Wave Nabs Funding–On Free vs Paid

The other day SaaS Accounting vendor Wave announced that it had just closed $5 million in funding led by well respected VC, Charles River Ventures. While yet another vendor raising a series A wouldn’t usually be cause for comment, this is an interesting case in that Wave, as I’ve written about before, is a free application. Not a vendor utilizing a freemium model but rather a vendor that has flipped traditional business models for accounting software on their head and is offering its product for free and monetizing by offering customers deals with particular partners. This is a model that Mint popularized and one that is well proven in the consumer space but is more rare in the business sector. In terms of delivering those offers, users of Wave see a section called “Business Savings.” This screen gives targeted offers for business-related needs things like business printing, banking, web hosting etc.

Given the funding round it seemed timely to reflect a little on what the emergence of Wave means for the business models of companies targeting SMEs

Traditional Approaches

Led by vendors Sage, MYOB and Intuit, the traditional approach to SME accounting products is to have a dual sales strategy. These three customers all sell boxed software through traditional retail channels but also have an extensive partner network where accountants, bookkeepers and other professionals on-sell their software – either for commissions, margin or as a service backed offering. This has traditionally been an excellent approach, it leverages SMBs trusted advisers and the reach of High Street retailers.

A move to cloud computing however makes this traditional channel difficult. Retailers have difficulty understanding the concept of selling a fully virtual product (as an aside I know of some vendors who actually sell SaaS licenses in a box just to make customers feel they’re buying something real). At the same time professionals are wary for two specific reasons;

1. They tend to be highly conservative and are unwilling to move from a product they know and trust
2. Cloud has the potential to reduce the traditional areas that practitioners have been able to monetize their service, practitioners are naturally nervous about that

Traditional meets Cloud

Led by high profile vendor Xero, but with significant players including FreeAgent, KashFlow and others, this method mixes cloud software with generally traditional sales channels. While most cloud vendors forego direct retail channels, they instead replace this with sales/marketing initiatives such as those shown by Xero who has a sales/marketing partnership with telco T-Mobile. Similarly FreeAgent has a partnership that sees Barclay bank customers being offered the FreeAgent product.

This strategy has paid dividends for many vendors – Xero boasts of 50000 or so customers while the less visible vendors are all clocking up numerous wins as well.

The Brave New World

While consumers have long been accustomed to receiving free services in return for targeted offers (be it via advertising with Google or targeted services from Mint) it is relatively rare in the business world. The proposition however is obvious – micro businesses are very cash poor and a significant proportion of them are likely to be happy to receive special offers in return for free provision of services.

I was pretty impressed to see that Wave is claiming that it already counts some 75,000 small businesses as customers, this only 11 months after its launch. Clearly the average revenue per user that Wave can drive from targeted offers is likely to be less than the subscriptions charged by the paid products. As such Wave is likely to need a much higher number of customers to generate sustainable revenues. That said however I have spoken to a number of businesses who have balked at the subscriptions being charged by the other SaaS accounting vendors. This along with the fact that Wave claims 50% more customers after 11 months than Xero has gained after four or so years – speaks to the potential of an entirely new business model.

Of course that’s not to say that Wave renders the other vendors obsolete – there is undoubtedly a place for a paid SMB accounting application, however Wave, by following both a new delivery model and a new business model, is well placed to become a very important industry player.

How Will Other Vendors React?

In theory there is nothing stopping one of the other SaaS vendors from delivering a low level free product. The reality however is that the investments they’ve made in chasing a channel strategy, and the basis upon which their business has been built make this highly unlikely. Rather I would suggest that another entrant will potential emulate Wave’s approach. The barriers to entry here are low and it comes down more to the ability of a vendor to build the relationships and momentum to gain traction. Wave’s 75000 customers and significant funding round will help get it that momentum.

(Cross-posted @ The Diversity Blog - SaaS, Cloud & Business Strategy)