Opportunities in unbundling of mid-market ERP (Part 2/3) — the general ledgerDawn

By Dan ChaplinZoe Qin and Skye Fletcher

As we discussed in our last post, finance and accounting forms a core part of a business’s ERP stack and over the past few years we’ve seen an explosion in the number of specialist software vendors building across this area. They have helped CFOs to automate greater parts of their workflow, gain greater visibility and control over their company’s financial data, more easily collaborate with wider organisational functions, and ultimately take on a more strategic role within the management team.

Note: categories neither exclusive nor exhaustive

The demand for best-of-breed tools across this stack has seen players like AnaplanZuoraCoupaKyribaBrexRamp, and Soldo (in our own portfolio) grow to significant scale in areas like planning, billing, procurement, treasury and spend management. It’s been a feature of the market’s development that many of these have focused largely on enterprise and upper-mid-market. But we’re seeing an increasing number of new entrants now aiming to serve the wide and diverse set of businesses in the mid-market who face similarly complex finance challenges but aren’t yet ready to onboard and implement heavy enterprise tools.

So where do we see the deepest opportunities to build the next platforms for this underserved middle?

The general ledger

Well we should start by looking at the general ledger itself. The accounting record that sits right at the heart of this whole finance stack and the ERP, forming the foundational system of record for all other finance processes and systems that read and write data in and out. The need to consolidate into a single general ledger is often the first reason people adopt an ERP system, and it’s the last system that they will choose to rip out and replace.

Given the potential opportunity, it’s notable that there are relatively few new entrants taking on the challenge of building in this area and attacking incumbent ERP vendors right at their core, particularly when compared to the financial planning and operations categories that sit above it. Perhaps this is unsurprising. Taking on this piece of the stack is a formidable task. There is the sheer breadth and depth of build and functionality required to offer a competitive general ledger solution (particularly one that can support the complexity of multiple tax jurisdictions). This also isn’t an area where a ‘fast fail’ MVP will suffice. At the same time, there are clear risks for businesses procuring from a startup and the stickiness of existing systems means that the most attractive group of buyers are those just graduating to an ERP.

Opportunities in the ‘Xero to NetSuite’ gap

However, we believe that there are deep and tangible opportunities in this space for companies that are ready to take on these challenges with the right product and go-to-market strategy. One of the clearest opportunities that we currently see for the mid-market is in the ‘Xero to NetSuite’ gap. The lack of platforms that meet this sweet spot is an issue that we hear about time and time again from our own portfolio — and Dawn’s own finance team!

The basic problem is that for many scaling businesses, SME-focused accounting tools and solutions no longer fit the needs of their business; but the cost and complexity of implementing a heavier and more expensive solution like NetSuite just simply doesn’t add up. Buyers might need a more flexible ledger that allows them to drive automation through their finance function, but the wider platform and/or global functionality offered by NetSuite or Dynamics just isn’t likely to be relevant for them over time; and certainly not at the cost of a clunky user experience. In practice, most end up buying from the large platforms simply due to a lack of good alternatives.

The problem has already been identified by incumbent platforms, with both Sage and Intuit making moves with Intacct and Quickbooks Advanced to extend their product offerings upwards and better support customers in this bracket.

But there are interesting offerings coming from younger and nimbler new entrants, that are building from day one with the mid-market in mind, that are mostly aligned around one of two approaches:

  • Lean core accounting ledgers — platforms offering powerful cloud-accounting functionality but with a trimmed down finance-focused specialism, and advanced automation capabilities. Whilst more geographically limited, these vendors are aiming to be a more nimble and agile solutions for customers compared to the accounting offerings from larger ERP vendors. They are aiming to be easier to implement whilst delivered at a highly competitive price point. Examples of such offerings would be iplicit in the UK and Light in Denmark.
  • Orchestrators — these platforms sit over the top of existing SME accounting software, assuming that customers are broadly happy with more basic functionality but struggle with consolidating across multiple entities and/or geographic systems as they scale. These vendors are consolidating accounting data across systems to provide a single view for the finance team. This approach doesn’t rely on such extensive local market knowledge, and development costs may therefore be initially lower; however, they also require ongoing API maintenance, relying on smooth integrations into other systems. Vendors taking this approach include Translucent and Mayday.

What will winning propositions look like?

We believe companies following either approach can find success and take market share in today’s underserved mid-market, each contributing to the development of a more composable ERP stack. But there are few things that will be important to keep in mind along the way:

  1. Lean and focused product — challengers need to aim for 10x better product vs the larger incumbent players, so maintaining focus on core strategic competencies and delivering a deep product that is the best-fit for their target customer segments will be critical to success. This will likely necessitate leaning into an ecosystem-friendly approach, enabling customers to realise the benefits of other best-of-breed vendors.
  2. Competitive price point — maintaining cost differentiation vs the larger platform players. Without a clear-cut difference, buyers may find the credibility gap harder to justify or otherwise take the leap to larger platforms, even if they are yet to be of a really appropriate size or maturity.
  3. TAM development — whilst maintaining a lean and competitively-priced product, challengers will still need to think carefully about how to build a wider addressable market over time, either through adjacent product functionality or geographic expansion.
  4. Partnerships — leveraging partnerships will be crucial to a successful and cost-efficient go-to-market. Xero famously achieved exponential growth through the accountants and bookkeepers serving smaller business customers, and it is the same dynamic that will play out in the mid-market. Partnership strategies should seek to bring greater lifetime value to accountants from their graduating class, whilst new entrants benefit from enhanced credibility and cost-effective access to a wider distribution network.

The general ledger is a highly challenging but exciting area that we’re sure will see new generational champions emerge over time. So if you’re building in this space, please do reach out!

Meanwhile, in the next post, we’ll look at some of the other areas of the finance stack that sit above the ledger where we see the greatest potential for new challengers — in particular, procurement and treasury management.

If you’re a founder innovating in this space, please do get in touch with: dan@dawncapital.com and zoe@dawncapital.com and skye@dawncapital.com.

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26-04-2021

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