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Hubdoc acquired by Xero Ltd., putting it right in Toronto-based Freshbooks' walls

What happens when a competitor from across the world moves into your backyard? That’s the new reality for Freshbooks, the Toronto-based cloud accounting firm.

Back in April, the document-data-capturing startup Hubdoc subleased space in Freshbooks’ Dupont Street offices. But last week, after barely four months in those offices, Hubdoc announced that it had been acquired by Xero Ltd. – another leading cloud accounting firm – putting the New Zealand-based, Australia-listed company right within Freshbooks' walls.

Freshbooks and Xero frame themselves as serving different target markets – the former aims for small-business owners, Xero for accountants with broad client lists – but overlap with services such as invoicing and financial reporting. And they have little problem chasing each others' business: Freshbooks has even published a web page arguing why it’s better than Xero.

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Hubdoc fits right into the cloud accounting world: It scans financial documents, such as bills and receipts, to extract necessary information to make work more efficient for accountants and bookkeepers. Its founding co-chief executives, Jamie Shulman and Jamie McDonald, are celebrating the US$70-million sale to Xero as an opportunity to scale faster globally from their home base in Toronto.

Luckily, executives at both Freshbooks and Hubdoc are laughing it off as a happy coincidence.

“Is it a bit ironic that Xero bought them when they were sitting in our building? For sure,” says Mark Girvan, Freshbooks' chief commercial officer. “But if you looked at their business model ... that was a logical place they would end up.” As Mr. McDonald sums it up: “We’ll definitely have laughs with Mike and Levi over beers in the next couple weeks," referring to Freshbooks co-founders, Mike McDerment​ and Levi Cooperman​.

The incidental encroachment is, in part, a reflection of what can be a tight-knit tech scene in Toronto. Earlier this year, Freshbooks had access to extra space in its building, but didn’t need it yet, and saw an opportunity to host a company it saw potential in that aligned with its accounting focus.

“If we’re going to grow this Toronto tech scene, we need companies that are thinking globally and thinking scale,” Mr. Girvan says.

Mr. McDonald and Mr. Shulman – occasionally referred to as “the Jamies”– have known each other for decades, and previously co-founded another startup, Sparkroom, a marketing-strategy company. They launched Hubdoc in 2014, and while it had connectivity with Xero’s accounting platform early on, first sought to grow it with venture capital, including a $6-million seed round in 2017 led by BDC IT Venture Fund and Bruce Croxon’s Round 13 Capital.

“It is one of those rare companies where its customers truly love the product,” says Greg Barnes, principal at Hyde Park Venture Partners, which participated in the raise. “Hubdoc’s focus on building something their customers love is a key ingredient in their success.”

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Looking to raise more financing this year, the Jamies entertained another investing round, but had long been discussing a deeper partnership with Xero. In the past six months, “they expressed an interest in going further,” Mr. Shulman says.

Xero is publicly listed in Australia, where it has a market capitalization of 6.3-billion Australian dollars (about $6.1-billion), and has deeper market penetration than in North America. It faces off regularly with local company MYOB Accounting for market share there, though frames itself as a more globally focused player. Australian short-seller John Hempton wrote this week that Xero had potential to become a “global tech behemoth" worth 100-billion Australian dollars.

Luther Poier, a Canadian-born, Sydney-based tech watchdog who runs the venture portfolio for one of Australia’s largest startup accelerators, BlueChilli, says Hubdoc is a strong fit to help Xero expand within Canada. The machine-learning technology Hubdoc uses, he says, “will really help Xero, but it is still behind on the e-invoicing revolution that is arriving in Australia and the UK now. Nonetheless, it is a smart move to build the data set while those newer technologies develop.”

Xero has U.S. operations headquartered in Colorado, but only launched in Canada in May with a handful of employees. Its market research suggests only 9 per cent of Canadian small businesses have adopted cloud-based accounting tools, which it sees as a huge opportunity. While Hubdoc will effectively operate independently of Xero for now, the companies don’t suspect both teams will fit in Hubdoc’s Freshbooks space.

“I think the long-term plan will be to co-locate,” Mr. McDonald says. “There will be a a lot of collaboration on the Canadian market, and longer term, we’ll build development teams that support the broader Xero platform as well.”

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