In North America there are something like 26 million small businesses which have two things in common: they are small and most of them are admittedly inept at handling the accounting side of their businesses, says Wave CEO Kirk Simpson.
“The reality is that when you just take a quick look at the market, 40 to 60 percent of SMBs are sitting on the sidelines when it comes to managing the books,” Simpson observes. The best case is that they are handing it off to an accountant or bookkeeper. But a lot of the time they’re using nothing at all except for an Excel spreadsheet, a shoebox filled with receipts and a collection of word documents.”
The opportunity, therefore, to help is there – and seems an enormous one at that. But, Simpson notes, it’s unfortunately one that’s not finger-snappingly simple to dial into. Most of these businesses are very small — fewer than 9 employees and less than $2 million a year in revenue. They are also, he notes, a staggeringly diverse group of merchants that span any number of business set-ups and so need slightly different accounting solutions.
But, he notes, they all share a singular problem – what exists in the market today to help them, doesn’t.
“It’s very hard to be successful if a business is flying blind with respect to its financials. And a lot of them are,” Simpson observed. “Traditional accounting software is not well-tailored to their needs. So they either don’t use it, or they use it very sporadically for two weeks at the end of the year when they are trying to reconcile the books.”
Wave thinks it can fill that void, and since late 2010 has been slowly but surely spreading its wings with an SMB accounting and invoicing system that SMBs can actually use that gives them better control of their financial lives. As of this week, that control now extends to using the platform for access to credit underwriting as Wave has announced a new strategic partnership with OnDeck.
So how does it all work — and why does the team at Wave think they have the secret SMB finserve sauce?
Beating Back The Bloat
The problem with the accounting software on offer for most small businesses isn’t that it is bad, notes Simpson — it’s just that it is much more involved, expensive and complex than what smaller firms need.
“The traditional providers have tried to build a tool that will satisfy the needs of a micro-business owner as well as a medium sized business, so it is bloated and is filled with stuff that a typical SMB owner will find too complex or won’t use at all.”
So Wave went another way.
“We decided to get after those micro-businesses and get them the off the sidelines with free software that is tailor-made for them and is easy to use — in a language created for them to understand.”
And no, you didn’t read that wrong — Wave’s basic software offering is free. No paywalls, and no limits on the main service areas it offers: invoicing, credit card processing, core accounting (merging all accounts into a single reported data stream) and payroll services. Wave is not a charitable organization — it does seek to make money, but it looks instead to the other financial services its software platform allows to do so.
“We embed financial services deeply into the software, and our goal is to have SMBs consume those services through use. That, over time, makes it very easy to run their business on top of our platform.”
And while giving away one core innovation might not sound like a brilliant way to make money, Simpson notes that it’s the best way to give these micro-SMBs what they need – and Wave a runway to make money a different way.
Rethinking The Segment
The SMB market — particularly because of the very small companies — is just hard to serve for providers, Simpson notes, because it is hard to make the math work out.
“It’s been very, very challenging to serve this market because their cost of acquisition to their lifetime value is out of whack,” Simpson noted. “That is true for alternative lending providers, it is true for banks, it is true for payment processors. These companies report it costs $600 to $1000 dollars to get an SMB customer.”
Wave’s cost of acquisition, on the other hand, is just about zero — it is signing on customers as fast as it possibly can. According to Simpson, Wave signed on an additional 62,000 customers last month, most of which found it through organic search and word of mouth.
By giving away the software for free, Simpson says that his company is able to develop a relationship with the customer that gives Wave visibility into how that business is performing like no other provider can. Simpson said that Wave has data on customers’ invoicing, their accounts payable, their accounts receivable — all under its purview and stored in its cloud. A cloud, Simpson said, which also includes many other financial services that can be served to those businesses as needed – and on demand.
Services like Wave’s newest core feature — a tie-in with SMB lending platform OnDeck.
Going forward, users of Wave’s software platform will notice that a new tab has appeared — one that says Lending By Wave.
In its earliest iteration, clicking that tab will allow a small business to complete a few pieces of information about the business (size, age, revenues) and get a few preliminary quotes before a “warm hand-off” back to OnDeck’s site to finish the underwriting process.
Simpson said the the pair-up was a natural fit, given that access to working capital is a central issue for their small business customers — and OnDeck is a uniquely focused partner used to offering those services at scale.
“What we love about OnDeck is its focus on this category. It isn’t trying to both do small business and consumer loans — it is entirely focused where we are,” Simpson noted. “It also understands that small business have very different requirements, which means the benefit of being able to do both a term loan and a line of credit within one partnership is really valuable.”
It is not easy being a small business in America – especially when most of the solutions on offer don’t quite fit the needs of a classic small business.
But solutions need to be found, and Wave thinks the way to do that is to redefine what the table stakes are — and then give small businesses access to other services as their needs mature. It’s not without risk, considering it is giving its core product away to businesses — many of which, statistically speaking, won’t make it. But, Simpson and Wave hope that small businesses will, well, catch the Wave — and ride it all the way to a healthy financial future.