How Mike McDermott grew FreshBooks

Software company co-founder shares advice on whether and when to raise capital and how he keeps his entrepreneurial chops fresh

Sometimes, a big mistake can trigger a big idea. In 2003, Mike McDermott was running a small web design agency when he accidentally saved over an old invoice. Frustrated and looking for a better way to bill clients, he decided he might as well build it himself. The solution he came up with would become the foundation for FreshBooks, a cloud-based accounting software for freelancers and service-business owners. In true startup fashion, Mike spent the next 3 ½ years growing the business out of his parents’ basement. After a decade of incremental growth, FreshBooks raised $30 million in venture capital funding in 2014 and another $43 million in 2017, fueling its dominance in the booming self-employed and small business market. In this episode, Mike shares how he made the decision to pursue outside investment, how his role has evolved and what he’s doing to stay inspired and keep his entrepreneurial chops fresh. Listen now on Apple Podcasts, Overcast and Spotify. If you love it, please help more people find it by leaving a review!

“The funny thing about the universe is, you start doing things and things start coming towards you.”

One of the keys to growing a successful business is really knowing your customer. Mike McDermott certainly knows the FreshBooks customer, because he’s been there himself. Inspired by his passion for the sport Ultimate Frisbee, Mike started his first two small businesses right out of college — an Ultimate Frisbee tournament event and a league. When the caterer for the event business needed a website, he jumped at the opportunity to put his web design skills to use. Eventually, the event business turned into a web design and consultancy business, and “the rest is history,” Mike says. Although that’s really just the beginning of the story.

“For me it was really kind of a passion, follow-your-heart kind of thing.”

The web design business was growing, but another pivotal moment would put Mike on a new path. Burned by the experience of accidentally saving over an old invoice, he decided to build his own billing software for the firm, a side project that inspired him to shift his focus to building a software company. That software company would become FreshBooks.

Of course, when the cash is coming in through the consultancy side of the business, a lot of entrepreneurs struggle with the decision to build a product, especially when there are no guarantees it’s going to pay off. But Mike, who had never built a product before, was instantly hooked. So, he says, he made a point to figure out how he could be the most efficient with the consulting business while pivoting more of the team’s time to working on the new business. 

“I think there’s this moment where you know you’re on to something.”

I often ask my guests about the moment they finally felt that their startup was going to be a sustainable enterprise. Considering how important customer experience is to the FreshBooks culture, it’s not surprising that one of those moments for Mike came during a conversation with a customer, who talked about all the ways FreshBooks was making their life easier. “That call,” he says, “was the last time I doubted that we were doing something of value for others...that was the moment that I was like, Okay, we have something.” 

These were the early years, when Mike was running the business out of his parents’ basement. You’ll get to hear the story of how that came to pass, and how Mike’s team essentially became part of the family. The family played a part in the business, too. With Mike and his co-founders unable to get a bank loan themselves, his mother secured a $50,000 line of credit for them. Among the other early angel investors was one of the founders of Rackspace, who would go on to have a significant influence on the company.

“Raising capital has been an intellectual, emotional journey for me, more so than a lot of entrepreneurs.”

Mike resisted venture capital funding for a full decade. It’s not that he wasn’t thinking about what he could do with more money. Instead, he says, it was his concern over “what would happen to the constituent groups, the stakeholders, my customers and my employees, if the…’financial types’ took over and started running the show.” As a company that’s huge on customer service, he was particularly worried about losing the ability to create the right customer experience. In the end, it was actually a people decision that would change his mind. After hiring the company’s first “real” executive, a CTO, and then rebooting the executive team over the next year, he realized what they needed in order to scale: “more of these people.” And for that, they needed capital.

Around this time, the company also recognized that it was going to have to tackle another issue if they wanted to scale: replatforming. I know from my own experience with my company Muck Rack that replatforming can be a daunting task. Mike describes the innovative way they approached the challenge — by creating (and then acquiring) their own competitor, BillSpring.

“I said, I have no idea what I’m doing, right. So what do you do in that situation? You go to the customer.”

For anyone who’s facing that first board meeting with the person who’s just written them a multi-million dollar check, Mike offers some good advice about what you can do to dial back the terror a bit. True to his customer-first mindset, he wrote up a survey and spent an hour with each of the board members, learning what they expected from him and how they wanted the board meetings to run. Even if you’re not currently working with a VC firm, you’ll want to hear Mike’s advice on how to run an effective board meeting.

“As a founding CEO, by the time you get to 300 people, you know if you’re the execution machine or kind of the vision machine, and you’re probably not great at both.”

Today, FreshBooks is the #2 small business accounting software in America, with paying customers in more than 100 countries and around 500 employees. To manage that growth, Mike brought in a partner to take over CEO duties, freeing up his time to work on more of the longer lead brand issues, like product, marketing, customer development and culture — “all the stuff I love,” as he puts it. FreshBooks has won all sorts of awards for its culture as well as its products, and as Mike points out, sustaining that kind of excellence is a perpetual job. 

Just like with his first businesses out of college, Mike continues to be motivated by the things he’s passionate about. He recently co-founded another company, and that’s giving him the opportunity to apply what he’s learned at FreshBooks through a structured time investment of only 90 minutes a week. While he does his best to protect his “white space” time, he says that even when things are wall-to-wall, there’s some relief in the fact that he’s working on the things he loves to do and making a difference for small business owners.

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