How Wave Financial Reached Nearly 80,000 New Small Business Sign-Ups a Month with Below 2% Monthly Gross Logo Churn (Interview with Co-Founder and CEO Kirk Simpson)

Introduction and What Wave Does

Nathan Latka

00:00Hello, everyone. My guest today is Kirk Simpson. He's a serial entrepreneur and co founder and CEO at a company called Wave, which he's led to nearly 3,500,000 small businesses registered with a 100,000,000 in funding raised from investors around the world. He believes in giving back to the tech community as a mentor and an angel investor. Kirk, are you ready to take us to the top?

Kirk Simpson

00:18Alright. Let's go.

Nathan Latka

00:19Alright. Very good. So fintech is obviously hot. There's a lot of companies kind of pushing the 80 to $100,000,000 ARR range. Expensify comes to mind. You know, I always had the Venna... Got the Venna folks on, which is doing top down ERP solution related things. You're in this space too, but it sounds like going after SMBs. Tell me what you do and how you make money.

Defining the Small Business Target Market

Kirk Simpson

00:36Yeah, so first of all, we actually, we don't love the SMB title because in some ways, you look at The US census, that's anywhere from businesses with one employee to 500. We think there's massive differences in how those businesses operate. We like to call, we're going after SBs, small businesses, zero to 10 employees, under $2,000,000 of revenue. Most people aren't aware about 95% of all businesses in North America are in this size. And we're aiming to

Freemium Model and Monetization Strategy

Kirk Simpson

01:04give them better financial management tools. We give away our invoicing and accounting software 100% for free. And then we monetize by putting payments, payroll, lending offers, etcetera, in the application and get those deeply embedded into what the small business owners are doing.

Nathan Latka

01:23And you're owning all these different things. I I look at a company like Kabbage, they do one of those things and they have 5,000,000,000 in loans outstanding. Do you integrate with them or you compete directly with them in different spaces?

Building vs. Partnering: Payments and Payroll

Kirk Simpson

01:32So we've done the partnership route. Our payments business, for instance, was built on top of Stripe. We get to a point of scale and quite frankly, our users want us to deeply integrate it. And so most of this stuff over time we've been building ourselves. And again, the goal there is no small business owner wants to be doing this stuff. They're not passionate about accounting or invoicing or payments or all that kind of stuff. They're passionate

01:55about their business. And so how do we make it super simple and integrated for them to onboard into payments and payroll and other things? We feel like we've got to control more and more of that experience for them. And so for the most part to your question, we're building it ourselves.

Average Revenue Per Paying Customer

Nathan Latka

02:11Interesting. All right, give me some averages here. So like average customer, what would you say they pay you per month? I know you have probably 10,000 cohorts, but on average.

Kirk Simpson

02:20Sorry, you broke up with me, broke up on me for a little bit. So average of what, Nathan?

Nathan Latka

02:25Yeah, the question was on average, what are one of these SMBs paying you per month? I said, I know you probably have 10,000 cohorts, but on average, what would you say?

Kirk Simpson

02:32Yeah. So up in the 70 to a $100 range on our paying customers for all of their transaction processing, etcetera.

Nathan Latka

02:40That's okay. So I mean, that's a fairly competitive price for a small business to jump in and do all Yep. Yep. Give me more of the backstory here. Put this on a timeline. When did you launch?

Company Timeline and Early Mistakes

Kirk Simpson

02:49We launched right around the beginning of twenty eleven. So we've been in market for a little while and feel like the product, etcetera, is getting to a place. One of the mistakes that I made, I'm pretty open and honest about areas where we've done well and where we've made mistakes. One of the mistakes that I made early on was we went too broad with the platform too quickly. And over the last few years, we've sort of

Sign-Up Volume and Distribution Advantage

Kirk Simpson

03:13said to ourselves, let's go through every single one of those verticals and make them be super competitive in terms of the product offering that we have in the market. We're getting to that place now. But as you mentioned at the opening, I mean, one of the most amazing things about the model that we built is we're signing up almost 80,000 small businesses a month on our platform. And so the distribution is oftentimes the hardest thing for software

03:37companies going after this market. We've really cracked that code. And now obviously our goal is to get more and more of them to use us, drive more and more of their activity through us and to get them to paid services over time.

Nathan Latka

03:50Yeah. Now Kirk, when you throw out those numbers in SB space, I can't help but think of my friend Gail, right? When you look at Constant Contact and she was never respected in the public markets in terms of the, you know, the private equity rate, know, sorry, the price to earnings ratio because she would add that amount, but she would churn about 50,000, right, of these customers. So walk me through your churn today and how you

04:12manage that.

Churn Rates and Activation Metrics

Kirk Simpson

04:13Yeah, so we're a private company. I'm not going to give you all the inside scoop, overall I would 100% agree with that. And I would say the difference for us is that churning out of an email software program is a lot different than churning out of an accounting and payroll and payments and invoicing software. And so we really see industry low churn rates. Once we get them into that active state, they will stick for a long

04:42time. As you mentioned before, we got a lot of cohorts and we've looked at them over time. Churn rates are not necessarily the issue. It's driving more and more of that adoption because as I mentioned before, small businesses aren't passionate about doing accounting. They're oftentimes sitting on the sidelines with Excel and shoe boxes and all that kind of stuff. How do we get them to buy into this? How do we make it easier and easier for

05:06them to onboard? And most importantly, Nathan, how do we begin to deliver them insights so that they're not failing? Most small business owners fail because of cash flow problems. And that's because they're very unsophisticated in how they run their business. They're running it off of their bank balance

05:25month? If so, I must be successful. We need to be delivering them better insights so that they can be better business owners.

Nathan Latka

05:30So so Kirk, tell me, I mean, you have a huge cohort to work with, big sample size and a lot analysis. When you look at, let's just say, gross logo churn per month, maybe not talk about yourself, but talk about the industry as a whole, what do you think is a good number to be below when you look at the data?

Kirk Simpson

05:47Yeah, so if you look at small businesses, I would say, look at companies like, public companies like ADP in payroll or Paychex or others, you basically get to a place of about, I think they would say, 80% to 82% retention on an annual basis.

06:04In

06:05small business, you're going to have, to your point before, you're going to have 10 to 15% that are gonna naturally go out of business. And so we call that kind of uncontrollable churn. When we survey these guys, they're like, listen, there was nothing I could do. It wasn't your fault, wasn't your software, etcetera. I just... I went out of business.

Nathan Latka

06:22Yeah. This comes... 80% annual retention would say come out just maybe 2% gross logo churn per month. And you're saying that's probably a healthy target for this kind of space.

Kirk Simpson

06:32I would agree on a monthly basis. Correct.

Nathan Latka

06:34And

06:34so you're dealing with kind of a five year life. Right?

06:37Yep. And have you, you, so are you better than that? Are you below, can we say you're below 2%?

Kirk Simpson

06:41Yeah. We're seeing that we're below 2%.

Nathan Latka

06:43That's great. Congratulations. That's not easy. What do you know you've got to get a new user to do in the first day or two to make them like exponentially increase their lifetime value?

Kirk Simpson

06:51Yeah. I mean, things like connect your bank account so you're importing your transactions, send out a couple of invoices, accept a couple of electronic payments, those kinds of things, those are huge signals of success long term.

Nathan Latka

07:05And I imagine because of this price point, you can't afford to put too much touch on this thing with an inside sales team. So you've gotta build trust quickly so they connect their bank account in a no touch way. How do you do that in a UI?

Kirk Simpson

07:17Yeah. I mean, you've you've hit the nail on the head. Like, we're we're closing in on 200 people in the company. We don't have a single sales rep that works here. Not an inside sales rep, not an outside sales rep.

Nathan Latka

07:27And that model wouldn't work at the price point.

Kirk Simpson

07:30It 100% wouldn't work. And so, you've got to have good product and designers, good product people and designers, obviously. And most importantly, you've got to be ruthless in terms of your testing cadence, right? Constant optimizations of all of these screens and funnels. And to your point, when you talk about something like payroll onboarding, ADP as an example, they'd have a whole suite of both sales reps and implementers that are walking small business owners through setting them

08:04up. We're trying not to do that. So we're zero touch through the onboarding.

Nathan Latka

08:08Yep.

Kirk Simpson

08:08Payroll onboarding is hard. And so you got to be really iterative and you got to look at interview a lot of customers, watch them on board to see where the friction is and just be ruthless about removing it everywhere.

Nathan Latka

08:23So launched in 2011, testing rigorously, no touch, $70 price, but you optimized for all these things. Walk me through the kind of success you've had. How many customers are you now serving today?

Paying Customers and Free User Base

Kirk Simpson

08:35So hundreds and hundreds of thousands of small business owners are using the platform to run their business. And tens and tens and tens of thousands are paying us every month. And I won't go much deeper than that. And our opportunity, I gave you the signup number. So lots of people at the top of the funnel. We just got to continue to rigorously push on driving more and more of them into an active state.

Nathan Latka

09:02Yep. So when you say tens and tens, basically minimum 10,000, maximum a 100,000 in terms of paying folks. Have in the hundreds of thousands that are actual users on the platform. So there is some freemium component to this.

Kirk Simpson

09:15Yes. 100%. Yeah. And, you know, the interesting thing that we see, Nathan, is that we'll get some people to be paying in the first month, and then we'll have others who are using the free platform for twenty four months and on the twenty fifth month convert into pay.

Nathan Latka

09:29Yeah.

Kirk Simpson

09:29So we see a real long tail in terms of adoption and we're okay with that.

Nathan Latka

09:35You said, sorry, it might take twenty four months for the conversion to happen?

Kirk Simpson

09:40Yeah. I mean, we see a real long tail on that.

CAC, LTV, and Organic Growth Philosophy

Nathan Latka

09:43Yeah. Which is fine though, because your CAC is not super high. Right? So you can afford to give them the time.

Kirk Simpson

09:49Correct. Our CAC is very, very small.

Nathan Latka

09:51Yeah. Like, do you optimize that for like, you know, one month ARPPU, so $70 or less or even lower?

Kirk Simpson

09:57We see it much lower than that, to be honest. And the reason for that is because of the offering, way that we've been rigorous in our click rate optimization on our homepage and that kind of stuff, 85% of our signups are coming through organic unpaid channels.

Nathan Latka

10:15But do you have an SEO or content team? Like are there other things touching that?

Kirk Simpson

10:19Yeah, although we're relatively new into content. We've always done well on SEO and more and more we're seeing the CAC to LTV in a place where we can really double down on paid spend in the right channels. All of that sort of put together drives towards that 80,000 a month mark.

Nathan Latka

10:37Kirk, at sub 2% gross logo churn per month, you can get lifetime values that start to lie to you pretty quick. You could argue for unlimited on some of these accounts where there's expansion revenue and things. How do you keep yourself honest on what lifetime value is? Because ultimately you just said you're using it as an indicator dividing by three to go back to what you're comfortable with on CAC.

Kirk Simpson

10:55Well, first thing is that with lot of our revenue being in the payment space, we need to be honest with ourselves about what gross margin is, right? So we look at gross margin LTV. So that's the first thing, very, very important, right?

Nathan Latka

11:11But Kirk, very few people come on the show and explain this. So I want you to give you a second to explain that actually math equation for that.

Kirk Simpson

11:16Yeah, for sure. So essentially in our business, because we're paying out to Visa and MasterCard and AmEx on our payments revenue, it's important to not look at the gross revenue, but instead to the net, right? And to take lifetime times it by your net revenue to get a true view of LTV. Now, some people, listen, there's a lot of companies that are evaluating growth at all costs and they'll look at the gross revenue and they'll paint

11:41a really nice picture of the LTV CAC. We just don't think that's sustainable. And so we look at that gross margin LTV. And then on the flip side, we also look at fully loaded CAC. So not just the cost of what we pay Google for SEM, but what about the salaries? What about the content that we're producing? All that kind of stuff. And that is what we view to be the important metric.

Nathan Latka

12:03Fully weighted CAC still sub 70?

Kirk Simpson

12:05I'm sorry?

Nathan Latka

12:06Fully weighted CAC is still sub $70?

Kirk Simpson

12:09It is.

Nathan Latka

12:09That's great.

Kirk Simpson

12:10Remember that we... We've got a lot of users who are still on the free platform. So, you know, if we, again, look at what the LTV to CAC is on the paid side of those paid users, it still takes us a few months to pay back.

Nathan Latka

12:26See. What I'm is is what I'm hearing you say you're willing to spend up to $70 to just for a new lead on the thing, and then it might take that lead twenty four months after you already spent $70 to get them to convert?

Kirk Simpson

12:37That's the longest of the long tail. I can tell you on, we would still call them a customer. We want to treat everybody who's on the platform as a customer. We think that's really important mindset for the company to have. But to get them to be a customer on the free side, we're well, well, well south of that on the LTV to CAC. But as a ballpark, that's how we look at the equation. And I think

13:03it's really important for companies that want to be sustainable over time to be honest about their CAC to LTV. Because it's easy to inflate the numbers.

Nathan Latka

13:11Yeah, know, a lot of you listening to this are going to be envious of you because they're going to say, of course he can account a sign up today that's free. In his brain, he can calculate that as paid because he has such a large data, a large cohort of historical data. He knows that a maximum 24, if they hit these activation metrics, they're gonna convert. And other people are gonna say, I don't have that data.

13:31I don't have that confidence. I can't afford to spend $70 to acquire a customer. What would you tell people who don't have the sample size you have, but want to test their way to your level?

Paid vs. Organic Marketing Mindset

Kirk Simpson

13:40Well, so what I would start with is this, to your point, we didn't always have this data. And so we made some good moves and we made some stupid moves along the way in terms of not having this data. And I would say the number one lesson that I would give them, and I've lived through this both on the good side and the bad side, is once you allow your marketing team to start using paid marketing

14:07as a channel, you will watch them spend all of their time optimizing that paid channel and almost no time optimizing on organic. And we are a good example of the fact that of the 80,000, as I've said, about 70,000 are coming in organically and that's the best place to be, right? And so again, as soon as you put that paid in there, they're going to be constantly optimizing against that paid. And my suggestion is there's lots

14:41of ways to drive organic first before you then start driving paid on top of it.

Year-over-Year Growth Rate

Nathan Latka

14:47Yep, interesting. Let's wrap up here, Kirk. I wanna get back real quick about growth rate. It gets harder to multiply bigger numbers. What are you guys growing at today year over year?

Kirk Simpson

14:58We're growing at a healthy, healthy clip. We're not quite a 100, but we're close.

Nathan Latka

15:03Can can we say it's between 80 and a 100? Is that fair?

Kirk Simpson

15:06It's a it's a good range.

Nathan Latka

15:07Okay. Very good. By the way, again, not easy to do. Right? I'm taking some of your numbers you gave me earlier. You said between 10,000 and a 100,000 paying. Let's say 50,000 in the middle there at $70 a month puts you at 3,500,000 a month or 42,000,000 annually. So even growing at 80% year over year, that's still adding $30,000,000 to $40,000,000 bucks in new ARR year over year, which is obviously healthy. Let me ask you a question. You've

15:29raised a ton of money. Yep. If a lot of this is coming through organic, where are you putting all this money?

Capital Allocation and R&D Investment

Kirk Simpson

15:35A lot into R and D. Believe, and you look around the marketplace, there's some amazing players in this space that are tackling it from different angles. We got to be excellent across the board. And we think there's a huge opportunity to leverage the platform that we have and to layer on additional products that can drive better utilization for our customers, their business to be better, and quite frankly, revenue for the business. And so we're putting a

16:02lot of our time and effort into R and D.

Nathan Latka

16:05And Kirk, do you pass 50,000,000 in ARR this year or next year?

Kirk Simpson

16:09Good question. Likely next year, early And next

Nathan Latka

16:13you feel good about that or it's a stretch goal you motivate your team with?

Kirk Simpson

16:17So I always stretch the team. You know, I've lived through this for long enough, Nathan, where I feel, I was describing this to somebody else the other day, I feel

16:32satisfied but not happy on an everyday basis. It's kind of like we're doing good things, we need to be doing better. And I think that's important mindset for everybody in the company, me on down, about ourselves and about the business. We all need to constantly be getting better. And that's a driving force here.

Team, Location, and Culture

Nathan Latka

16:52And you said almost 200 folks. Is it folks remote or is there everyone in one spot?

Kirk Simpson

16:57For the most part we're here in Toronto, and everybody's in the same building. I've I've always valued that. I think we're getting better at having people remote, but I've always valued having people here that we can build some culture and have some water cooler conversations. I think that's been important.

Nathan Latka

17:13Yeah. That's good. We just had... You must know you must know Sean Goodeau. Right?

Kirk Simpson

17:17I do not, actually.

Nathan Latka

17:18How do you guys not know? You're both in the fintech space with with... You know, he's doing 2,000,000 in ARR. You're doing north... I mean, in MRR. You're doing north of that, and you don't talk to each other.

Kirk Simpson

17:26I don't know. I don't know. Maybe... Nathan, can you make an introduction for me?

Nathan Latka

17:30I'd see it up. It's interesting because he's going... He's very much going top down at enterprise. You're you're very different space, but saying it's both fintech. So I imagine you're hitting the same kinds of things. Let... One last question here. You raised a bunch of capital. Would you ever pursue a roll up strategy to buy some of these things instead of building them in house?

Kirk Simpson

17:49Yes, absolutely. We think the platform is valuable and we'll be at a place soon where we can look at doing that just in terms of robust APIs and more of a microservices type engineering culture. We believe in that because there's more and more things we can bolt onto this platform to make the lives of small business owners better.

Famous Five Rapid-Fire Questions

Nathan Latka

18:07All right, let's wrap up with the famous five. Number one, favorite business book.

Kirk Simpson

18:12Lately, I've been reading, it's been fantastic, it's Powerful by Patty McCord from Netflix. Really, really enjoyed the book. Different mindset, love it.

Nathan Latka

18:22Number two, is there a CEO you're following or studying right now?

Kirk Simpson

18:26Yeah, so I've kind of fallen in love with Satya Nadella. Love his book and just very interested in

Nathan Latka

18:32You're talking Hit Refresh?

Kirk Simpson

18:34Yeah. In his sort of huge focus on culture and getting people and empathy and listening and all that kind of stuff. There's not enough talk of that, I think, in the world. And so I've been really interested in his mindset.

Nathan Latka

18:49Number three, besides your own, what's your favorite online tool for building your business?

Kirk Simpson

18:53Yeah. So we've been playing a lot with Drift,

18:59and I mean, hot company, and we've been using it on on our payroll product. Love it. Really, really interesting in terms of the use cases and where they're taking that company. Think it's it's on to big things.

Nathan Latka

19:10No. Wait. Kirk, hold on. That's touch. You've gotta have an... If you have 80,000 people hitting your site, actually, factor that hitting your site, and they're all generating Drift messages, you gotta have someone on the other end answering those things.

Kirk Simpson

19:20Do you know what's interesting is we actually talked to the company to Drift, and we said, we want to use it for self serve. We want to use it to preload it with an answer to a whole bunch of questions. And it's been working amazingly well for that. So we've actually been pushing them to allow usage of that tool in a new way that they hadn't even sort of brought forward to this day. And we're finding

19:45it's working really, really well.

Nathan Latka

19:46And new folks landing on the website, these small business owners, they don't call you on that and say, is a robot, don't want to do this.

Kirk Simpson

19:53No, in fact, but I think the key thing is we make it clear it's a bot. So you're I pretending it's something else, I think there's an issue. We make it 100% clear this is a bot, this is to answer your key questions. If you need help, click here, we'll

20:10answer them. But the amount of them that are going from the bot into wanting to interact with a human is very small.

Nathan Latka

20:18Got it. Number four, how many hours of sleep do get every night?

Kirk Simpson

20:23Depending on the day, five to eight, I would say. And I would add in one other thing, which is if I could tell myself something two years ago, three years ago, I've been getting up and doing a bootcamp three days a week now at like six in the morning, and it's the best thing I've ever done.

Nathan Latka

20:39What is... Well, and what's your situation? Married, single, kids?

Kirk Simpson

20:42Married, I'm 44. I got three kids, 13, 11, and eight. And I used having kids and the busyness of that, let alone the business to justify not working out. And I changed that a couple of years ago, and it's been a game changer for me.

Nathan Latka

20:56I love that. All right, last question. What do wish your 20 year old self knew?

Kirk Simpson

21:00Learn to code.

Nathan Latka

21:02Quick. Didn't even hesitate. Learn to code right out of the gate. Guys, there you have it. Very interesting company, waveapps again. Another great example of one of these folks using kind of a freemium model. We've had a lot of these people on. Conga came on, same kind of model. It's really interesting. Get Postman also doing it. We've had... Plevo came on 70,000 customers freemium model. Another good one to study here. Again, launched in 2011 in the

21:23financial technology space, really serving small business owners. That's it. They currently have, you know, between 10,100 paying customers, paying $70 a month, growing 80 to a 100% year over year, hoping to hit $50,000,000 in ARR by the end of the year in 2019. Less than 2% logo churn per month, really hard to do in this space, super healthy. That's because they understand the activation metrics. Paying less than $70 to acquire a new lead that they're confident

21:47will convert and, you know, definitely before twenty four months of using the platform. Team of 200 people based mostly in Toronto and other remote locations. Alright, guys. There you have it, Kirk. Thank you so much for taking us to the top.

Kirk Simpson

21:59Thanks for having me.