Well-Funded Competition Forced VC-Free FreshBooks To Take Investors After A Decade Of No's

Alex Konrad for Forbes writes: For twelve years, Mike McDerment has run FreshBooks out of Toronto to be self-sufficient. But when your market gets hot, you don’t want the smallest war chest. So even as FreshBooks announced its first major funding round today, it’s decision to take venture capital after years of growing on margins shows just how fast the market environment can change–and why the benefits of going it alone can become less attractive fast.

FreshBooks raised $30 million, it announced Wednesday, in its first institutional round from Oak Investment Partners, as well as Atlas Venture and Georgian Partners. The money’s supposed to help the company grow at a faster clip, expanding what’s currently a team of 150 to 400 in the next two years. They’ll help with engineering and sales and marketing. All that’s pretty standard as a use for funding.

But since raising $100,000 from friends and family when the company first started, FreshBooks and its CEO have eschewed venture backing. In the fall of 2012, McDerment told Bloomberg that while he had no specific rule against taking funding, venture investors didn’t have much appeal to him. VCs build a portfolio with a few bets, they look for patterns and ways to improve a company’s operations, and they expect an eventual return. And he was adamant that any investor in FreshBooks would need to be one that wouldn’t take stock with liquidation preferences that would allow them to cash out even if the company tanked.

Fast forward to 2014, and McDerment’s taken on the growth capital he was loath to consider before. What’s changed? Venture funding begets more venture funding.

By selling software to small businesses to help entrepreneurs and shopkeepers who are not professional accountants run their businesses and manage their expenses, FreshBooks has long gone against QuickBooks and its parent Intuit INTU -0.1%, a company with a market cap of more than $23 billion. FreshBooks’ user base of 10 million is centered around North America, and while it may now look more internationally, that’s allowed fast-growing competition to set its sights on the U.S.

The lead challenger, as McDerment knows, is a New Zealand company, Xero. That company’s got more than 200,000 paying customers already, and most importantly, it’s setting its sights squarely on the U.S. market. Back in October, Xero raised $150 million of funding of its own, the majority of it from U.S. investors led by Matrix Capital Management and Valar Ventures, Peter Thiel’sventure firm focusing on companies from outside the U.S. Valar’s mission is specifically to help such companies expand aggressively stateside. [snip].  The article continues @ Forbes, click here to continue reading...

You can follow the author Alex Konrad on Twitter here.  Alex writes startups, enterprise software and venture capital.