Digging Into Expensify's IPO

On this week's episode of Industry Focus: Wildcard, host Jason Moser sits down with Motley Fool Ventures partner Brendan Mathews. Tune in as they take a closer look at the business of Expensify (EXFY 3.66%) as it makes its debut as a publicly traded company.

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This video was recorded on Nov. 10, 2021.

Jason Moser: It's Wednesday, November 10th. I'm your host, Jason Moser, on today's Wildcard Show, we're digging into a new IPO, hitting the market today, Expensify. Joining me to break it all down, he's a partner with Motley Fool Ventures, it's Mr. Brendan Mathews. Brendan, good to see you again.

Brendan Mathews: Good to see you, Jason.

Jason Moser: Been a little while, been a little while. You guys are keeping busy over there, Motley Fool Ventures it sounds like?

Brendan Mathews: Yeah, always busy, but level Wildcard Wednesday.

Jason Moser: Yeah, yeah, we can never ever, ever discount the Wildcard Wednesday. It always takes me back to Always Sunny in Philadelphia. I can't get over it, it's a little inside joke there and I think few of our listeners may know what we mean there. Brendan, we are going to talk a little bit today about a company that's getting ready to start trading today, its IPO, it's going to list on the market today, start trading. A company I'm sure a lot of folks have heard a little bit about, and we, I think, have a unique perspective on it at least as well, from a user's perspective, but it's Expensify. Now, Expensify is pricing, it looks like at $27. It's not started trading yet, so we'll see, at least at the time of taping here, it has not started trading, so we'll see how that all shakes out for the day. But it will be trading under the ticker EXFY. In simple terms, Expensify is expense management software that is meant to help small, medium, and large businesses manage their money more effectively, more efficiently. Brendan, we both have gone through the S-1 here, the filing when a company prepares to go public. It gives us a lot of information on the business itself. Let's talk a little bit about what Expensify does actually do. What's the problem that they're trying to solve to your mind?

Brendan Mathews: The function is expense reporting, and it's not all of the expenses of your business, it's specifically when your employees have expenses and you've approved them. Oftentimes, that's travel, but it can be a lot of different things. It could be a subscription to a business publication. It could be parking to attend an event. It's a lot of little things like that, and usually it's like once a month, every pay period, you submit some expenses to your employer and they pay you back. This is an online tool to do that.

Jason Moser: Yeah, and I think as with most businesses today, this is a cloud-based platform, so something that's built up on modern-day technology, obviously, that's a good thing. But to your point there in regard to the customer, to the employee, I think that's important to note because even in their S-1, and they know their North Star has been improving the experience of the actual in users of this expense management software. The everyday employee they call. So you and me, all of the folks that we work with. Expensify is really aiming to make expense management easier for us. It seems like that's part of the explicit strategy they stayed out. They feel like they've got a very grassroots organic way to grow the business. In that one employee maybe downloads the app or interfaces with the website, deals with some form of expense management. They have a good experience with it then that then breeds more employees with the company to use it and then the company grows to adopt Expensify's platform and the tools that it provides. You see a lot of companies perhaps attacking it from a different angle. Trying to offer leadership of the company, some big management platform and then you're more or less impose it there on your employees whether they like it or not. Expensify seems to feel like they've got something pretty good here and that they are confident enough to take that strategy of starting really at the very base level, at ground-up approaches, they call it with the individual employee and then growing from there.

Brendan Mathews: Yeah, actually one of the things that's most appealing to me about this company is they have what's called the bottoms-up sales strategy, which we've seen that at Slack or MongoDB. Whereas what you do is you put out a free version, and you just let people go out there and use it. Eventually, they like it, they tell other people at their company about it. Eventually, you transition the whole company onto a paid account. It's called a bottoms-up approach. It's a contrast to the traditional enterprise sales model, which would be more of a top-down where you have a salesperson, who finds some director or manager, and you pitch them and maybe there's a committee and they sign a contract. It's time-consuming, it's slow, and actually, I don't know if the results are ever that great. I've been on committees of people evaluating a pick software. I've also seen the results of bottoms-up where you have employees, especially if you have tech employees, will go out and find good products, and organically, introduce them versus being rolled out company-wise and Expensify is definitely in that category of bottoms-up. The reason I like that as a business is it's cheaper. You don't need to spend a ton of money on a huge salesforce, if you've just got people organically adopting it, and then almost selling it for you.

Jason Moser: You feel like it's how Slack got about things. It feels to me at least a little bit like Slack took that same approach. I don't know if they explicitly stated that as their strategy, but it feels like Slack took that same path and just individual users used it. They liked it, it grew from there. Companies then realized a lot of their employees were using it, and then started to establish the relationship with it.

Brendan Mathews: I think that's definitely how Slack went to market. I might not have this started 100 percent correct. But I think at the Fool, we're big users of Slack, and I think the early adopters were folks in our tech department who were on a free version and just started using it themselves, and there is no companywide dictate. They just started using it and they liked it and a few other people joined. Then all of a sudden, you say, hey, you're using this companywide, let's get you onto a paid subscription and that's how it works.

Jason Moser: Yeah. Let's talk a little bit about the market opportunity here because that's obviously something we focus on a lot as investors. When you look at the numbers, this is still a small business. They generated $88 million in revenue in 2020. Now, obviously, it's growing very quickly so that number will be significantly higher for 2021, I would imagine. But still, it's a small company, just starting to get its feet underneath it. But they see, I think a pretty size-y market opportunity out there. If I'm reading this correctly, it looks like they see the total addressable market here domestically, at least at $16 billion, which certainly indicates some reasonable room for growth there at least opportunity.

Brendan Mathews: Well, I think the way that they are sizing the market is they're focusing on small businesses, and there's a lot of small businesses. Most I think they have stats on 100 or less employees is the vast majority of businesses in the United States, so that's who they're going after. I think what they're replacing is probably, in many cases, not a software solution. It could be you just submit an envelope with a bunch of receipts in it or you email receipts to somebody, and there might be a spreadsheet in your accounting department, or you might have a person who is not even a full-time finance person, who's just trying to keep track of it. This is what that is replacing.

Jason Moser: Yeah. Yeah, it definitely feels to me like they state this and it reminds me a lot of business that we cover a lot here on Industry Focus on Monday show Bill.com, pursuing a very similar market there. There may be some nuances there, that differentiated two businesses, but generally speaking, they're focused on that same market and helping small to medium-sized businesses and large businesses manage their back end finances better. Disrupting a very inefficient market there, I mean, we used consumers have really enjoyed this transition to digital money. PayPal and Venmo, and Cash App and everything in between. They're just a million different ways for us to manage our finances now, just through the tap of a few buttons on our phone, yet the enterprise side has remained surprisingly inefficient. Lots of paper, lots of manual entry, lots of inefficiency, lots of the errors. It certainly does feel like they're tackling a market that needs to be "disrupted", so to speak. But also, it feels like there's the opportunity to develop a lot of tools and services down the road that should be able to expand that market opportunity over time.

Brendan Mathews: Once they get into a company, they want to launch new products, new services and the software to keep track of the expenses is to send a beachhead. They've also introduced expense cards, which I think is adding another layer of efficiency, but also another way for Expensify to make money.

Jason Moser: Yeah, absolutely. Do you feel like you've walkaway from looking at this business, at least to the extent that we have for the show? What do we feel like a competitive advantage for this businesses? Or is there one? Is there something that stands out that makes you say, these guys have something that the others don't because, if you look at Bill.com versus Expensify, for example, Bill.com came into the market a little bit earlier. But it's clearly been a tremendous performer and the stock is up 250 percent over the last year. Now it brings in a little bit better than three times the revenue right now of Expensify, but Expensify I think will continue to grow and catch up as well. What's the advantage there? What makes someone say, I'm going with Expensify over something else? Do you comp anything there?

Brendan Mathews: Well, this is typical for software, but I think there's going to be a certain stickiness associated with behavior, so if you've been using one particular tool for a long time and it's integrated with all of your other systems. There is not a huge motivator to change if it can be difficult to change. Now, SMBs are a segment that are usually a little bit more fickle, so they'll change more often. One of the things that I was looking at in the S-1 because of this competitive advantage issue is churn and I was actually pleasantly surprised by their churn numbers. We could probably talk about COVID a little bit later but 2020 was a hard year for them because of COVID, and they still, on a customer-by-customer basis, retained 86 percent of their customers. For an SMB retaining 85 percent plus of your customers in any given year, I think it indicates that there is something there. I think there is a competitive advantage but I think it's also maybe a little bit of a land grab. There's other people going after this market so I think the advantage is always going to be to the incumbent. It's going to be important for Expensify to get out there, get set up with these SMBs before other competitors do, and there's other people out there, there's other cards, there's Brex to private competitors. There's also Coupa software, as a component that includes billing. I would say, there is room for competitive advantage, they're probably not locked in quite yet. When we think about companies that are really locked and they're not there quite yet.

Jason Moser: It feels like on the one hand, you've got things like this it makes me think a little bit of banking relationships. You get set up with your checking account, for example, when you're 20 or however old you are, you get first checking account and then you just end up staying with your bank, it's just a commodity service. You just need just need a place where you can get your money from point A to point B and you tend to not switch very often those banking relationships because of the longer they go on, the more difficult it becomes to switch, you have more things just embedded in that relationship. Whether it's automatic payments, budgeting tools, whatever it may be, it becomes the incentive to switch just becomes less and less over time and it feels like certainly Expensify can benefit from that. By the same token, I think you made a very good point there. 

In that with small to medium-sized businesses in particular, they are going to be a little bit more economically sensitive. They are going to revisit these relationships from time-to-time and assess whether the value is really there and then furthermore, I think also, while I do like their strategy in really focusing on the individual employee. There's also risk there and that the next mouse trap comes along. A little bit of a better mouse trap that a few other employees tend to really glob onto and really like and then that word starts getting out there, and so then you start having perhaps some competing services within an organization. Something to keep in mind, I think. You raised a good point there with competition in space. I think Coupa Software, one absolutely to keep in mind very strong business there. A lot of private businesses in this space. It feels like a land grab at this point and they got to get as much as they can quickly and provide superior service to really try to lock those relationships in for as long as they can. I guess really gross margin to me is probably one of the good indicators over time that they are able to either maintain or exercise even a little pricing power. What do you think?

Brendan Mathews: Yeah, definitely. Their gross margin right now is good, it's I think 76 percent, which is all Software-as-a-Services typically, going to have high-gross margin. I think if you see that ticking up, that's going to be a positive indicator on both product quality, willingness to pay, and then ability to efficiently deliver.

Jason Moser: Then that retention rate that plays into that idea of churn your customer staying with you, not only staying, but really are you growing the relationship with them? That's something to keep an eye on as well. Let's move over to leadership here because, of course, leadership is something we always like to discuss in so many of these businesses that are coming out now to the market. Many of them are founder-led. You love to see founder-led businesses. You love to see those founders out there with skin in the game really trying to steer the ships so to speak, and Expensify is no exception there, David Barrett.

Brendan Mathews: He's a bit of a wildcard.

Jason Moser: I think it's a very good theme for today's show. He feels to me like he is a little bit of a wildcard. I don't know that he necessarily is the CEO that I'm gunning for. I don't know that I'm actually looking for a CEO that's doing the stuff that he is doing and we can get into that, but what's your initial take on him?

Brendan Mathews: Probably two things. He's definitely doing things differently and if you want results that are different than average, you have to do things definitely, I like that he's got some different employee policies like consensus pay. I laugh because I think around the election, he was sending emails.

Jason Moser: I was going to bring that up.

Brendan Mathews: Because we're customers that created a big debate internally which I didn't really participate in. But he's wildcard. Definitely he has a vision of himself that's more than just the CEO of a successful software company. He definitely sees himself as a visionary and a social activist, which is good and bad. I think the thing with him is you really have to get comfortable that it's going to be a little bit of, things are going to be exciting from a leadership perspective because, not only is he the biggest owner of the company, the company is set up with this voting trust structure where there's different classes of shares. The CEO, CPO, and CFO all put their shares into this voting trust so that they are essentially going to control the company. Good or bad, David is the captain of the ship.

Jason Moser: I think that's it. It's good or bad. We've seen companies where the founder, and the CEO, the leader of the business, can be a substantial part of the bull case and can also be a substantial part of the bear case. One of the businesses that comes to mind immediately Under Armour, I feel like Kevin Plank is a very good example there where we saw Plank as absolutely a key to the bull case but also you very clearly saw how he was part of bear case as well, and so far, that's really worked out. The bears have won there, I think. You do have to be aware of that. Barrett, I think to me very political. Neither good nor bad. That just is. You have to make your assessment there as to whether you're comfortable with the CEO who is as outspoken politically as he is. You referenced that email that he sent in November as the election was coming near. It was very awkward, I think, for a lot of folks, a few of us internally when we got that email, we all ask each other, "Did you just get this weird email?" Everybody was like, "Yeah." It just was very odd. I like you did not participate in any political debate because this is just not my thing. But the one thing that stands out to me because he is very outspoken. I think to give folks an idea of what this email said, he said in the email, "A vote for anyone other than Biden is a vote against democracy." 

I'm not going to unpack that, but I'm just saying that's the angle, but this guy is approaching it from the one risk that seems to play out is a possibility that it could create an environment where people don't want to work for a person like that. It doesn't seem to me when you get out there and lay it on the line like that, you're telling people exactly where you stand and this is how things are. It seems like it would make it difficult to attract talent that perhaps things a little bit differently than you do. Just because people think different than you do doesn't mean they're right or wrong, but it harkens me back. I don't know if you ever read that book, Team Of Rivals, the Abraham Lincoln book by Doris Kearns Goodwin. But it made me think one of the reasons why Lincoln was so successful, he surrounded himself with people that thought differently than he did. I think that's key to good leadership. It is not only surrounding yourself with people who think differently than you do, but also then putting those thoughts into action. 

The flip side of that is I think feels very confident in his worldview and the ways he's doing things, so that's something that investors in this business would probably have to get comfortable with. It is just certainly something worth keeping in mind. I wanted to just ask you really quickly from a user perspective, because we talked about red flags and risks and I feel like we talked a little bit about that with leadership and competitive advantages. From a user's perspective, I don't know how you feel about Expensify from a user's perspective. Maybe you asked our accounting department here at the company and they tell you it's a great platform. I have no idea. I can tell you as a user or from an employee's perspective, I don't find it all that great. I don't find it all that sleek. I don't find it all that intuitive. Now, I'm sure that's also because I use it probably once a year. I don't use it frequently, but it's like every time I go in there to use it, I have to relearn how to use it, particularly if they've made changes to the platform. I wonder if you have an opinion there as a user of Expensify, if you have any concerns or if you feel like it's a great platform.

Brendan Mathews: I agree with your take. It's funny, a decade ago, I was working at Accenture and doing a lot of business travel. I would fill up these envelopes and mail them somewhere in San Antonio, they will go into some vault. Now, I would say it is a lot easier to click between I've got a credit card connected to Expensify and a couple of clicks it works. When you're not using it that much though, definitely it's not completely intuitive and there's a little bit of friction there. I don't know. I think there might be a little bit of a dirty secret that that friction is a feature for some of the companies. We've both probably had instances where we've had an expense we could reimburse and you look at the process and you just can't get through it.

Jason Moser: It's just not worth it.

Brendan Mathews: You end up beating it. I think there's probably some element of that where employers don't mind having a little friction.

Jason Moser: I'm glad you said that because I'm guilty as charged.

Brendan Mathews: Not too much, but it will.

Jason Moser: I've let a few of them slide because I just think just one work and I couldn't get through it and it's just, you know what, we value our time a little bit differently today than we did two years ago. Maybe that is by design, but something worth keeping in mind. Again, everybody is different. There's Android users, there are iOS users. Everybody is going to get their own perspective on user experience and whatnot. Just something worth keeping in mind because I do feel like a business like this could be subject to that better mouse trap of threat there. Clearly, FinTech is a very quickly evolving space with a lot of hands in that cookie jar. But before we wrap it up, Brendan, great conversation on Expensify. I wanted to give you a chance real quick just to talk a little bit about what you guys are doing these days with Motley Fool Ventures.

Brendan Mathews: We just noticed the grind scones still investing in start-ups hoping to help people grow their businesses from small to medium or big. We're looking for tech companies with around half a million to a million in revenue. Always looking for opportunities. The best way to contact me if you have a business that meets that criteria is [email protected].

Jason Moser: Very good. We'll leave it at that. I think that'll do it for us. Brendan, thanks so much out of all your research with Motley Fool Ventures to dig into a new publicly traded company with us today and I'm sure our listeners will appreciate all of your insights there.

Brendan Mathews: Thanks, Jason.

Jason Moser: Remember, folks, you can always reach out to us on Twitter @MFIndustryFocus or you can drop us an email [email protected]. As always, people on the program may have interest in the stocks they talk about that The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. Thanks as always to Tim Sparks for putting the show together for us. For Brendan Mathews, I'm Jason Moser. Thanks for listening and we'll see you next week.