As they approach the break-even point, Ed Molyneux and the small team behind the UK-focused FreeAgent Central online accounting system face a big decision this spring. Should they pursue the organic growth route that has taken them this far, or seek investment to pursue a more aggressive growth strategy?
"Is this about software or is it about channel?" he ponders. "If it's about the channel, the faster you get into it and stop other people gaining a foothold, the more likely you are to do something really big." Focusing more on the software might mean playing second fiddle to someone else, while external investors would expect the company to plan a strategy for global domination - much like the one being put in place by New Zealand-based rival Xero.
Molyneux admits to considering the venture capital option, but says: "We're not throwing ourselves at it. If you don't need their money, they're really keen to give it. But when you do, they're very cagey."
Product philosophy
FreeAgent's ease with staying small comes from its close identification with the microbusiness market it serves. "We all came from freelance and accounting backgrounds and what's in the product comes from that," Molyneux says.
With 2m freelances and small service businesses in the UK, it's not a bad niche to target. FreeAgent's unique selling point, according to Molyneux, is that it has built a comprehensive online accounting and tax compliance system that caters for end-users rather than accountants.
The default FreeAgent home page displays an overview screen made up of a collection of screen widgets, including a mini profit & loss table, with a summary "distributable reserves" figure at the bottom showing in theory how much the user could extract from their business after tax has been paid.
But the program's star feature is a timeline linked to an accounting and tax calendar. The timeline tells users when they are going to next have to deal with tax liabilities - and how much they will be. Users can subscribe to their FreeAgent timeline from their Google Calendar or Microsoft Outlook.
Molyneux admits the FreeAgent developers went down a "painful road" to get to the Holy Grail of the timeline, but in retrospect he's glad they put in the extra effort. "The bookkeeping stuff is dead easy - that's why there are so many online accounting systems coming out," he says. "To get to the tax timeline we had to do things around the accounting model - and that's a barrier to entry."
Having formed in February 2007, FreeAgent put the prototype version into the public domain within six months and launched the product in November. All this was done by the three-strong team backed with a £100,000 investment. Through 2008 FreeAgent's growth was "linear", according to Molyneux. But now it is beginning to see a surge in its user base, with monthly growth rates of 40% between January and March 2009. Many of its early users were beta testers who were lured with the promise of six months' free use.
"The downside of SaaS economics is that it can look good with 35,000 on board, but if only seven are paying £20, it can be a long road before you show a profit," he says.
Like many online bookkeeping systems, FreeAgent's growth strategy is based around developing partnerships with accountancy firms that will bring their clients on to the online accounting system. Deals have been tied up in 2009 with London-based Blevins Franks, and Upton & Co from Wakefield in Yorkshire.
As part of the arrangement, Blevins Franks has launched a monthly accounting service that will cater for 300 within the FreeAgent system.
Around half of Wakefield & Co's 700 clients, are likely to come across to FreeAgent from other accounting software systems. The bulk pricing deals that underpin these partnerships represent the developer's "first big step towards paying the bills", Molyneux said.
The partnership relationships were in place by Christmas 2008, but they have taken some time to start showing returns, Molyneux explains: "Either it's an 18 month sales cycle or the time is now right and people can see what we're doing. They can see there are proof points there."
Growth will come from niche focus
Aside from taking care of the requirements of its accountancy partners, FreeAgent is basing its expansion plans on building out the freelance functionality rather than "building up into generic small business accounting system", Molyneux explains.
"The engine we built to do this is getting better all the time. We're doing stuff on the timeline and exposing it through things like a visual bank accounts summary to project a cash flow. Because we are modelling each individual transaction and tax liability and what impact they have on cash, this can go down to daily granularity."
He concludes: "We're happy sitting where we do because the scope of what we offer can be so much broader. If you're an online player with aspirations about moving up the chain, you'll never do all this because you can't do it for mid-size firms."
In FreeAgent's view, bringing its niche Cloud accounting application to market is not just about the channel. "It's about continuing to build clear view water between us and competition who's following," argues Molyneux.
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