Surging Toronto financial management software startup Wave Accounting Inc. has landed a $24-million (U.S.) venture investment led by National Australia Bank (NAB), Royal Bank of Canada and Power Corp. of Canada's venture arm Portag3, and revealed it's in talks with the two banks to embed their banking services into its offerings to its 2.5 million small-business users.
Chief executive officer and co-founder Kirk Simpson also said Wave, which is more than doubling revenues annually and generated close to $20-million (Canadian) last year, could be ready to go public by the end of 2018 if its expansion pace continues. "It will come down to the question of, 'Is it the right thing for the company'" at that time, he said.
Wave, which previously raised $54-million (U.S.) from venture financiers including OMERS Ventures and BDC Capital, started in 2010 by offering free cloud-based accounting software to businesses with fewer than 10 employees. The idea was to provide an alternative to their typical method of handling finances, which Mr. Simpson categorizes as a combination of using Microsoft Word and Excel and "shoebox" accounting. "We knew if we could get significant adoption of the product there would be many different ways to monetize," he said.
Wave amassed users quickly and inexpensively – typically for less than $1 each, compared with typical customer-acquisition costs in financial services of hundreds of dollars apiece. "Every fintech is trying to solve for scale at the lowest customer-acquisition cost and these guys are signing up more than 60,000 customers a month … at unbelievably attractive unit economics," Portag3 president Adam Felesky said.
Wave initially generated revenue by selling advertising within its platform. It later offered fee-based money-movement and payroll services, invoice issuing, tax remittances and online loans through a partnership with U.S. upstart OnDeck Capital Inc. About 80 per cent of Wave's revenues come from the United States and 15 per cent from Canada.
"The company has come a long way," said Damien Steel, managing director with OMERS's venture capital arm, which made the fund's inaugural venture investment into Wave in 2011. "Wave has really keyed in on the specific needs of these small businesses and tailored its products to them."
Wave is hoping to build on that after signing a letter of intent to partner with Royal. The proposed deal would see Wave embed RBC's small-business-oriented financial-services offerings to its customers, while Royal would act as a distribution and marketing channel for Wave to the bank's 650,000 small-business customers. Wave is negotiating with NAB for a similar deal.
Such deals would provide better distribution to customers that are harder to reach in Canada and Australia than in the more competitive U.S. market, while providing an opportunity for the partner banks to deepen their relationships with customers who have been wooed by upstart fintech competitors.
"It introduces a series of new capabilities that we can put forward to our small-business customers, giving them a more complete solution," said Mike Dobbins, RBC's head of strategy and corporate development. It also marks the continuation of a trend that has seen fintechs including Borrowell Inc. and Wealthsimple Financial team up with financial-services heavyweights, including Canadian Imperial Bank of Commerce and Power.
"The accounting platforms are becoming the first place small business goes to," Mr. Felesky said. "It makes sense banks want to integrate and be the banking solution. It's all about incumbents finding a new customer base at an attractive acquisition cost they wouldn't necessarily be able to target in an efficient way."
Added Mr. Steel: "My expectation is banks partner more and more with companies like Wave."