Why Small Really Is Beautiful

Five years ago, Michael McDerment built an invoicing system for his web design business. Today, FreshBooks lets nearly 400,000 users invoice their clients, track time and manage expenses electronically. Not all are paying — the service is free for users with up to three clients — but it’s growing fast. “We’re seeing double-digit growth for both users and paying customers each month since our May 2004 launch,” he said.

McDerment, who is also a co-organizer of this week’s Canadian Mesh Conference on Internet technology, has grown the company slowly; four years later, it has only 17 employees. And he hasn’t taken any VC funding, choosing instead to bootstrap from his web design agency and some individuals close to the company.

Another small-is-beautiful powerhouse, Infinity Box, runs a web forms service called Wufoo. The company has 75,000 users, of which 3,200 are paying customers. It launched in July, 2006, and was profitable less than 10 months later.

VCs might dismiss small startups as “lifestyle companies,” since with only small investments needed they’re often too small for big VC firms to work with. But for the entrepreneurs themselves, it’s a way to keep control and avoid dilution, a sentiment echoed by David Heinemeier Hansson of 37 Signals at Startup School 08 and by Bo Burlingham in his book, “Small Giants,” which is all about small companies:

“To excel in all those things, they have to keep ownership and control inside the company and, in many cases, place significant limits on how much and how fast they grow. The wealth they’ve created, though substantial, has been a byproduct of success in these other areas.”

Infinity Box, which was spun out of Y Combinator with $18,000 in seed financing and has taken another $100,00 from undisclosed angels, currently has three employees. “One reason not to take money is that it slows you down,” said Kevin Hale, co-founder and head of user experience. “You start worrying about hiring, office space, facilities, taxes, and suddenly you’re spending a third of your time on that stuff instead of building the product.”

Many of the capital costs that used to force startups to seek money are now available on demand. McDerment cites hosting provider Rackspace.com as one reason FreshBooks has reasonable capital costs, and Hale says Infinity Box relies entirely on BitPusher for their hosting.

But traveling down such a markedly independent road meant these small business have had to find ways to stand out from the crowd and build lasting, loyal relationships with their customers. In other words, there may be another reason not to take money, particularly if you’re targeting other small-businesses as customers: Personality.

Wufoo’s site is a study in personality, with Shakespeare quotes peppered across its pages. “There were lots of other form builders out there, so our whole target was to be distinctive with the personality of the application,” said Hale.

FreshBooks’ site is also whimsical, with service tiers like “Time Machine” and “Private Jet” — playful language that wouldn’t fly with enterprise customers, but soars with smaller clients. “We’re an experience business and the currency of our business is relationships,” said McDerment. “Word-of-mouth marketing is our biggest driver.” It’s what 37Signals calls Opinionated Software.

If you’ve got big financing, you have big investors with big expectations. It’s harder to have attitude and personality when you’re targeting large enterprises, so if a startup needs personality, it’s important to make sure the investors agree with the philosophy. VC backers will want name-brand customers, and an enterprise CFO probably can’t put “friendly” on a balance sheet.

And keep in mind that enterprise customers typically need customization. “The chances are, big companies can’t take [the software] as is,” said McDerment.

Hale, however, thinks it’s possible to keep your personality even with enterprise customers, pointing out that Wufoo users include several big companies. “But you have to be firm,” he stressed. “Don’t take money to do features because you lose sight of your original vision. You have to be conscious of saying, ‘Don’t let the money change me.'”