A shiny new app with lots of cool features often comes to the scene, promising to transform accountants' lives and solve every problem under the sun. When in fact, what's on offer is a half baked MVP looking for validation, with all those life-changing features forever coming soon.
This illusion ends up costing dearly to accountants after spending precious time reviewing, implementing and sometimes training staff, only to be disappointed when the benefits aren't materialising as promised. Or worse, losing a client's trust by making the same promises about the life-changing value that's never delivered.
So when accountants have a bad experience with a new startup, they don't give it a second chance, and perhaps even more importantly, they talk.
Accountants are much more collaborative than they used to be. If they have a terrible experience with a vendor, they will tell others. More importantly, the most significant factor influencing purchasing decisions is what other trusted accountants are using and recommending. When these two factors are combined, one accountant's negative experience can have an exponential adverse impact in the long term.
Accountants don't have the time to keep reviewing solutions they got lured into with false promises and tend to never look at that solution again (even years later). Instead, they check the next competitor to come along.
So when startups overpromise only to underdeliver, sell the dream and burn bridges, those bridges often cannot be repaired. And there are fewer overall bridges than many startups appreciate.
Your TAM is smaller than you think
While burning bridges in the B2C space is often nothing more than a short-term setback to learn from and iterate, it can be another matter in the B2B space, and even more so in the AccounTech niche.
The initial early adopter market segment for accounting tech isn't as large as many think. According to Will Farnell, a reliable authority on the subject, it is still a fraction of accountants that fully utilise cloud software.
A figure most likely not changed in the past two years, and with some bulk license deals hiding the real usage, there is around 20% cloud adoption in the UK. But perhaps as little as 2%-3% of accounting firms that have a majority of their client base on cloud software with a good core tech stack in place to fully utilise the app ecosystem that plugs into it.
So despite all the hype, mostly led by the vendors, it's still a tiny fraction of firms that are sophisticated enough to make the most out of the data they now control. And in this small segment, there is very intense competition.
So bringing an untested product that is still looking for validation under these market conditions can be a very risky endeavour.
The death of the MVP
Much of the approach of startups in the accounting space originates from the general dominant lean startup methodology, the MVP being a core pillar of it.
These methods have proven themselves to be the secret sauce to startup success in many industries. They have achieved a somewhat religious following in the startup world (alongside sacrificing profits for rapid growth).
The tech going into accounting and SME software is nothing close to the deep tech influencing other industries (such as sophisticated AI algorithms shortening the time to get to nuclear fusion by decades). Nevertheless, small nuances, often very unsexy to tackle, require a deeper understanding of accounting work. More time can be necessary to research, speak with accountants, and develop the product before earning the status of viable.
Accountants are frustrated being the unwilling guinea pigs of an underdeveloped product, only to satisfy the startup mantra to get an MVP as quickly as possible in customers' hands.
And the best way to convince people to use a weak solution is the source of another significant problem in this space. Too much money going towards marketing, sales and general noise creation instead of initially focusing on product research, development and achieving a strong product-market fit.
Startups are essentially getting distracted from the most fundamental truth that leads to longterm success- find a problem, build a solution, offer significant value.
It's undoubtedly a massive challenge for a new tech startup to stick out with all the noise out there. Even more so when there's a global pandemic, and it's becoming an incredibly competitive space.
But that's precisely the problem. Shiny marketing and aggressive sales around a mediocre product will never lead to meaningful long-term results. Sooner or later, churn becomes a significant problem.
And it's when those results fail to appear that the growing pressure for short term results becomes detrimental. Much of this pressure undoubtedly originates from investors and VCs, funding and promoting that massive spend on marketing and sales.
The negative side of Venture Capital
VC's certainly have their place in helping to accelerate growth. The right funding at the right time can be all the difference between a new global category leader to another fantastic solution that never takes off.
However, it's becoming apparent that this is the wrong model for many types of businesses. But more importantly, the blind belief many startup founders hold that VC's always know what they are doing, investing in good companies with limitless potential, is long gone.
The fact is that most, not all, but most VC's have a terrible track record of making smart investments.
IRR from every single VC in the US from the beginning of the industry (about 30 years ago) until 2011 (apparently not much different today).
The figures above indicate that about 25% of funds deliver negative returns, 33% provide single-digit returns, and only the top 1%-3% of funds provide the spectacular returns touted in the media. Articulating his point of view that startups need to focus on a customer-funded model rather than a VC funded model, Professor John Mullins from London Business School says quite simply when presenting this information:
"Do you want the help, advice and support from these guys delivering this kind of performance"?
In the UK, most people making decisions on startup investment have never even worked in startups. Success in large finance, banking or management consulting institutions often doesn't translate to an understanding of the startup world, not even to mention the lack of diversity which is a severe risk of group thinking in investment decisions.
Startups need to be very careful whom they bring on board early on as investors to ensure they understand and align with their long-term vision of the product and understand the accounting industry's subtleties that require a different approach.
When investors are pressuring to take a direction not dictated by the market and end-users, it's the start of a slippery slope of a never-ending cycle chasing short term results while never building the foundation for more sustainable long term growth.
What's the solution?
It seems there is an undeniable MVP fatigue in the accounting space new startups launching should take into account.
Suppose the MVP's death seems like an exaggerated attention-grabbing headline, at least raising the threshold for a product to be considered viable is undoubtedly recommended.
There's nothing wrong with an MVP. But when presented as something it's not, a mature product, and when startups think it's all about selling the dream first and building it later (fake it until you make it), that leads to a disconnect between expectations and what is eventually delivered.
Accountants are for the most part honest people that appreciate honesty back. And that's part of the solution I will discuss in the next and final article in this series, alongside some other practical insights.