I recently learned that a venture capital-funded SaaS startup called FloQast had moved into new offices just a couple miles away from my home in Sherman Oaks, a suburb of Los Angeles.
And they make accounting software!
Being a self-professed “cloud accountant,” I knew I had to meet the founders of this startup. Mike Whitmire, co-founder and CEO, greeted me on the day I visited.
What FloQast Does, and Why You Should Care
FloQast is a cloud-based “close management solution” for internal accounting departments.
In other words, it’s project management software designed to help CFOs and controllers gather information and manage tasks that have to be completed in order to produce monthly, quarterly, and annual financial statements according to GAAP. (Watch FloQast’s brief overview video to see how it works.) GAAP requires a strict cutoff between accounting periods, so the accuracy of the reporting is critical.
In the accounting industry, this process is known as the “monthly close” or “financial close.” And it’s pretty much a given that it’s never fun for the internal accountants. It’s practically part of the job description.
For example, at publicly traded companies that report to the SEC, it’s common for the internal accounting staff to work through the weekend four or five times per year in order to get the financials together by the reporting deadline.
Even in non-public companies, the rush to close the books creates a challenge, since most of the work in the department is compressed into the first half of the month. Accounting departments are therefore almost always under- or over-staffed.
The monthly close is particularly challenging for growing companies, since the complexity of the close is increasing at the same time that the accounting department is growing and bringing on new employees who aren’t familiar with the process, which may be different for every company.
This is exactly the situation Mike Whitmire faced from 2009 to 2011, when he was working as a Senior Accountant at Cornerstone OnDemand.
“I came out of Ernst & Young and was the fifth employee in accounting at Cornerstone,” Whitmire explains. “In three years, we went from five to 50 staff in the accounting department, and during that time we also had an IPO.”
“When Cornerstone was small, it wasn’t difficult to close the books,” he explains. “But as we grew, it became a bigger challenge. By the end of my time there, our controller was holding weekly standup meetings that were four hours long with about 25 of the staff.”
“I was bored out of my mind sitting in those weekly meetings — it was a huge waste of time,” says Whitmire. “But it was the only way we had to make sure that everything got done. I knew there had to be a way to make our monthly close faster and more transparent.”
The FloQast Dashboard
Whitmire, with his co-founder and CTO, Cullen Zandstra, founded FloQast in 2013. They were accepted into Amplify.LA, a local startup accelerator, that same year.
In 2014, FloQast launched the first version of the app and raised a $1.3 million seed round led by Toba Capital. In March 2016, FloQast raised an additional $6.5 million in a Series A round co-led by Polaris Partners and Toba Capital.
During that time, FloQast built up quite a roster of customers, including Ruckus Wireless, DocuSign, GrubHub, the Golden State Warriors, Ancestry.com, Indeed, RingCentral, and Zillow.
Cloud Accounting Ecosystem Coming to the Mid-Market
Like the companies on the list above, most of FloQast’s customers are not small. They’re typically “mid-market,” with more than $10 million per year in revenue and between 200 and 500 employees.
This is interesting because up until now, most of the attention in the cloud accounting industry has gone to cloud accounting software and add-ons geared toward small businesses — mostly those generating under $10 million per year in revenue. These are the companies that are now switching in large numbers from desktop software to QuickBooks Online and Xero, the top general ledger applications for small business.
FloQast, on the other hand, is geared specifically to mid-market companies. Rather than integrating with QuickBooks or Xero, FloQast syncs data with Intacct and NetSuite, ERP (Enterprise Resource Planning) systems that support the more substantial databases required by larger companies.
What’s also interesting is that FloQast is a true “add-on.” By add-on, I mean that it is intended to supplement the functionality in the ERP system, not to be used as a stand-alone application.
The way this works is that FloQast connects via APIs to the ERP system — Intacct, for example — plus a document storage solution—let’s say Box. FloQast then pulls in the value of the General Ledger accounts from Intacct and matches those up with the results of the financial close Excel workbooks stored in Box. Then it builds a task management workflow around that data.
This is a perfect example of a trend Doug Sleeter identified in 2012 for the small business accounting market. Sleeter calls this trend “chunkification,” and defines the term as “splitting up separate parts of the overall business management systems into discrete parts.”
This is all possible due to the switch from desktop to cloud-based applications. Thanks to the protocols available to apps that are hosted in the cloud, they can now exchange data efficiently. This means that it may be possible to replace or augment all-in-one applications with a set of interconnected but independent applications developed by different software companies.
Xero, which pioneered in cloud accounting with their open API, uses a different term for the same trend. They call this set of interconnected cloud applications the “ecosystem.” By being open (meaning that any developer can integrate their own application into Xero’s database) Xero has caused this ecosystem to flourish. As of June 2016, there are over 500 apps that sync with Xero, and dozens more join every month.
There are indications that a similar trend is already underway in the mid-market for cloud accounting. Intacct’s website lists 60 apps (including FloQast) that have direct integrations with Intacct.
The financial implications are significant. Xero’s openness gave birth to an entire industry of apps that wouldn’t have been possible without the cloud ecosystem. It also inspired Intuit, the market leader in the United States, to move to an open approach. As I write this I count 370 apps listed on the Intuit App Center that integrate with QuickBooks Online. Just a few years ago there were none.
Having more choices is a big net benefit to both accountants and small business owners. Owners now have the option of building customized solutions for their individual businesses. They don’t have to try to fit into a “one size fits all” solution. Tech-savvy accountants can offer new consulting services to help their clients build cloud accounting systems. And developers have access to a new market.
If the same trend occurs in the mid-market as in the small business market, the industry will benefit many times more. That’s because the value created due to productivity increases is often much greater in larger companies than in small ones. Therefore mid-market companies will be willing to pay significantly more for add-ons than small businesses.
Mid-market add-ons such as FloQast can charge many multiples of the subscription fees billed by apps targeted to small businesses, but they are still many times less expensive than the available enterprise solutions, which used to be the only option for the mid-market.