Sweden’s Dominant #1 Cloud Accounting & Financial Management SaaS Leader | H.E.R.O. Issue 12, 30 November 2020
“When flying, you must not forget how difficult it was to take off.” - Mr. A
From the alleys and cobbled streets of Växjö in Småland, southern Sweden, emerged an idea in 2001 so innovative that the market took years to catch up. Guided by its down-to-earth culture and values, the Nordic SaaS innovator has transformed that idea to generate in the recent 5 years a 20X lift-off in returns that is still climbing exponentially. That idea was online accounting - in 2001. Today, the pioneering innovator command a dominant domestic market leadership with a significant exponential competitive edge that is hard to break, with ~1/3 of all Swedish companies and all major accounting firms are their customers, and business schools are teaching the software. And the SaaS innovator is expanding into becoming the indispensable fintech vertical and payments platform for a simpler accounting and administrative everyday life for entrepreneurs.
This week, we highlight one of our portfolio companies, Sweden's Dominant #1 Cloud Accounting & Financial SaaS Leader, which is up +20.2% during the week (23 to 27 Nov 2020). It had earlier reported on 23 Oct 2020 a healthy set of 3Q2020 results, in which sales climbed 27.8% yoy, operating profit rose 48.9% yoy with operating margin improving from 40.4% to 47.1% and CFROE (= Operating Cashflow/Equity) of over 36%, on continued stable growth in its customer base which increased by 10,000 during the quarter to 351,000 companies as its customers, representing ~1/3 of all Swedish companies (1.2 to 1.4 million, or an addressable market of over 800,000 businesses).
This rising dividend-yielding profitable and cashflow generative innovator has also compounded +1,953% in capital gains in the recent 5 years vs MSCI ACWI World index +52.6%. Revenues are generated through a subscription-based model that provides a stable and visible recurring revenue stream, where customers pay per system and per active user. Because of its dominant market leadership and indispensability into the everyday life of its customers, the company can raise prices by more than 100% without being affected by subscription terminations (churn). Average Revenue Per Customer (ARPC) has also climbed 12.8% yoy in the recent quarter. Due to small variable costs whenever a new customer is acquired, the business model is highly scalable, giving the company the upside potential to reach higher margins and positively surprise investors.
The company offers a wide range of services in the fintech area, including accounting, invoicing, sales support, time accounting and payroll administration, as well as inventory management. Thanks to its software offering, the company has access to its customers' accounting data which strengthen its competitive edge. By leveraging its access to its customers' data, the company offers financing & business insurance services tailored for small business owners. Several financial services – such as loans and factoring – can be price more efficiently by using not only the customers' data but also the customers' customers' data. Additionally, marketing can be targeted towards businesses base on their accounting data. The company's Insurance business can similarly benefit from the accounting data. The data will tell if a business has insurance or not and detect any actions that could require insurance, such as a purchase of machinery. The company will be able to notice certain actions by its customers – such as the buying of a vehicle – that triggers a need for insurance.
Notably, the company's customers can do direct payments and conveniently conduct all bank transactions on the platform through its bank integrations with all major banks in Sweden, following its breakthrough approval in Oct 2019 to become a payment intermediary. The company's fintech vertical business has gained momentum to grow strongly to contribute around 15% of the company's revenue, and is expected to redefine the entire company's growth trajectory.
The company’s focus is to deliver platform-independent products and services with high degree of automation. By better understanding the customer's everyday life and behavior in different situations, the company continuously gains new insights into the problems it faces. The insights are used in the development of functionality and experience. This is how a cycle is built with the customer's needs at the center. The company’s ambition is to be able to help the customer at every stage of the business and to be the best friend of small businesses. The company has continuously increased value delivered to its customer base of small businesses, accounting firms, associations and schools with new innovative services to efficiently manage their financial administration, including the launch of its AI-based solution for accounting for bank transactions, as well as its AI-powered automated real-time invoice data interpretation and recording of accounts receivables that is integrated with its Payment solution, processing over 20 million supplier invoices, 15 million customer invoices and 1 million payslips since its launch in April 2020.
Reflecting on the entrepreneurial journey, founder Mr. A shared how the first few years were really tough. Mr. A and his team toiled to crack the code for an internet-based program and the employees worked to create relationships with accounting firms and small business owners. They managed to get some accounting consultants curious enough to come to Växjö and test the program and help with input on what could be better. They became the first reference group – and thus also started the long and in-depth relationship and long-term cooperation the company has with the accounting firm industry, where the agencies are both customers and partners. The partnership with accounting firms – large and small ones – has been and still is arguably one of the most important factors behind the company’ success. The partnerships have made it possible for the company to reach large numbers of customers without major investments in sales personnel. Although it is easy to transfer data from one accounting software to another, many accounting offices, accountants and business owners have invested significant time in learning and integrating the company's software. Thus, a monthly fee of SEK 100 to 200 is likely insignificant compared to the cost of spending several hours or days, even weeks, in learning a new system.
During the initial years of its founding, it was tough trying to explain the benefits of online accounting to stressed hairdressers, shopkeepers, craftsmen and other small business owners. But in the few customers who could still be persuaded to test the product, they got an invaluable base. In this way, they built relationships – and then a network of ambassadors arose. It also laid another foundation in what would shape the company's corporate culture: the courage of daring to stand out, show humor and heart, simplicity, joy and consideration in a rather conservative industry. Today, online accounting is an everyday product that does not attract much attention, yet is also surrounded by socially important actors who see the value of digital ecosystems, such as banks and the Swedish Tax Agency.
The company's open API makes it easy for various system vendors to connect to the platform with their solutions and thus become integration partners with the company. The company’s software has 400 integrations to help its customers find solutions tailored to their business, including E-commerce solutions as Magento and Shopify, payment systems like iZettle and Klarna as well as several sector-specific ERP-systems. The many integrations are arguably one important selling points for the company. The integrations serve as niched modules – for certain sectors with specific needs – to complement the company’s for-all-businesses offering.
In Feb 2019, the company initiates collaborative project with the Swedish Tax Agency. The project will investigate the possibility for companies to collect, and in the long run also submit, certain tax information directly in their financial platform. In Oct 2019, the company was granted to become a payment intermediary. In Dec 2019, the bank integration with Swedbank is underway, which means that the company now has integration in place with all major banks in Sweden. In March 2020, the company launched its marketplace, simplifying the use of and search for partner applications for its customers.
CEO Mr. E comments: "The focus of the business is to develop and launch future solutions that revolutionize the way to post - one of the cornerstones of entrepreneurship. One of these is the AI-based solution for accounting for bank transactions. In addition, with our automated real-time interpretation of invoices using AI, the invoice can be posted at the same time as it arrives. This removes a difficult moment from the entrepreneur's everyday life. The only thing required of the entrepreneur who posts is to review and approve the posting proposal. It is very gratifying that Swedish entrepreneurs continue to choose to run their business with our company's software and see the benefits that the new technology brings to them in their entrepreneurship. More and more people are now realizing the importance of working with the new technology, and all the benefits it brings - something I think will be felt even after the coronavirus pandemic. I'm really proud to lead the company. It is all our dedicated employees who create these results for Sweden's companies."