Bottom-Up Sales: How Expensify Disrupted SaaS

Expensify's Unconventional Growth Strategy

Conventional wisdom might suggest that an expense management company would prioritize a substantial sales department and extensive advertising. However, as demonstrated throughout this EC-1 analysis, Expensify consistently defies expectations.

Consistent with its tendency to follow its own internal compass, Expensify achieved over $100 million in annual recurring revenue and amassed millions of users with a relatively small team of 130 employees, alongside some contractors, and a minimal sales team.

The Power of Organic Growth

The question of how such growth is possible without a dedicated sales force has a straightforward answer: word of mouth. Expensify benefits from operating in a sector where expense reporting is often perceived as a tedious and unrewarding task. Consequently, users who discover an effective solution are highly likely to recommend it to peers.

However, the company’s growth within small and medium-sized businesses (SMBs), its primary customer segment, is particularly noteworthy. Expensify cultivates this growth by delivering a user-friendly and valuable product experience.

Product-Led Growth: A Pioneering Approach

The result is that only a few enthusiastic users are often sufficient to convert an entire company into paying customers. This strategy inverts the traditional sales model and is now recognized as product-led growth.

Expensify implemented this approach before it gained widespread acceptance as a viable business strategy. While challenging, this early adoption has positioned the company uniquely, and it intends to capitalize on this advantage.

Here's a breakdown of key factors:

Minimal Sales Investment: Expensify prioritized product development over aggressive sales tactics.
User Experience Focus: A seamless and valuable product experience drives organic recommendations.
Bottom-Up Adoption: Growth originates from individual users within organizations.
First-Mover Advantage: Pioneering product-led growth has created a distinct competitive position.

Ultimately, Expensify’s success highlights the potential of prioritizing user satisfaction and a superior product as the primary drivers of customer acquisition.

Initiating the Growth Cycle

Numerous approaches exist for initiating a business model of this type. However, Expensify notably disregarded conventional wisdom and instead focused on transforming its user base into advocates for its product.

As detailed in the first part of this EC-1 analysis, Expensify’s CEO, David Barrett, initially developed the project independently. He then applied to the TechCrunch50 2008 conference, where the company was officially launched alongside co-founder Witold Stankiewicz. Their presentation centered on a blend of corporate card functionality and expense reporting, with the latter proving more impactful with the audience, according to Barrett.

The initial viral growth began when Expensify secured second place at Demo Pit, a precursor to the current Startup Alley. This achievement led to media coverage and significant attention from individuals who would later be recognized as influencers. “This increased visibility was instrumental in accelerating our word-of-mouth based business model,” Barrett explained.

how bottom-up sales helped expensify blaze the path for saas

The conference attendees represented the precise demographic Expensify aimed to reach, as they were all likely to have travel expenses requiring reporting. By this point, the co-founders had identified that the number of individuals needing to submit expense reports exceeded the number of accountants processing them, allowing for more focused targeting.

Expensify also benefited from favorable timing, particularly with its mobile receipt scanning capability, coinciding with the growing adoption of smartphones. While the technology was somewhat premature, the demonstration served as a viable proof of concept given the capabilities of iPhone cameras at the time.

Nonetheless, mobile technology was beginning to empower individuals, and businesses were observing this trend. This period marked the emergence of the Bring Your Own Device (BYOD) movement, creating an opportune moment to propose that employees could independently select their preferred expense reporting solution.

Targeting the Small and Medium-Sized Business Sector

An employee-focused sales strategy likely wouldn't have resonated with large corporations, however, that wasn’t the primary target for Expensify. Instead of directly challenging established enterprise solutions like Concur, Expensify identified an opportunity to attract individuals who were managing expenses through spreadsheets or manual processes. Barrett quickly discovered that a significant portion of these individuals were either operating or employed by SMBs, and they didn’t represent the problematic customer base he had been warned about.

In fact, this segment proved to be advantageous. “My initial experiences within the SMB sector differed greatly from prevailing perceptions. We soon realized that the SMB market is often overlooked, particularly in Silicon Valley, where the focus is overwhelmingly on enterprise-level clients, leading to a missed opportunity of considerable scale,” Barrett explains.

Remarkably, nearly half of all American employees are employed by small businesses, which were responsible for over 50% of net job creation in 2014. “Therefore, if your business model thrives on revenue expansion – as ours does, with charges based on active users – scaling within the SMB market is considerably simpler than scaling within the enterprise market, purely from a user-count perspective.”

Barrett also observed that the SMB landscape is where traditional top-down sales methodologies encounter limitations, while a bottom-up sales strategy proves highly effective. “Each submitted expense report essentially serves as a referral to the employee’s manager, who ultimately holds the decision-making authority,” Barrett stated.

The company’s emphasis on word-of-mouth marketing further facilitated customer acquisition, as employees within smaller businesses have a greater ability to voice their opinions compared to those in larger organizations. “Our customer base consistently originates with individual employees downloading the mobile application without charge, based on a recommendation from a colleague, and then integrating it into their workflow,” he noted.

The impact of this customer acquisition model on the company’s growth is substantial. With users actively promoting the product within a market where businesses aren’t actively seeking alternative solutions, the need for an outbound sales force or conventional advertising is minimized.

Instead, the priority lies in delivering an exceptional user experience that fosters both customer acquisition and retention. SMBs tend to exhibit low churn rates, as they rarely revisit their contracts unless prompted by an issue. Counterintuitively, they also demonstrate less price sensitivity compared to enterprise clients, who consistently prioritize cost reduction.

Expensify also adopted an unconventional pricing strategy. Initially, the service was offered free of charge, as the founders had secured approximately $1 million in funding and possessed ample resources. However, they were compelled to introduce charges when early user feedback indicated that a free offering diminished perceived trustworthiness. To address this, the company designed its pricing structure to ensure Expensify remained accessible to the majority of users at no cost.

This was made possible by their technology-driven approach and the inherent zero marginal cost associated with software. These factors collectively fueled their product-led growth, resulting in a significant influx of both large and small customers, and a corresponding surge in revenue.

Given the demonstrable success of this business model, one might anticipate intense competition among venture capitalists to invest in the company. However, the reality was quite different.

Although investors did express interest following TC50, Expensify consistently felt misaligned with a significant portion of the startup investment community due to its sales approach. Jason Mills, Director of Product and Customers, explains, “We reached a point where the market began to recognize the value of a business like Expensify, but this wasn’t the case for a considerable period.”

“We recognized a divergence in strategy and understood the VC landscape wouldn’t facilitate our vision”

For companies mirroring Expensify’s profile, a product-led growth strategy proves remarkably effective. Recent years have showcased numerous successes, including Slack, Zoom, Dropbox, Airtable, Asana, Coda, and Figma, all demonstrating the viability of this business model.

However, this approach lacked widespread acceptance around 2008. According to OpenView partner Blake Bartlett, speaking to TechCrunch, “While companies like Atlassian and SurveyMonkey had already established this method, it remained an outlier rather than the norm.”

The landscape for SaaS itself was also less defined. While the recurring revenue model held appeal, questions persisted regarding enterprise adoption and scalability. The notion of bypassing conventional sales processes entirely appeared almost implausible to many, often dismissed as a fleeting trend.

This prevailing skepticism presented challenges for Expensify. Barrett recounts feeling as though their approach was considered unconventional and even “crazy.”

Securing funding was initially achievable for Expensify, but this eventually changed.

Barrett remembers fundraising being relatively straightforward until 2013. The differences between his strategic vision and traditional methods were initially overlooked, with VCs anticipating a future shift in approach. A turning point arrived after pitching to “every top firm” in Silicon Valley and receiving consistent rejections.

The feedback centered on the exceptional nature of Expensify’s financial results, with investors questioning the transparency surrounding their generation. This proved frustrating, yet sparked a crucial realization. “It became clear that we were pursuing a distinct path, and I understood I couldn’t rely on the VC community to support us,” Barrett explains.

This prompted a fundamental question: “Why seek their investment in the first place?” Profitability had always been a long-term objective, but the time to accelerate that goal had arrived. Ryan Schaffer, the CFO and a recent marketing addition, vividly recalls the moment: “David convened an all-hands meeting and announced, ‘I’ve declined the funding round we anticipated. We must achieve profitability, and we must do so rapidly.’”

The renewed focus on profitability necessitated difficult decisions, including a company-wide salary reduction, a hiring freeze, and a thorough review of expenditures. However, these measures proved insufficient. They alleviated immediate concerns, but Barrett recognized the need for further action. “Marginal profitability is precarious – it’s hardly a sustainable position,” he stated.

This led to the ambition of making Expensify “wildly profitable.” To address the primary obstacle of escalating customer support costs alongside revenue growth, the company prioritized self-service solutions and integrated artificial intelligence. Simultaneously, they significantly reduced their traditional marketing and advertising budget. “Since then, we’ve experienced consistent and substantial growth,” Schaffer noted.

A Shift in Investor Confidence at Expensify

Significant gains in revenue and improvements in cost management substantially improved Expensify’s financial performance. This profitability afforded the company greater autonomy in its decision-making processes.

The reduced pressure to secure immediate funding empowered Expensify to negotiate more favorable terms with venture capital firms. Crucially, it also allowed the company time to identify investors aligned with its long-term business strategy.

Ultimately, Barrett secured commitments from new investors, including Rahul Prakash of NOMO Ventures (previously Coyote Ridge Ventures), David Martirano from PJC (Point Judith Capital), and subsequently, Bartlett at OpenView.

“Notably, by the time we reached a point where investor confidence had been restored – ‘Okay, now VCs trust us again’ – we no longer required their investment,” Barrett stated. Consequently, Expensify aimed to raise only the minimum amount necessary to minimize equity dilution and avoid the complexities of managing excessive capital.

Despite this leverage, new investors had specific expectations, leading Expensify to engage in “a lot of secondary deals” to restructure its capitalization table. This allowed for space to accommodate the new investment.

However, Expensify remained cautious about diluting its ownership. This led to a preference for debt financing over additional venture capital rounds. “This might seem unusual to some,” Schaffer commented, “but we consider debt preferable to equity because once equity is sold to a VC, it cannot be reclaimed.”

A key factor in pursuing debt was the company’s robust cash flow, enabling it to both secure and repay loans. This also provided a pathway for early investors to realize a return on their investment. “We began utilizing substantial loans to facilitate leveraged buybacks of shares from early investors,” Barrett clarified.

Acknowledging differing perspectives, a disconnect existed between Expensify’s long-term vision and the typical return cycles demanded by venture capital funds and their limited partners. “We aren’t a nascent startup; this represents a 13-year journey to success,” Barrett observed. He conceded that “viral business models present challenges due to the time required for maturation,” despite his frequent critiques of conventional VC strategies.

The company’s confidential Initial Public Offering (IPO) filing is poised to finalize what the buybacks initiated, and appears to be the primary motivation behind the filing. “This will allow remaining investors, including OpenView Venture Partners, NOMO Ventures, and super angel Bobby Lent’s Hillsven, to liquidate their holdings,” as reported by Insider in January.

Beyond Monetary Measurement: Key Performance Indicators

Looking back, Barrett considers the share repurchases to be a particularly effective allocation of capital, particularly when contrasted with alternative investment avenues. He explicitly stated his satisfaction with prioritizing buybacks over expenditures like advertising, expressing skepticism about the potential efficacy of the latter.

Such a declaration might be startling to a marketing professional, yet Expensify had already established that its expansion wasn't reliant on marketing investments, and its customer acquisition cost wasn’t a readily adjustable parameter.

“Communicating this concept often presents a challenge,” Schaffer observes. “Individuals frequently propose increasing marketing spend to achieve proportional growth, but our experience demonstrates that such increases actually lead to diminishing returns.”

Consequently, Expensify allocates minimal resources to marketing, directing its efforts towards brand-building initiatives designed to broaden awareness and attract potential customers. “Our product then effectively handles the conversion process,” Schaffer explained.

“Prior to 2019, we refrained from traditional outbound marketing or demand generation activities,” marketing director Joanie Wang detailed in a podcast interview. “Instead, we concentrated on experiences further along the sales funnel, such as events and nurturing our key advocates,” referencing their participation in industry trade shows and the exclusive ExpensiCon conferences.

This approach underwent a shift in 2019 with Expensify’s launch of a comprehensive Super Bowl advertising campaign, “You Weren’t Born To Do Expenses,” starring actor Adam Scott and rapper 2 Chainz, portraying a lavish lifestyle. The campaign included a 30-second television commercial alongside a hip-hop music video.

The campaign also functioned as a product demonstration, notably the “Expensify Th!$” music video, which invited viewers to participate in a contest by utilizing the Expensify application to scan receipts for the extravagant items featured in the video. Wang reported that the campaign yielded $62 million in earned media coverage and a 1,400% surge in new customer acquisitions.

Other initiatives also attracted significant attention, including a 2011 motorway billboard advertisement and a recent video announcing the company’s initial public offering filing; however, these were largely isolated occurrences.

Expensify prioritizes organic growth through virality, and therefore closely monitors its K-factor – defined by Schaffer as “the number of users acquired through user-based referrals.” Similar to many contemporary startups, the company also conducts sophisticated cohort analysis, incorporating new users into the cohort of the individual who initially extended the invitation.

The company also diligently tracks the rate of conversion to paid subscription tiers, as well as a metric formerly known as negative revenue churn. “We faced skepticism when discussing these concepts,” Schaffer recalls. “However, the industry now commonly refers to this as revenue expansion, and it’s become a more widely accepted practice.”

The Unconventional Approach to Sales at Expensify

If one were to inquire about Expensify’s sales leadership, the response is nuanced. Barrett clarifies that Jason Mills essentially manages the entire product management lifecycle.

This oversight extends to effectively leading both the customer success and sales divisions, though the latter exists in a non-traditional form. Expensify deliberately avoids conventional outbound and inbound sales strategies.

Instead, the company prioritizes a highly self-serviceable product experience, aligning with the preferences of the majority of its user base, as Mills explains.

“Small businesses typically prefer to independently explore and implement solutions.” To supplement this, Expensify provides Guides – contractors and staff addressing onboarding inquiries – a chat-based Concierge service, and a community forum for peer-to-peer support.

Interestingly, the support team dedicates roughly one-third of its time to direct customer interaction. Furthermore, company-wide involvement is encouraged. “Initially, our customer support operated on a rotating email basis, requiring all employees to engage directly with customers,” Mills recalls.

Every team member participates in “chores,” a system of assigning small, accessible tasks across the organization. This extends to product management, which operates as a remarkably open and “democratized process,” open to contributions from all employees.

“The belief is that valuable insights can originate from anyone within the company.” A public Slack channel, automatically joined by new hires, facilitates idea sharing. Individuals initiate discussions by posting a “What’s Next” proposal, outlining a problem and a potential solution.

These proposals require robust justification, as Expensify emphasizes “respecting the status quo.” Mills states, “Prioritize consistency with existing systems whenever feasible. Only consider significant changes if other options prove inadequate.” This philosophy is succinctly captured by the motto: “Cut, don’t glue.”

A core principle at Expensify is “compounding product management,” focusing development on issues impacting all users, rather than catering to isolated needs. Mills elaborates, “We are prepared to decline requests for substantial product alterations that deviate from the broader market direction and our existing customer base.”

However, such situations are infrequent. Despite its primary focus on small and medium-sized businesses (SMBs), Expensify serves several large, public companies. “We experience growth alongside the majority of our customers, which is a notable characteristic of our SMB relationships,” Mills observes.

The company’s “Wall of Fame” showcases prominent clients like Atlassian, GitHub, Stripe, and Pinterest. Expensify is receptive to enterprise leads, provided they accept the standard product offering. However, a move towards targeting larger enterprises is not currently planned.

Expensify's Distinctive Approach to Growth

According to Barrett, Expensify operates differently from companies prioritizing top-down enterprise sales. A conventional acquisition strategy typically leads to an upward market progression, driven by incentives for sales personnel and product managers to target larger clients and develop advanced features. Their focus remains on securing larger customer bases.

Expensify, however, deliberately concentrates on the SMB market, perceiving it as a considerably larger opportunity with less competition. The company’s confidence stems from years of observing competitors enter and exit the market.

Beyond its product and technological infrastructure, a significant competitive advantage lies in its legal structure – specifically, individual account ownership, a feature unmatched by other enterprise businesses. Replicating this model is virtually impossible without a fresh start, and even then, competing with Expensify’s established word-of-mouth network of 10 million users would prove challenging.

Despite this, Schaffer noted in February that the market was “very noisy,” identifying Divvy, a Utah-based corporate spend management startup, as a close competitor to Expensify’s offerings.

Divvy’s success is potentially a positive indicator for Expensify’s IPO, given Bill.com’s recent acquisition of the startup for $2.5 billion. This figure significantly exceeded Divvy’s valuation of approximately $1.6 billion from a January 2021 funding round, as highlighted by Alex Wilhelm.

The involvement of a payments giant like Bill.com in the acquisition underscores the expanding landscape of this sector. Expensify introduced bill pay functionality in 2020, followed by invoicing capabilities, marking the initial phases of its strategy to evolve into a “pre-accounting” platform.

This platform, as Barrett defines it, is a system designed to collect, categorize, consolidate, and standardize financial data to facilitate the accounting process. Mills believes this comprehensive approach will suffice for the majority of the market.

This evolution positions Expensify as what Barrett terms “the Amazon Prime of the back office” – a single subscription providing complete back-end financial management. The company’s strong brand recognition allows it to absorb the costs of offering these additional features without increasing prices.

Furthermore, with invoicing and billing processes shared across companies, each new user represents a potential entry point into Expensify’s viral growth model, as Mills explains.

Expensify does offer one additional product with a separate charge, the Expensify Card, but its pricing is unconventional. The card itself is provided at no cost; however, users who decline to adopt it are subject to an unbundling fee to compensate for potential revenue loss.

Barrett initially stated in April 2020 that this pricing structure was implemented to mitigate the impact of COVID-19 on the business. However, the company has since recovered and, according to Schaffer, surpassed its 2020 revenue targets.

Consequently, revenue from interchange fees has become less critical. “We’re seeing strong adoption of the card and are pleased with its performance, but it’s not essential to our business,” he clarified.

Schaffer emphasizes that the card’s primary benefit lies in enhancing user experience. It eliminates the need for users to photograph receipts, enabling AI-powered policy enforcement and data processing at the point of purchase, rather than during the transcription phase. This represents a natural progression towards an even more streamlined process.

While Expensify benefits from a substantial existing base of business spending, it faces growing competition from rapidly expanding, well-funded corporate card and spend management companies like Ramp and Brex.

However, Expensify’s next major initiative isn’t centered around its card. That distinction belongs to Expensify.cash, a financial group chat platform with ambitious goals. According to a December 2020 announcement, the service functions similarly to Slack, SMS, or WhatsApp, but is specifically designed for financial discussions.

Currently in development, this open-source service represents Expensify’s attempt to reach a user base measured in billions, rather than millions. Barrett explained to TechCrunch, “Venmo and PayPal have hundreds of millions of users, but only chat services – Facebook, LinkedIn, WhatsApp, and similar platforms – have billions. We believe chat represents the largest potential use case, as it connects everyone.”

A Visionary Foundation

Consistent with its established practices, Expensify approached the development of Expensify.cash by adhering to its fundamental principle of iterative improvement and leveraging existing strengths. The company has consistently prioritized long-term growth, a commitment evident in its technological infrastructure, strategies for customer acquisition and retention, and overall operational approach.

This dedication naturally led to a re-evaluation of the company’s core focus. Barrett explains that the Expensify team’s motivation extended beyond simply managing expense reports; they were recruited with a broader vision in mind. “Our objective has always been to establish a substantial enterprise powered by a network-effect business model, starting from the very beginning,” he states.

This strategic direction necessitated several unconventional choices that might have appeared counterintuitive. These included a deliberate focus on small and medium-sized businesses (SMBs), the creation of a unique technology stack designed for rapid dissemination, and a policy of assigning individual account ownership. All of these factors ultimately contributed to the launch of Expensify.cash.

These decisions have yielded significant long-term benefits, including exceptional employee productivity and a scalable, profitable business model. Barrett emphasizes this point: “Building a truly great and enduring company requires a foundational commitment to sustainability.”

While the ultimate success of Expensify.cash remains to be seen, it is clear that this venture is the result of careful planning. Given Expensify’s track record, there is a strong indication that this new initiative could evolve into something remarkable and unforeseen.