at the SMB level, the small to medium-sized business level, classic business models fail. What do you mean by that?

David Barrett:

I would say there's a huge gulf between consumer acquisition and enterprise acquisition. In fact when I got into this space I'm like, "Oh, I'm going to do expense management." Everyone's like, "Oh, I know exactly how your business is going to go. They're going to put together a commission-based sales force who's going to go out beat on the doors of the Fortune 500. They're going to lock in a three-year contract for large commission, which is going to go into a large product management organization for the multi-year commitments you're going to have to make. That of course, it's going to be handed over to a large account management team who is just going to try to land and expand over time. Your entire business model is completely predictable."

David Barrett:

I would say literally every one of our competitors is trying to follow that same model. As such, they're all advertising in the same places for the same economics. They're all hiring and trading back and forth the same salespeople. Everything about their business is exactly the same, the economics, the engineering, the strategy, everything. I don't know how you can disrupt an industry by literally exactly the same as everyone else.

David Barrett:

Our approach is very different. We don't advertise. As a result, we don't have a business model based around salespeople. We don't have any sales people. We don't actually do any outbound calling. That means we have no commission structure. Without a commission structure, that means we aren't doing multi-year contracts. 90% of our revenue is just month-to-month on a credit card. As a result, we don't have to lock people in, oversell the product. We just build our product and then people just buy it.

David Barrett:

This means that the customers that we have are largely self-service. They actually don't have any sort of commitments from us. We just build and release when we need to. It makes for a completely different internal structure for the company. As a result, this means that we have vastly higher margin than everyone else. We're insanely profitable and growing faster than everyone else with more customers than everyone else. This is only possible because our business model is so different. If it were possible to do by just tweaking a few of the variables by one of the existing business models, I'd say any of our dozen or so competitors would have figured out that that mix of knobs. But, no. We have a completely different machine which produces a completely different result.

Michael Hainsworth:

Did you go into that deliberately? Did you build the business saying, "I've looked at the traditional way of building a business model for a company. Everyone else is going to do it that way. We're going to go about it a different way."? Or did you just sort of start putting the pieces together over time and then you step back and you realized you had something unique?

David Barrett:

It's definitely the latter. I mean, it's easy to look back in hindsight and be like, "I did all this research and studied things and figured out the opportunity and went after it." No. It didn't work like that at all. As I mentioned, I didn't intend to make this business.

Michael Hainsworth:

Right.

David Barrett:

The only reason I did it was because people were so excited. At this conference, I can't tell you how many just strangers came up and just gave me creepy hugs. They're like, "You're going to save me so much time." I was like, "Really? Why? Just tell me what is it you think that I'm doing and why do you care so much?" I actually talked to, I don't know, a couple thousand business travelers. They're just like, "I hate all of the options out here is so bad." You're like, "Why do you hate it specifically?" I realized there was so much pain on the business traveler. I'm like, "I could solve that I guess. I'm an engineer. I could just build that."

David Barrett:

Then I talked to all the experts. They'd be like, "What are you talking about? This is never going to work. When are you going to hire your sales teams to go after the CFOs?" I'm like, "I don't know. I'm just going to sell straight to employees."

David Barrett:

"How does that work? Because employees don't choose their own expense management." I'm like, "It just seems like they're using Excel or really nothing at all. I mean it just feels like they're willing to buy." They're like, "That's crazy. People are going to get fired if they try to do it." I'm like, "I don't know. It doesn't seem like people are getting fired. It just seems like it's working." It's only after quite a long period we sort of realized why it was working. I would say expense management is insanely viral, but only inside the company.

David Barrett:

Every time you submit an expense report, you put us in touch with someone more important than you, like your boss, your finance department and so forth. Then with the advent of the mobile app stores, Expensify is a truly free app for employees. We don't pay the app store tax or anything like this. As a result, we managed to convert through a free app, the mobile app stores into a zero marginal cost lead acquisition mechanism to employees that feeds into an incredibly viral bottom-up adaption dynamic straight to the CFO and does it all at massive scale. So like an unusual start-up, we're like on day one we've always been absolutely flooded with leads. As a result, our challenge is not top of the funnel. Our challenge is how do we convert this massive swell of leads that are always coming to us.

David Barrett:

I think that because we didn't have the same problems as most companies where they're just begging to be noticed, we had such strong word of mouth from the earliest days that it was about how do we just convert and capture what we already have. I think that's something where while trying to like talk with others. It's like, "There's no possible way this could work." Usually it's like, "Okay, that's cute. This is a really cute model that you have here. That works up to like $100,000 a month, but not to a million." Then we get to a million. "It doesn't work to like 2 million." It keeps going up doubling again and again and you realize, "I don't know. It just kind of seems like it works forever."

David Barrett:

Maybe at some point people have to start listening to the businesses that are actually making it work in practice and just accept that it's possible that all the best practices that we have around how to sell maybe aren't the only story. Especially because everyone talks about like, "Enterprise sales has always been exactly like it's being done right now."

David Barrett:

It's like, "No, it's not." I mean, the whole idea of SaaS businesses didn't happen until Salesforce. When Salesforce came onto the scene, they were just viewed as idiots. It's like, "Wow. How could you possibly sell products like this without an established sales force, a regional salesforce?" I'd say again and again, "The whole notion of selling is a very innovative space. Innovation happens over the course of decades necessarily not in years." People tend to forget that just because this is all being done in a particular way right now, it doesn't mean that it was always done that way and certainly does not mean that it's always going to be this way.

Michael Hainsworth:

All right. Clearly you didn't go to MBA business school class 101. Let's throw out the lessons of business 101. Let's find out if you threw out the lessons of business 201? How much of your time did you spend building the company versus schmoozing and acting as an ambassador for the company and raising money?

David Barrett:

As far as time spent schmoozing, I would say the most important lesson that I learned from that period is become profitable. Until you're profitable, you are always beholden to the next investor. You just don't control your destiny. From the very earliest days when I sat down to build Expensify, I sat down to build a company that could get wildly profitable. Because all of the stuff that I wanted to do depended upon having a ton of money and a great team of people to spend it with. Yeah, I'd say raising money was a part of it, but now all I'm doing is spending every moment of my time trying to buy back shares from my investors. Because now we're profitable I'm like, "That's cool. You were there for a period, but that period is over and I'm never going back."

Michael Hainsworth:

Tell me about that though, because you've raised more than $26 million in financing if my back of the napkin calculations are correct. You are an expert in raising cash.

David Barrett:

No. No. No. No. First off by Silicon Valley standards, that's nothing. It's a pittance. It's a truly embarrassing number. People are shocked at how little we have raised. Usually people are raising and kicking off like multiple hundreds of millions of dollars to get to where we are. We're like, "No." The vast majority of our business is built through profit and through the money that we actually earned, which makes for a very different company culture. Now when it comes to raising money, I'm terrible at it actually because I don't know how to spend it. More importantly, I'm too honest about the fact that I don't really need it.

David Barrett:

Because I'd have conversations early on with investors. I'm like, "I'm going to raise this money is going to be great". Like, "What are you going to spend it on?" I'm like, "Well, I don't know, maybe advertising." They're like, "Why you haven't advertised to date? Everything's growing, why would you advertise?" I was like, "Yeah, maybe I'll spend it on this other thing." They're like, "Why? Engineers don't cost that much." In the end, I could just never really convince anyone that I needed the money. Therefore, I didn't really raise that much. Lo and behold, I didn't really need it in the first place. It's cool. I'm glad that we've raised so little money. It's amazing.

Michael Hainsworth:

Then why was the debt facility from CIBC a logical step?

David Barrett:

Debt and equity are very different things. It's funny. In Silicon Valley, profit is anathema. Basically, it's like it's a heresy. It's basically like profit is viewed as just missed opportunity. What I would talk to investors about trying to make a profitable business, I would just get blank stares. People would literally ask me like, "Why? Why make a profitable business?" Forgetting that the point of business is not just to sell equity. The product I'm trying to sell is not Expensify as a company, but Expensify as a product to individual customers.

David Barrett:

I think first off we just got profitable just because I'm like, "I want to own my own destiny." But now that we're profitable, I realized, "Wow. Profit can be leveraged through debt in a super-powerful way, in a super non-dilutive way." CIBC for us was fantastic. I mean, we talked with a number of different debt providers. I think we just really hit it off with Paul. They've just been so incredibly flexible for finding different covenants and terms and just really understanding what we're trying to do with the business and really finding a to make the numbers work. Debt is fantastic. Equity I could do without, but debt is fantastic.

Michael Hainsworth:

You've been programming since you were in the first grade?

David Barrett:

Yeah, yeah. I started when I was six back in the ... you might remember the Radio Shacks would have those Tandy computers.

Michael Hainsworth:

Oh, yeah.

David Barrett:

We'd go to the mall, my parents would drop me off at the Radio Shack. They'd go shopping. They would come back and I'd have like this little bat flying around the screen or something like this. But yeah, I started when I was six, computer graphics and video games. Throughout middle school and high school I was writing 3D graphics engines. I worked in the virtual reality lab at the University of Michigan. Then I got into the game industry in Texas for a truly while. I did a voiceover IP, video conferencing, screen sharing, and then ultimately PDP content distribution with [Red Solution 00:24:29].

David Barrett:

Most of my technology background is hard technologies, really, really difficult sorts of things. It's an unusual profile for the expense report magnate that I'd become.

Announcer:

Learn more about the innovation economy, how to build a minimal viable product, retain that entrepreneurial spirit in the face of growing head count and how to take your company global. Subscribe to the CIBC Innovation Banking podcast with Michael Hainsworth at cibc.com/innovation banking.