No VC: FreshBooks CEO Sees Risk Capital as Too Risky

Photograph by Petrified Collection

FreshBooks says it has paying users of its Web-based accounting software in 120 countries.

This is the first in a five-part series called “No VC,” which highlights startups that have succeeded without venture capital, the lifeblood of Silicon Valley.

Mike McDerment was shacked up in his parents’ basement in Toronto when the first venture capitalist called. It was 2006 and the entrepreneur was in his fourth year of work on FreshBooks, Web-based accounting software he’d created for small businesses. His startup had a handful of employees and no salespeople, but it was getting enough market traction to merit a call from Insight Venture Partners in New York.

“They scared the hell out of me,” said McDerment. “I wasn’t ready for what they had to offer. It was about running sales and enterprise teams. We barely have a sales team today.”

FreshBooks, which now has 110 employees, is part of a rare breed of technology companies that has achieved success without the help of venture capitalists, the lifeblood of startups for the past half century. While the company doesn’t disclose financials, FreshBooks has paying users in 120 countries and its product has been used by more than 5 million people since its inception, McDerment said. The software is free for independent consultants and freelancers that have fewer than four clients. Paid packages start at $19.95 a month.

McDerment, 36, isn’t opposed to taking outside investment money. He raised about $100,000 from family and friends in the early days to go along with $30,000 of his own money to kickstart the business. He then brought in some angel investors that also act as advisers, though he won’t say how much they’ve contributed. McDerment said he’s just never gotten comfortable with taking capital from an institution that views his company as part of a portfolio.

He’s right to be concerned. Venture capital is known as risk capital, because investors are gambling on unproven technologies that often fail. Therefore, they make many bets and double down on the breakout hits, often ignoring or winding down the others. Yet, McDerment says the risk goes both ways. For him, the peril is that an investor comes in with interests that are unaligned with his own and those of his company.

For example, FreshBooks spends boatloads of money on customer support because that’s what keeps users coming back and encourages them to spread the word. An investor could see that as an unnecessary cost that could be outsourced or automated, McDerment said.

He also doesn’t want to sell the company or be forced to take it public before he’s ready, even if an investor needs the money back to shore up its own returns.

“I don’t want to deal with your problem,” McDerment said. “I’ve got enough of them on my own.”

McDerment has long since left his parents’ house, and earlier this year moved the company into an office near the University of Toronto. He still gets multiple calls a week from venture capitalists, including one the day before our interview offering to put in $25 million. He takes the calls and engages with investors, because there may be a time when FreshBooks wants or needs the money to scale faster or just add to its balance sheet.

At this point, he’s beyond the traditional venture phase and more in the category of growth investors. Still, if he chooses to take in money, McDerment wants to set the terms. He won’t allow investors to come in with so-called liquidation preferences that allow them to get paid out first in the case of a sale. He also won’t let in anyone who can’t commit to a 10-year investment, a time horizon that doesn’t fly with most venture capitalists.

“I don’t want to hear anything about you needing your funds back until year No. 9,” McDerment said. “At which point I will call you and ask you if you still want it back in the next year.”

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