Compound startups: Will integration be the product?
Compound startups: Will integration be the product?
After a decade of cloud app expansion, integration frustration and rising subscription costs are forcing cost-conscious accounting professionals to consider consolidation. Will this play to the strengths of existing large vendors, or is a new compound startups era, prioritising a one-platform approach, upon us?
After more than a decade of unbridled success, has the cloud accounting world reached peak app?
The past 15 years have seen an explosion in the breadth and depth of the cloud accounting market, turbo-charged by app ecosystems where accounting platform users can find and connect niche solutions to almost every business need.
Fuelled by cheap investor cash, startups have piled into accounting and business tech, following the tried and tested software path of “find a narrow problem, solve it, get rewarded”. And by and large, this has worked well for both customers and vendors.
But recently, things feel like they’ve got a little out of hand.
Accounting tech spaghetti
A few months ago, I saw a firm owner post on LinkedIn about their tech stack. One full-time member of staff, two part-time bookkeepers, and 42 different apps running. An extreme example of accounting tech spaghetti, but how can they possibly keep up with the billing, let alone get the best out of all of them?
AccountingWEB’s recent Intelligence research into the cost of technology found that accounting firm software spending has risen from 4% (2010) to 7.6% (2023) of a practice’s cost base. These are obviously broad-brush figures, with variances depending on firm size and setup.
However, they are indicative of a wider feeling that while technology has driven efficiencies, fees have not kept pace with software costs and accounting professionals surveyed said they were looking to drive down their tech outlays.
Another major issue is integration and the knock-on effect this has on data health. Circling the show floor at accounting shows last year, one of the main frustrations AccountingWEB heard repeatedly was around the time wasted when integrations fail, having to log in multiple times for different parts of the same system, or having to set different permissions for each ‘integrated’ app.
Speaking at the Digital Accounting Show earlier this year, former Xero UK head Gary Turner gave a talk provocatively titled ‘The Problem With Apps’. Turner argued that while we've never had more software, this has led to a place where it has become increasingly difficult for accountants to manage and orchestrate it coherently.
“Whilst everything is connected by API [application program interface] … the databases are not,” said Turner. “You've got data silos dotted around, you’re not entirely sure where your data is, who's looking after it, and whether it conforms to local laws and regulations. You’re having to relearn and learn different ways, different apps, different systems.”
The bundling has begun
So how is this playing out in the accounting software world? Well, after the cloud accounting Big Bang, comes the Big Crunch, or as former Netscape CEO Jim Barksdale once famously stated, “There are two ways to make money in business. One is to bundle. The other is to unbundle”.
And the bundling has begun in earnest. Pretty much across the board, accounting platforms are expanding into “everything” apps.
In the past three years, systems like Bright, FreeAgent, QuickBooks, Sage and Xero have added functionality such as pre-accounting, tax, accounts production, payroll and working papers in the form of integrations and acquisitions, in the hope of tempting core accounting customers away from their best-of-breed apps.
Enter the compound startup
But wait! A new tech trend player has entered the game. There’s even a handy buzz phrase for it - the ‘compound startup’. Instead of just doing one narrow thing better than existing vendors, this new breed of tech builds a whole set of different point solution systems into one coherent product.
Against the prevailing wisdom of the past decade, part of the promise of the compound startup is that it doesn’t necessarily perform much better than individual best-of-breed rivals – instead, integration is the product.
But isn’t that just a suite?
Yes. And… no.
Let’s dip into former Xero UK head Gary Turner’s talk to tackle this one: “They share many of the same characteristics as traditional suites, but generally speaking, suites have evolved through mergers and acquisitions, which generally doesn't lend itself to a single consistent data model, user experience and overall solution.”
To extend Turner’s point further, instead of a variety of best-of-breed apps purchased, connected and then branded with a marketing label, compound startup vendors would argue that they are building connected cloud suites from the ground up, with the ability to process vast amounts of data and move it around the system in a coherent, connected manner that wasn’t possible before.
The Rippling effect
Perhaps the most visible example of the compound startup operating today is American HR tech giant Rippling. Built with the goal of providing an all-in-one solution for corporates handling employee data, from recruitment and onboarding to payroll, expense management and HR, Rippling is now valued at $13.5bn.
On this side of the Atlantic, and in the world of accounting tech compound startups, is Translucent. Launched in 2023 by Receipt Bank founder Michael Wood (and with Gary Turner and fellow Xero alumni Craig Walker on the board), Translucent bills itself as a ‘CFO Super App’, and is designed to create a single system of record for finance leaders.
“It’s a natural progression,” Wood told AccountingWEB. “In the next decade, we’ll see a huge switch from apps to platforms. There are too many vendors, solutions don’t talk to each other and their functionality overlaps.
“It makes more sense for one vendor to build different apps on one platform, rather than ten vendors to pay inflationary pay rise to engineers, building in their own niche,” he continued.
“Not only will moving onto one platform cut costs for accountants, but the software will have the same user experience and everything talks to each other – you don’t need to worry about security, permissions etc. As long as it executes well, others can’t really compete.”
And as pointed out by FreeAgent’s Tony Stevenson, new software often just does more. Apron combines accounts payable and OCR-driven data capture, Mimo bundles accounts payable, accounts receivable, cashflow and invoice factoring, while Client Engager combines practice management, pricing, e-signing and engagement procedures – previously standalone products that now all sit together in one package.
Will there be compound interest?
As with any nascent trend, it’s hard to know whether the compound startup will take root and flourish in the school of hard knocks that is accounting software.
Matching accounting firm needs and desires to a set of products that provides them might seem like a slam dunk, but successful software isn’t always about being the best. Just ask the folks at Betamax! But the outlook for the compound startup looks promising.
If it does cut through with the accounting profession, purely based on the cloud expansion, the trend could take another decade or so to hit the mainstream – changing firms’ software habits is a hard job.
Perhaps we’ll look back in 2037 with a wry smile at the vast array of software options available to accounting professionals and feel a pang of nostalgia. Or perhaps we’ll just be glad to have fewer vendor names to remember.
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