Skip to main content

Mike McDerment, founder and CEO of Freshbooks

COURTESY OF FRESHBOOKS

THE CHALLENGE

How do you enter a market that already has an entrenched major player?

That was the challenge facing Mike McDerment in 2003, when he founded Toronto-based FreshBooks, a company that provides accounting  software for small businesses.

Story continues below advertisement

Intuit Canada's QuickBooks already had most of the market sewn up and dominated the shelves at big retailers.

"That's the question that kept me up at night," Mr. McDerment recalls. "Everyone kept asking how I was going to compete with them. They had all the distribution channels sewn up. How could I even get my product out there to become known?"

THE BACKGROUND

Prior to starting FreshBooks, Mr. McDerment was a self-employed Web professional whose income depended on prompt and accurate invoicing.

He was dissatisfied with existing products on the market. He felt they did lots of things that he didn't need, but didn't do the things he did need and want.

So, in 2003, he started to build software that met his own invoicing needs. After a year, he thought he had a product that was ready to launch.

He knew that it might be a long process to get traction in the market against a giant competitor. So he moved into his parents' basement.

Story continues below advertisement

It was a long process: He stayed in their basement for three and a half years. During this time, he got lots of advice about how to compete against the Goliath, but little of it resonated with him.

For example,"someone told me that the only way to gain a presence in a dominated market like this was to partner with another giant, such as a big telephone company. But I couldn't imagine how I could get that to happen. Why would a giant telco partner with an unknown startup?"

THE SOLUTION

Instead, what Mr. McDerment did was focus on who and what he knew: IT professionals just like him, who also wanted easy, painless invoicing.

He didn't go head to head against the dominant player in the industry because he couldn't. Instead, he deliberately did two things very differently from them.

"First, I didn't try to offer everything the incumbent offered. I sliced off invoicing, which is a small piece that I knew I could do better. Invoicing is also something that small-business owners care a lot about because it affects when they get their money."

Story continues below advertisement

It took some time to get traction. "I think we had about 10 customers paying $9.99 for two years," Mr. McDerment laughs. "I had to keep a consulting business going on the side to make ends meet."

Still, a narrow focus and targeting a customer group that he himself was part of enabled FreshBooks to establish credibility within a familiar market.

The second thing Mr. McDerment did differently from the incumbent firm was to bypass retailers altogether.

"My software is cloud-based, and that's a great fit with the IT professionals who were my first target market. They're on the Internet all the time and get its potential, and want the mobility that cloud-based software provides."

That was a smart decision. Not only was a cloud-based platform consistent with societal trends toward mobile computing and smart phones, it also allowed Mr. McDerment to target a global market from the get-go. There were no cross-border issues, and he didn't have to convince distributors and retailers in foreign countries to give him shelf space.

THE RESULT

Story continues below advertisement

Mr. McDerment's startup tactics for differentiating against a giant incumbent worked.

FreshBooks' customers now include many kinds of small businesses and self-employed people.

"If you pick one vertical and do it well, other folks will find you. From a narrow niche of IT professionals who were our early target market, we now have a wide variety of customers. We are particularly focused on service-based businesses, where people – including butlers, bakers and dog walkers – are paid for their time and expertise, and whose needs are not particularly well -met by generalized accounting software."

Freshbooks now has five million users who have collectively invoiced $8-billion this year, Mr. McDerment says. Customers are in 120 countries, 60 per cent of them in the United States. Freshbooks now has 110 employees. And Mr. McDerment has moved out of his parents' basement.

Special to The Globe and Mail

Becky Reuber is a professor of strategic management in the Rotman School of Management of the University of Toronto.

This is the latest in a regular series of case studies by a rotating group of business professors from across the country. They appear every Friday on the Small Business website.

Join The Globe's Small Business LinkedIn group to network with other entrepreneurs and to discuss topical issues: http://linkd.in/jWWdzT

Our free weekly small-business newsletter is now available. Every Friday a team of editors selects the top picks from our blog posts, features, multimedia and columnists, and delivers them to your inbox. If you have registered for The Globe's website, you cansign up here . Click on the Small Business Briefing checkbox and hit 'save changes.' If you need to register for the site,click here .

Report an error Editorial code of conduct
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter