If you want to build a successful software company, you should start by building software, right?
Maybe not. Today’s guest started by doing everything for his clients by hand. It helped him figure out their pain so he could build software to eliminate that pain.
Rene Lacerte is the founder of PayCycle, an online payroll service that he sold to Intuit for approximately $170 million in cash.
Andrew: Coming up, have you ever given your product to a friend or maybe a friend of a friend and asked for feedback and what you’ve gotten instead was ‘Oh, you’re doing a great job. It’s terrific. Congratulations. You’re doing great’. Well, the people who are well meaning like that, who are hiding their honest feedback, how do you get the good stuff? How do you get their good, honest feedback that you can actually use?
Well, check out the one thing that today’s guest did. If you’re in that situation I think you’ll find that part helpful.
Also, where do good ideas come from? Check out where today’s guest got his, well not $1 million dollar idea, $170 million dollar idea. Interesting approach that we’ve heard from other guests but never quite like this. Listen for that section of the interview and you’ll see where great ideas come from.
Finally, what’s in this box. I’ll open it up on the interview. All that and so much more coming up.
Listen up. Hate to have commercials interrupt this interview so I’m going to tell you about these sponsors quickly now and then we’ll go right into the program starting with Walker Corporate Law.
If you need a lawyer who understands the startup world and the tech community, I want you to go to WalkerCorporateLaw.com.
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All right. Let’s get started.
Hey there, freedom fighters. My name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart. And I want to find out in this interview, well, here’s the thing. Usually you think that if you want to build a software company you should start by building software, right? Seems to make sense.
Well, maybe not. Today’s guest says he started by doing everything for his clients by hand. He just did it by hand and he did it so that he could figure out their pain and then he build software that eliminated that pain for them.
Rene Lacerte is the founder of PayCycle, an online payroll service that he sold to Intuit for approximately $170 million in cash, according to Intuit’s press release from the sale. Today, he is running Bill.com, a service that we use here at Mixergy, which is how I connected with him and asked him to do this interview.
We use Bill.com because as we were getting more and more contractors and working with more and more companies to grow this site I found myself getting a little bit distracted by all the different payment methods that people like. Some people like PayPal, others checks, some wire and all the different people who were getting paid, we use Bill.com to keep it all organized and it’s been working well for us and like I said, that’s how I got connected with Rene.
Rene, thank you for doing this interview.
Rene: Well, thank you, Andrew. I am excited to be talking to you and I thank you also for being a customer. It’s always great to bond on that experience because we both understand the pain that we’re trying to solve.
Andrew: Yes. It does give me a better understanding of your product and gets me more prepared for this interview.
You were working at Intuit and we’ll get later on to what you were doing there. But you wanted to start your own company and the first idea that came to you, the one that didn’t work, what was that?
Rene: Basically, long story short, my dad and grandfather, each had 4 or 5 businesses in their life so I grew up hearing about entrepreneurship, all of them since the 60’s were financial services and a couple of them were payroll companies. And so when I was kind of getting the itch to go do something on my own at Intuit, I was actually on a payroll product. And the original idea that came to me was that payroll is really hard and there’s this concept of employee leasing, I don’t know if you’re familiar with that or your listeners are familiar with that. But employee leasing is when you take all of the employees in your company and you have somebody else employ them and then you get better benefits because you have a broader pool of people and then you pay them a fee for doing that.
And so I thought well maybe we can do employee leasing for, we start with this segment market of household employees and eventually get into businesses but we start small to understand how it works and all that. And what we found out is that the regulatory environment for employee leasing, the employment laws in the States was too cumbersome and that it would’ve sucked up all the capital we raised just to even begin the process. We decided not to do that. That’s when we focused on household employment and the payroll [??] and the challenges they have at PayCycle, and then also the small business and accounts.
Andrew: How long did it take you to figure out that this wasn’t the right approach? I mean, you were at Intuit. You had a background in this. Your family understood this. Here you were launching a business. It’s natural to see some setbacks, and to think, ‘Well, this is just part of the process.’ Instead of saying this is the wrong approach. How long did it take you to realize it’s not part of the process, the wrong approach?
Rene: We probably knew that within a year from when we started. Maybe not a year when I had the idea, maybe it was a little more than a year. We got started. We were building the software. The software that we were building, you brought up the point earlier about how I was doing it by hand. I was doing it by hand so that we could optimize the software. The engineering team was starting to build the code on that. That was happening.
Then probably six months in, I hired a general counsel. Because I knew that the employee leasing and the regulatory environment would require an attorney. She was probably on the job three to four months before she said, ‘Look, this is going to be really expensive. Do you really want all your money, I’m not sure VCs want all their money going to this particular [environment].
Some of the examples with employee leasing is if you have more than 50 employees, you’re required for example to have a handicapped spot outside, or a ramp for people to get into your building. If you have 50 employees within 20 miles, than each location is required to have that. That’s one example. So we [??] it, saying really, we’re not 50 employees. Because we’re 50 companies each with one employee. That was the challenge that we decided to move away from.
Andrew: I see. That makes sense. You know what, I was thinking of using some kind of service like that here. Because I said I don’t want to deal with all the headaches of having somebody work for me, all the laws around it. I don’t even want to understand the laws. I’ll just pay someone else to do it. It felt like an easy thing to do. But now I can see the problems in that. I can see why you would move away. Then you discovered what your business actually ended up being. How did you discover that?
Rene: Initially we knew that we were going to target the household employment market at PayCycle.
Andrew: What do you mean by household employment market?
Rene: If you have a nanny or caregiver, typically you’re paying them enough money that they should be paid payroll taxes and you should withhold income tax for them. That was the market we were going to go start with. This was at PayCycle.com. It was a little bit different. We’ll get to that in a second.
At PayCycle, we knew we were going to go after that market. I went out, to your point earlier, I went out and got a handful of customers that had household employees. I did all the payroll for them by hand. I did all their forms. I created their paychecks. I drove to their house and gave them the paychecks to give to the employee. I did all that stuff by hand so we would understand what the challenges were and what the process needed to be. We came up with some of the best innovation for the features that we ended up doing came out of that process. That’s how we started.
As we decided not to focus on the employee leasing part, I had also been talking with a number of accountants. Actually, my accountant and a few other accounts. We found out that they were all doing payroll and had a lousy solution for it. They were only doing it because their clients were asking them to do it, requiring to do it. With that, I said, you know what, there’s an opportunity to [bill] tools for accountants, to be able to go manage the payroll for their clients. Eventually we would get into small business as well. That’s how it all came together.
Andrew: There, you didn’t sit and create the software that we would see on Paycycle.com. You started out by doing what?
Rene: Maybe it’s good to talk about some of the features. Some of the examples that we had that came out of me doing it by hand. I was filling out the task forms by hand. I was creating the paychecks by hand. Like I said, I was driving to drop off the paychecks for folks. An obvious one would be, well, let’s do direct deposit, let’s do an e-mail pay stubs. That came out of that process so I wouldn’t have to drive around.
Then probably more importantly, it was filling out these forms. We were using Quick Books in the beginning days. I was using Quick Books to actually do the payroll [??] clients. Filling out these forms was a real pain.
One of the tenets of PayCycle was that we would take all of the data from the payroll that you had done over the last quarter or the last month, whatever the [??] was to the form. We would integrate that data into a form that would just print out. We created a really interesting technology to be able to take all those forms across all 50 states and put the data in. Then that’s a big part of the value that it took [??] the acquisition was that we had a very small regulatory team because we had automated this entire process. So that was one example. Then the to-do list was another example. So if you’re familiar with Bill.com-which you are-and PayCycle, they both have to-do lists and so what I really like about the internet is that you can kind of forget what you need to do as long as somebody else has a good process for you and so we came up with this to-do list saying, “Okay, you have a new employee. We need a W-9. We have a tax form due today. Today you need to put your hours in here” and at PayCycle it could be “You have bills to pay” or at Bill.com it could be bills to pay or invoices that are due or late payments that are due to you and stuff like that. So that to-do list and that prefilled form were kind of the innovations that came out of just trying to manage this manually.
Andrew: I see. So it was you doing it for them, to do the job for them and then you creating software that solved the pain that you discovered as you were doing it for other people?
Andrew: Got it. And so by doing it for them you’ve got more awareness of their problems than if you were to even talk to them, than you even had at Intuit. I would have thought actually, “Hey, you know what? This guy comes from Intuit”-and we’ll talk about what you did there in a moment-“He understands the process. He doesn’t need to do things for anyone else. He can just sit and create software.” Why didn’t you know this stuff?
Rene: It’s an interesting question and it’s actually become one of my pet peeves is that you can’t do market research to find out what customers want. Customers don’t know what they want and it’s the job of the innovator- the freedom fighters-it’s our job to kind of figure out how do you get people to transcend to the next level of efficiency or productivity? That’s what I like to focus on-those two things. But the person who comes up with the best chocolate chip cookie-nobody knows he can make a better chocolate chip cookie. You and I aren’t thinking about that. Actually, I am because it’s one of my passions. I love baking cookies. But nobody… Most people just think, “Oh, I’ll eat a cookie” and then when they have one that’s amazing they’re like, “Oh my God. How did you make this?”
And so at Intuit, it was a phenomenal place to learn about market research and how do you find out what customers really think about your product and what they want from you but what I learned is that if you rely on them to tell you what’s next in your business, that they’ll never tell you what should be next. They’ll tell you what they need and it’s up to the innovator, the visionary, the freedom fighter-whatever you want to call us- it’s up to us to kind of say, “This is where the market is going to go” and then you have to put your stake in the ground and then you just have to keep working against it. And sometimes you have to shift, like we talked about. But you really have to focus and deliver that solution. And so coming from Intuit, I didn’t really know that there was a painful process because everything I’d done before when I’d worked on payroll was we were a payroll company and we already had all the tools so I didn’t experience that painful process there either. So when you do it by hand you start seeing something very different.
Andrew: Intuit’s really good at this-at understanding customers. They were one of the first companies to actually go and watch their customers use software. You spent five years there. What are some of the things that you learned by doing at Intuit-some of the things that you learned about customer development by working there?
Rene: I think one of the most important things-and I first heard this from my dad and grandfather-but listening. And listening to your employees, listening to your customers-those are very important things to do and Intuit does a great job of listening to their customers and since the following homes that you’re talking about, the market research that we did- all these things-were examples of how we would listen to customers and we’d revise our products and come up with different roadmaps based on what customers were asking for.
Andrew: I’m curious about an example. I’m sorry to interrupt. What were you doing at Intuit?
Rene: I started actually working on the payroll solutions for the company but within six months we launched our bill payment and online banking activities and so I got pulled into that and did that for a couple years where I managed the retail bill payment product for Intuit as well as the bill presentment product and then I went back the last two years and did the connected payroll strategy for Intuit and then I left and did PayCycle. So examples were customers would kind of tell us…
Actually, if you think about the payroll that I was hired to do, we did three different market research studies within six months. The first one came back with a top two box of 6% or 8%. So people really didn’t think that they needed a better payroll solution. And then I asked the question differently because I was really convinced that we needed to go do this and we got that number to 12% or 14%. And then I asked again and I got it up over 20%. And when it got over 20%, that’s when the rest of the management team and all that said, “This is interesting. We ought to go do this.” And so with that, we started working on it and then we had to shift the focus and go do stuff for the bill payment and the retail business on the bill presentment. So I think what’s interesting about that story is that research… I had to convince the management team that they needed to go do payroll and if you look at it today, it’s… I’m not sure. I think it might be close to a billion dollar business that Intuit has from payroll. So it’s a pretty big business and it’s something that took a little bit of foresight to make it happen.
Andrew: And when you went to the research you were looking to research to back up your foresight and by just switching the question you can get whatever answer you want, it seems. Like if you really want to promote it you can ask a question one way. If you didn’t want to do it you can ask it another way and get data to support it.
Rene: I think that’s not entirely true but mostly I think that’s true. It’s like… When I took a statistics class in undergrad one of the books was Lying With Statistics, right? And so unfortunately, I think that’s… Unfortunately you can’t always trust every number that you see in the press, through media. But we asked a question and what we found out was that people did have pain and the way we described it originally, it wasn’t getting at it, right? And so I’m not sure if it actually changed what we built but it did make people feel better that we were building a solution. And so if we think about building a dot com, the first time I talked to lots of potential customers about it, they were like, “I don’t think that’s a problem. You just go focus only on their [??] side-getting paid faster is really important.” And I said, “Well, my problem that I’ve had is managing cash.” And so all the research I did-the one-on-ones- nobody kind of said, “Yeah, I kind of have a process for that. I don’t get it.” And now those same people that I asked that are all customers, they say, “Oh my God. I can’t believe how much time you saved me.” So there is some conviction around this and you have to believe that “Hey, this is a painful process that needs to get fixed.”
Andrew: So then is the lesson that I take away from this that if you ask people you’re going to get one answer but if you watch them you’re going to get the real answer?
Rene: I think that’s definitely a part of it and the other thing I would say is if you show them and if you do for them it’s… One of the examples I love to bring up just because it kind of shows kind of generationally how people think differently, you and I probably had ATM cards in college, right? And I went to college and I got an ATM card and that was somewhere back in the ’80s. My parents didn’t get the ATM cards until late 1990s- early 2000s, right? And if you’d asked them “Do you think that you need an ATM card?” for 20 years they would have said, “No, I like going to the bank. I like talking to the teller. I know them-known them for a long time- I like hearing about their kids,” whatever the story is. And yet that’s not what we all do today. So you have to kind of watch and experience and so going with the customer, going to their shop and kind of… I’ve done with both PayCycle and [??] is going and watching them do their payroll or watch them manage their bills going in and coming out. You see the challenges that they have and then you say, “Well, what if I did this for you? Would that be better?” and then they say, “Oh yeah, that would be better.”
Andrew: And then do it for them to really see whether their lives are changed.
Andrew: Speaking of your parents, you were basically born into entrepreneurship.
Andrew: Can you tell people what you mean by that?
Rene: So I think I mentioned earlier, so my parents had five businesses during their lifetime. My grandfather had six or seven. And so at one point my dad and mom were opening up a business in DC and it was 1967 and one of their clients was a defense contractor-one of the lawyers who was in DC-and my mom… It was two weeks before I was born. My mom was not feeling well and so she said to my dad “Hey, I think I’m going to go home and I’ll be fine tomorrow. I’ll come in and do the job tomorrow” and dad was like, “Well, just finish this job and take the rest of the week off and just relax.” And so she stayed until 12:30 at night and it was carrying these 50- pound racks of punch cards. And so she’s 120 pounds, pregnant with me and carrying around 50-pound trays of punch cards and sorting the punch cards. She got home at 1:30 and said, “I’m in labor.” Basically, by 3:30 I was born. So that’s… When I say I’m born into entrepreneurship, literally and figuratively I was kind of born into it because that’s… When you’re starting a company you’ve got to get the job done. And it was good that she got it done but she did take a couple days off and so…
Andrew: The next day did she go to work or did she take…
Rene: She took a couple days off. She was home within 24 hours but she took a couple days off so… My dad was quite happy the job was done and happy that I was born.
Andrew: You say that with a smile on your face and happiness. When I watch movies and I see people talk about… and I see parents work, their kids seem upset by that. Their kids feel ignored by it or they feel like, “Why is Daddy constantly talking about-or Mommy- constantly talking about work?” But you felt differently about that. Why?
Rene: Yeah, it’s an interesting… So when you bring up this to your line of thought, a song that comes to mind for me is “Cat’s in the cradle and the silver spoon,” right? So Harry Chapin… It’s an amazing song and it’s something that I heard when I was six or seven years old. And I do think that while I enjoy and I do think about all the memories, I do wish I’d had more time with my dad as a kid. That’s the nice thing about technology is I can work a lot harder than my dad ever worked but I have the flexibility so that I am with my kids, right? So we go on a lot more vacations than my dad was able to go on. I go to all their swim meets. I do my work between their races. And I can be there for them. So what’s fun for me is you learn a lot and what I do with my kids is if I have a hard day… Every day we come home, we have dinner, we say, “Tell us about your day. What are you grateful for or what was hard or what was challenging?” and you learn about their day and then you get a chance to talk about your day. And so it’s an opportunity for them to get an education around being a manager or about starting a company, having a vision and making something happen. And it was fond memories for me. Hearing that stuff from my dad and my mom and my grandparents and I hope it will be the same for my kids.
Andrew: You said you learned more from your parents’ conversation at the dinner table than most people would learn if they went to get an MBA.
Rene: Yeah, I believe that. I do believe that because it was… What MBAs don’t do is they don’t give you the case studies day in and day out so…
Andrew: I’m sorry. I get so excited about your story. I was about to interrupt you with more of your story.
Rene: So one of the examples…
Andrew: Let’s see if the connection comes back or… I’m sorry. We lost the connection for a moment. You were saying, “One of the examples”- and then we lost it and now you’re back.
Rene: Oh. Sorry. So one of the examples I was going to bring up is a couple of years ago we had… It was 2008 and the company wasn’t quite as financially sound as it is today and so I had to make a decision to lay off a bunch of people and I came home at dinner and I talked about it with my six year old kid and my four year old kid. Actually, it would have been five and three. And they didn’t quite understand it but to this day, they learned about compassion, how do you talk about it, how do you make it so it’s not an awful experience-just a bad experience. And so that type of education, you can’t get that in a business school. You don’t get that because you’re not going to… Any case study you have you’re not going to be emotionally tied to it. I mean they could see the worry on my face. They knew these people. They came to the company picnics and they would ask, “Is this person going to have to leave?” and it was… That education, you just don’t get. So that’s why I think it’s pretty important to share your experience. And if you’re an engineer and you’re really passionate about the work you’re doing, sharing that with your kids is just as valuable because they understand that Mom and Dad love what they do and that they put all their heart into it. And that type of education, you can’t get that from B school.
Andrew: At PayCycle, the first year you were working on a vision that didn’t work out for various reasons, as we talked about earlier. It took you a year to realize that. How long did it take you to realize that the new approach-payroll services-was the right approach?
Rene: As soon as I made the switch and came up with the idea for having a tool for accountants so that they could manage their payroll, then I knew it was the right approach. One thing I should say, part of what was driving Martin and I when we started the company is since we had been at Intuit we did not want to directly compete with Intuit. Obviously, as time went on and they weren’t doing stuff in the small business space, we felt like, “Okay, it’s fair game.” But initially, the whole household market and the market in accountants were things Intuit wasn’t doing so that’s kind of where our focus was. So as soon as I came up with “Hey, a tool for accountants to actually manage all this”-and that is a huge business for Intuit and it is a great business-it’s a huge business-because of what we did at PayCycle and I think that… I knew immediately when I came up with that idea that that was a home run so…
Andrew: Jeremy asked you in the pre-interview “What’s the first step you took with PayCycle?” and you said, “I picked a date.” Why was that so important? What did you do and why was it so important?
Rene: I think with any projects-and starting a company is a list of projects tied together-with any project when you put a date, a deadline, things happen. If you don’t, they don’t. Right? So even if it’s “I’m going to get to this stream of emails by the end of the day” and I make sure every night I go to bed and I’ve got my emails down to something manageable, I know that that’s a deadline for me and I have to make that. That’s a simple project. If we’re implementing a large bank-“Let’s pick a date. Let’s get it out there” because then everybody works to that date. If it’s we want this feature in the product, “Let’s pick a date” and then if we don’t make it, that’s okay but then we’ll pick another date.
And actually, I learned this from a great manager I had at Intuit, a guy named Sanjib Perplani [sp] and he just said, “Look, just pick dates and then work towards them and then if you move them, that’s great-just understand why you moved it and then pick another date.” That’s why it’s important because when you have a comfortable job and you’re working at a big company, it’s very easy to kind of say, “Well, next month is going to be better” or “Maybe the next month will be better” and so you pick a date saying, “Look, I’m going to leave, be doing my own thing by this date,” your mind starts working against that.
Andrew: And then you got some customers. How did you get your first customers?
Rene: Both places-both Bill.com and PayCycle-it’s always a network. And I had a couple of blogs on this but you can never underestimate the value of the network and the care and feeding of that network is a really important thing for any entrepreneur to do and it’s hard to kind of teach. Another thing that I think you could probably learn at the dinner table that I learned was that you’ve just got to work with people and you’ve got to help them succeed at what they are doing and then they’ll help you succeed at what you’re doing, right? And so that’s…
Andrew: Do you remember the first customer you got?
Rene: For PayCycle… I don’t remember how it was in the network but it was a friend of somebody who had just had a baby and they’d hired a nanny. That was the first customer. For Bill.com I was more fortunate that we had a little bit more awareness and [??] my friends and I were starting a company and so PayCycle was a customer for us and then we also had a number of friends that had started companies, had a number of accountants that actually had clients so we were able to get 15 or 20 out the bat, whereas at PayCycle first we got the… There were probably two different friends that had nannies that we worked with and then we just started talking to more people and word of mouth started happening and then we started doing advertising. SEO and SEM was big for us at PayCycle so that made a big difference.
Andrew: One of the challenges of asking your network is that if the product is not right you’re inflicting your buggy beta version on a friend and at the same time, the friend doesn’t want to point out the bugs because he’s a friend or a friend of a friend so you don’t hear everything. How do you overcome that? Was it an issue and how do you overcome it if it is?
Rene: It is always an issue. I mean… So the first… You had two points there. One is you don’t want to burden your friends and then two is you want to get the honest feedback, right?
Rene: So on the burdening your friends, you… I didn’t think about that too much because I knew that I could make their life better and so that’s where my focus was-making their life better. I didn’t ask any friend. I would always just kind of go in and find out which one had a pain and which one was the least comfortable with doing what they’re doing today and so I think it’s a good point but you can’t be afraid of that. If you’re going to start a company you have to have the confidence that you can do better than what they’re currently doing.
And then on the second point, one of the things that I’ve always done is use kind of the backdoor to find out what people really think. So the best way that I’ve done this, for example, is when you go and you pitch a bunch of VCs or investors they’re always going to say, “Oh, interesting product. Looks great. Thanks for coming in,” right? They’re never going to say, “Sucky market. Lousy management team. And your product sucks,” right? They’re never going to say any of that but if you ask a friend who knows them to go in and say, “Hey, what did you think of Bill.com?” they’ll find out “Great team. Not sure about the market.” Whatever the issue is you’ll find out. So I think it’s important to kind of use that backdoor to make things happen. And I’m going to do my…
Rene: Yeah, yeah.
Andrew: Water bottle? That’s it-not presidential anymore. You had a chance until that moment. I see. So by going to a friend of a friend who has a nanny, when you get feedback from them you can also circle back to the friend who made the introduction and say, “So what do they think? How was that introduction? How did I help?” and get feedback that way.
Rene: Yeah, and the other thing that I did do, is somewhere directly friends, I would just say, you have to, before you starting you have to tell me look me in eye, that you have to tell me this isn’t working for you .And you know we had, we did lose, we have lost in early days that [??] few people that it was you know they were right way for all the technology that we have and they were happier [??] , guess what they are customers and couple of years they are back, so I think you just have to have that conversation, in other example you take friends money, which is always hard right we get to do that both places, when you take other people’s money you really have to say to them you have to be careful give me this money and never see me again, and if he could say that to me , then I will take your money , if he can’t then you are not ready to be an investor, and you know I need to make decision without you being upset if you lose all money
Andrew: How happy where they after the sale?
Rene: Everybody was happy, I think everybody was happy all who have come, they take this , part was only great about early inverters is that they buy in to the vision and the team and they love seeing progress made so while they watch making a lots of money there, their probably more engaged about, you know your vision just like any . . .
Andrew: What are the issues with doing things by hand, am trying to imagine so one who is listening to us saying hey this is a great way to a software company I can’t build the product that I envision in any ways, I do things for people and I start to automate what I do often or whatever is most painful. One of the issues with that is hard to scale right, hard to see your full product
I guess its two different issues there one is hard to grow and the other is hard to see your actual product and see people feedback on this ultimate vision what they give feedback on is on your personal work not the vision that you have
Rene: You I think [??]
Andrew: For me the big part of doing the work is also is bigger half what process is I would need to stay else that I could produce the product and you know large item to sell its kind of you know the first it must go back to [??]
Your first make where about two, you know that you not going to be the person makes a thousand batches in every store right. You have to get the recipe right, you have to understand what the recipe for success, how is the scale and you find out like am using this much flower I want to buy this many bags whatever and I want to buy this for eight and I want this to makes with, all that stuff is important and so when I look at what we were doing in early days you know to book [??]. A big part of that was for me to how to scale and so the experience so for the customer when I was able to do it. I was able to give the experience to the customer pretty much they were gone get right so and phase like instead of them getting an email saying your tax form is ready, click here to submit, instead me saying tax form is ready sign at the bottom the page and I will take it back and submit it for you.
Rene: So literally a, you know probably the same amount of time it was ten seconds to sign something vs. ten seconds of time to click and what I did was will do email approval , will have check printed will actually get signed for you. All you have to do is just email approval you want it .So all that stuff help gives them a yes it’s a saving time and we want this automated, so then gain confidence without inverters and our team actually build that those features make the difference.
Andrew: When you grow and it’s no longer you build in by hands but you still try to figure out what to build for your customer, how do you know that point what to create? Or does this approach work in the early days of start up? Rene: I think it always work, I don’ t think , you know I don’t we do enough at all-time anybody does it when you become bigger, because when you get bigger you have more customers asking for certain feature , that drives a lot of work we end up doing today listen to our customers which you want to do , the new feature are sometime hard to get done because you have a existing system that’s in place you have to run . so better you can do it is do it by hand first and if you are thinking what we were doing now five billion dollars a year through our bank accounts, that is eight million transactions a year that we are managing, so do that and to manage all that the operationally the process has to scale and many have them automated but some of them are still manual because we are learning, how to make that process better so each process gets [SP] because we get one step further.
Andrew: Kind of back to that statement about having a deadline?
Rene: It’s have a process, have something out there, learn from it, iterate, have another process, learn from it, iterate again, and that iteration is just so important. If you don’t have dates and deadlines, you’re not going to iterate. You’re just going to kind of accept what you have. I don’t want anybody, any customer or any employee, to ever accept what we have as being done because there’s no way we’re ever done.
Andrew: What do you guys still do manually at Bill.com?
Rene: Probably the best way to think about it is the 8 million transactions and the $5 billion that we’re moving, the system kicks out a lot of things that need to be reviewed, but then those are reviewed manually. So somebody does have to look at that. And so we have a more efficient system that we can use to kind of understand what things we want to focus on for our customers, which areas, which customers that we’re concerned about from a fraud perspective or from a risk perspective. All of that is stuff that requires human intelligence, but then it does get more automated every day.
Andrew: I use Bill.com to get paid for Mixergy, too, and it’s a wire that goes into my account. I don’t know even know whose name is on the wire. I always assumed it would just be Mixergy, but my wife looks at our . . . it is Mixergy, right?
Rene: It would be Mixergy and Bill.com.
Rene: The way that the money moves, whenever you move money, there are all sorts of regulations around it, and we have to know our customer, and we have to be able to support why we move that money. And so that’s kind of the manual process.
Andrew: So it goes to you, and then from you to my account, to my personal account.
Rene: Right, exactly. Right.
Andrew: Got you. And there’s some manual work there to make sure that I really meant for the money to move or . . .
Rene: Yeah, yeah, with any new customer, we’ve got to know them to make sure that we know our customer. That’s a requirement any time you move money, and so while the system is automated and generates the ones that we want to look at more closely, they still get looked at more closely. And some of that manual process won’t ever go away, but I can tell you that the system gets more efficient each day about [sounds like] identifying, ‘Look at this one. Look at this one,’ because we’re learning from our own experience of what’s been risky and what’s been not risky.
Andrew: Got you. I was wondering if the reason that you did a lot of this by hand is because you started your business–I’m looking at the notes here for the quote. There it is, the quote from your conversation with Jeremy–you started the company with the money in your back pocket. ‘Money in my back pocket,’ . . .
Andrew: . . . is how you told him, meaning just whatever cash I had, that’s what I was going to start this business with. Is that why you had to do things manually, where if you had money you might have created software? Or is it just better this way to do things by hand for customers first?
Rene: So for me I think it is better because you understand the pain points better. When you’re a software developer, whether an engineer or product manager or somebody that understands software development, you need an understanding of the pain point that you’re solving for first. If I just said, ‘Hey, I want to create a tool that helps people manage cash,’ and I couldn’t actually tell you what features would actually do that, well, then the engineers don’t know what to go build, right? So I think that’s an important part of actually really focusing, is it helps you kind of get that granular understanding of what your customer pain points are and how you’re going to fix it. But the money in the back pocket is also a part of it, right, because you don’t have a lot of money. So the reason it’s important about the money in the back pocket is I wanted to go build something that I didn’t understand how I was going to build it, and so that’s a really important part. You’ve got to understand what you’re going to build and how it’s going to be able to scale, so that’s exactly what the money in the back pocket kind of focused on. I didn’t have a lot of money. I couldn’t just spend ten people on it and have them go out there. [coughs]
Andrew: Do you have a drink left in your mug?
Rene: I do. It’s not water. I don’t know what’s going on.
Rene: I mean, I had a cold last week, so it’s probably just some frog that’s still trying to get out.
Andrew: OK. I just wanted to make sure you’re comfortable. And one of the things that you did, because you didn’t have much money, is you went to Costco for the furniture in the office.
Rene: Yeah. Yeah, Costco and IKEA. The first days were Costco, and so we had folding tables and chairs that we bought from Costco. We still have some of them around, but then a lot of the furniture is from IKEA. One of our early investors had a company that went out of business, so we bought all of their furniture for 1000 dollars. So we got tables for the whole office and stuff like that. That kind of mindset about, ‘hey this is the money in your back pocket’, means you’re not going to go spend anybody’s money unless it’s an efficient use of capital. I think that’s different than what my Dad and Grandfather did, the entire business was funded by the money in their back pocket. Whereas for me, I funded to get something out the door with the money in my back pocket and had to talk to investors to get them to give me the money to go scale it. Paycycle was 40 million dollars invested, Bill.com is 40 million dollars invested, so I don’t have that much money in my back pocket.
Andrew: Why did you decide to sell the business? I want to find out why you moved on to Bill.com, but PayCycle why did you decide to sell?
Rene: I left PayCycle in 2006. My focus in 2006 really became Bill.com. I came up with the idea for Bill.com in 2003/2004 so it was something that had been nagging me in the back of my head. It was an opportunity that seemed untapped, necessary and the time was right. I was anxious to go to something new. As a board member at PayCycle the reason we sold, the reason I supported was…. At the highest level I think what any innovator wants is to know, is that they are going to be able to reach as many customers as possible and effect a change in as many ways as possible. When Intuit came knocking and they were willing to pay a very nice price, especially in the middle of the recession. When they came knocking and you could see, ‘hey this is a way to get what we built, our baby, out there with millions of businesses on it someday’ and that’s their goal. I know they’re well on their way to getting a million customers on the Paycycle platform, that’s exciting right? I was already doing something else on my day job. For me it was more about, ‘does this get the return for the investors that they would all be happy with?’ just to land the company in a spot that makes me feel like it’s going to exist for a long, long time and it did.
Andrew: The number that I pulled at the top of the interview, approximately 170, it also said will adjust based on what? Why is it an approximate number and why do they say in the press release at the time that it could adjust?
Rene: I’d have to read the press release again. It’s been enough time that I can probably say whatever I want. With any acquisition there’s always working capital that’s kind of in play. We had assets on the balance sheet, we also had bills that were due. I think that was part of the adjustment depending on what their working capital was. It was pretty much 170. Unlike other companies where you can have earn outs and goals that are set we didn’t have any of that. It was pretty much a straight cash deal like you said.
Andrew: That’s what I thought. It was one of the few press releases about a sale that was clear enough for me to actually understand and bring into this interview. It’s usually, “We acquired this company for some unknown reason for some unknown amount of money, but let me give you some corporate jargon about the reason for it.”
Rene: Right exactly.
Andrew: But this was really clear, helpful, it was like it was written by a human being.
Rene: Yeah, it’s nice huh?
Andrew: Yeah really nice, especially as a researcher before doing an interview, I have to spend so much time going through so many different articles trying to understand what happened, especially when there’s been a little bit of time. So you alluded to the reason for Bill.com can you talk a little bit more about what you were seeing that made you say, ‘I’ve got to launch this company’?
Rene: Yeah. I was doing the day to day managing of PayCycle. Part of that day to day managing is you’ve got bills that you’re paying, you’ve got invoices you’re collecting, and you’ve got really interesting problems to solve. You’re trying to build a business right? I wasn’t in business to go pay bills. I was in business to actually make payroll solutions for other businesses. Every Friday I would have a check run and attached to each check are invoices that need to be paid. I would be going through the stack of checks and I would say, ‘Why am I paying this? What does the contract say? I did not think the vendor did a good job on this. Did my development head approve this? What about my marketing person? Didn’t we just pay them? When’s the last time?’ All these questions were always things I was asking because I was trying to do what my Dad and Granddad taught me. Cash is kind stretch out payables, pull in receivables and I was trying to do that and I didn’t have the tools to do that. So I just started thinking about, ‘I need to collaborate with people, I need to collaborate with documents, I need to collaborate with my banking system, and my accounting system. I need something that does all that collaboration.’ I started thinking about the web and what we had built with PayCycle and I’m like Wow. People aren’t quite using it that way yet, and if you think about the life of the web, it was not a collaboration tool the way it is today back when it started.
When we started in ’99 the web was more of a delivery vehicle for the technology. It was a different way to get payroll into somebody’s hands. But we didn’t kind of say, “Well, let’s collaborate.” Like today from a payroll perspective you would have collaboration with all the employees around their hours and their benefits and you weren’t thinking about it that way. It was like, “I can just do it here and do it faster and cheaper than ADP or paychecks and so price is going to be an advantage” whereas at Bill.com it was all about the collaboration. That’s why I started it is I said to myself “I can’t do this unless I have collaboration tools” and then the web really makes it easy to collaborate and so that’s kind of what got me started and has kept us going for all this time.
Andrew: So you were trying to solve your own problem and one of the issues with trying to solve your own problem is that you’re unique and you could be seeing a problem that other people don’t have. For example, not many companies are the size of PayCycle. Not many entrepreneurs are as smart as you are about managing cash flow. God knows I’ve talked to so many here who made mistakes in managing cash flow. So how did you get a reality check to make sure that this pain that you were feeling is a pain that other businesses were feeling deeply enough to want a solution for?
Rene: It’s interesting. I mean I did talk to a number of customers that I knew, people that I knew from PayCycle that I had gotten to know, leading thought leaders in the accountant space and honestly, there was some reservation. Like I said earlier, some people would say, “Hey, why don’t you go focus just on the receivables market because getting paid faster is a really important thing.” So there was some of that feedback but then I kept going back to “Well, this pain is just so hard.” What I did actually- different than kind of your questions-I went and asked a bunch of people “How do you do it today?” and so they all told me they were doing it manually with paper. And so I said, “Okay, well that just doesn’t make sense.” So there has to be a solution that can be automated that doesn’t have all this paper all over the place so…
Andrew: So “How do you do it today?” is the question to find-not “What should I build to solve your problem?” but “How are you doing it now?” and then you hear their process and then what are you looking for as you are listening to them tell you how they were doing it? You’re looking for time waste pain, anger…
Rene: I was looking for… What I was looking for was “Can there be an efficiency gain in their process? What is the process they have?” And this kind of gets back to my earlier point is that customers don’t know what they want. They don’t know what they need. So if I was making cookies, if I wanted to find out if people wanted a better cookie I would say, “Well, here is a Mrs. Fields cookie and here is a cookie baked by Rene”-blindfold test-“You can have a few.” “Oh, that one is really good.” And so then if I got enough people saying that my cookie was good I’d feel like, “Okay, well I ought to go build cookies,” right? So for this, since this is all about efficiency around the process it was more like, “Tell me your process” and then I could see you’re spending ten times as much time on that as you should be and then it was my conviction to say I could actually get that ten times down to just one tenth of what they were spending.
If I could get it down to that, that efficiency… I had to figure out how to sell it to them but they would love it and that’s what people were saying. They love the amount of time that we save them. And so I think some of it is your conviction. So asking the question about “What are you doing today?” to understand how you can make it better-it’s up to the entrepreneur to have the conviction that they actually can make it better and that they can make it so that it can be consumed by their customers.
Andrew: I love the notes that Jeremy took on your pre-interview. Here is how he wrote down what you said about how you started. “We got a couple of customers and did it by hand and scanned documents and were keeping track of everything in a spreadsheet for them and creating checks manually. We did everything manually to see where the big pain points were.” That makes sense. You’re finding out what their process is. You’re looking for inefficiencies. You say, “Yes, I could make this more efficient.” Then you start creating it all… You create the efficient solution by hand and you see if it’s enough of a time save for them that they are happier and are willing to pay for it because it’s valuable to them. This is a long way of asking-how do you create this hand-scanned, hand-made solution when it’s a collaboration tool that you’re proposing to build for people, that works online?
Rene: Yeah, so what we did is we’d go to their office-kind of like at PayCycle-Bill.com we’d go to the office and we’d collect all their paper. We would then it back to our office, and we would take the hours to scan it and identify the bill and the vendor record. We would then create e-mails. We had a spreadsheet that had every bill in it, every vendor name, every amount, every due date, and we had macros and templates that would then send e-mails of those bills with the attachment out to the customer, the approver that they told us. They would tell us by hand who needed to approve bills, and then once we had the approvals, they would approve by replying via e-mail. We’d keep track of that in a spreadsheet. We actually had an attachment of the e-mail saying it was approved, so we could always go back and prove it, and then we would print checks. And then we would sign them, and then we would mail them. They would never see that. They just had to approve it.
So what we learned from that was having an audit trail for each of the transactions was really important because, every now and then, the companies would say, ‘Hey, did so and so really approve this?’ And so we would need the audit trail. They’ll say, ‘Yep, they approved it,’ right? And having the ability to kind of track all the documents because they might call up and say, ‘Hey, I’d like to see the last month’s bill.’ So that’s how we came up with our last five features, so you that you can kind of see the last five bills that you’ve paid that vendor. So it really does help you understand, and so doing it manually was pretty important. And there are a lot of systems where you can kind of fake it, right? I mean, you really can. Like, you can offer these services. I mean, if you were to do the social network manually it would be painful, but somebody could say, ‘You tell me who your 20 friends are, you send me a picture, and I’ll make sure I send a picture to all of them of what you just ate for dinner.’ And then they’ll reply back, and you can do that all manually before there was software, right? In that case, it might be easier to build the software because it gets pretty big when you think about the network. I think that is a really important part of any process, is how are you going to make this scale [sounds like].
Andrew: It’s so interesting. I wouldn’t have thought of it, but now I can see the process completely, that I tell you, ‘Here’s the bill that I get every month, but I don’t know whether we should pay it or not. That person gets the product. Check in with them first and see if I should pay it.’ You e-mail that person whenever you get the bill, you get a response, and you, Rene, or your team e-mails me back and says, ‘Hey, the guy who you told us to get an approval from says it’s OK. Go ahead and pay it.’
Rene: Right. Right. It was a great process, and I hadn’t thought about it in a while, so thank you for reminding me.
Andrew: I’m learning so much from this interview, especially, you know why, I’ve seen this process before in other interviews, but never in companies, I don’t think anyway, that have grown as big as yours. It’s rare to start something handmade and then get it to the level that you’ve been able to get it to now twice. What did you learn by doing things manually in the early days of Bill.com that you wouldn’t have known as someone who is already in this industry now, in multiple companies, and has a family background in it?
Rene: Right. I think one of the examples was the audit trail, like understanding the importance of being able to provide a record to show that somebody had approved it, at what time they had approved it, and whether a signature was on it. That was pretty important. So for us what was hard in doing it by hand was it was sometimes difficult to find the documents. So the customer would say, ‘Hey, I want to go see the contract.’ And so then we’d have to go look through all our folders and files to go find it, realizing that’s a pretty painful process, even online, right? If the file cabinet is there, it would be painful, too, and more painful. And so then we realized, well, we just need to make it so that if you’re on the vendor, you click on the vendor, up comes all the vendor documents, up comes all the vendor invoices, and you can see it there. We also wanted to have the ability to have a search capability so you could search for whatever. If you just had a graphic artist design a logo for you, type in the word logo, and see what documents come up. And so doing it by hand and having the customer say, ‘Hey, I need this, I need that,’ because basically they’re employing you then, and they’re asking us to do all the things they would ask their AP and their AR clerks to do. That’s how those features came out. It was pretty powerful. It’s a great learning experience to be able to figure out what your customers are going to need and what they expect.
Andrew: This was 2003 when you started, I think, right?
Rene: 2006. I had the idea in 2003 . . .
Rene: . . . and then I [??]. Actually, one of the things I do when I’m stressed about my current job, I think about the next vision of what I’m going to do because it’s less stressful to solve problems that aren’t actually your responsibility than problems that are your responsibility.
Andrew: So then two years after you launched, fall of 2008 is when you had to have that conversation where you told your team . . .
Andrew: . . . we have to let go of 40 percent of the people who work here. Why did that happen?
Rene: So we were looking at the market as a whole, and you could see that things were changing in the economy, and I looked at our cash position. We were going to be out of cash within six months at the current burn, so I was going to need to raise money in three months, and based on where we were in the economy, I did not think the economy would be turned around and up in three months that I’d be able to raise it. And so that forced me to say, well, did I want to chance it, or did I want to secure the future of the company and manage the cash more efficiently than we had been doing? So we decided, and I decided first, that that’s the right thing to do, and then I went and talked to the management team and to the Board. And they all agreed that, yeah, the economy did look pretty crappy, and it was going to be a hard time to raise money. And so we made that decision. It was very painful, but it did give us extra runway, which we did end up using. And then we raised money in the summer of 2009 and things had changed a little bit. If we’d been raising in the winter of 2009, it would’ve been very hard, and I’m not sure we wouldn’t have raised money, but I like the fact that we had more time.
Andrew: How do you get yourself to do that when it’s not critical? If it’s right now things are in trouble, I can understand making a tough decision like that, but when it’s not a burning issue right now, it’s easier to procrastinate.
Rene: I think part of the advantage is having been a CEO at PayCycle that helped me understand, being the second time, that everything is right now. Even if it’s a strategic decision that’s six months or a year away, everything builds to the timeline that you’re on. Six months of cash is actually not that much time when every time I’ve raised money it can be three to nine months to raise money from the time you say I’m going to go raise money to the time you actually get the money in the door. So six months was kind of right in the middle, and I was kind of nervous about it and just the challenge that I had heard. And there was a presentation from Sequoia Capital–you might’ve seen it–that really talked about how awful the economy was. I didn’t agree with all of it, but when you read it, it was hard to ignore. And so one of the others things I got from being at PayCycle was that when I’d left the day to day in 2006 and I’d been a Board member for two years at this point, in 2008, being a Board member helps you understand your fiduciary responsibility to the company and the investors, and as a first-time CEO, I felt more responsibility to the employees. So we have multiple hats we wear as a Board member, and as a Board member, it’s always to the company and to the investors. You want to make sure it succeeds, and as a manager, as a CEO, then, yeah, you focus on the employees. You want to make a great company for them, a great culture. But having that knowledge and that experience was pretty helpful in giving me the confidence that it was the right decision because, when you think about the investor hat, it’s like you talk to other investors, ‘Are you guys going to be investing in the next six months?’ ‘Nope, we’re waiting this thing out.’ So then it just changes your whole dynamic.
Andrew: One more thing that I wanted to find, actually, there are two other things. The first is about culture. You told Jeremy that one of the things that you learned is that you need to understand the values you’ve lived by, and you talked about how every employee gets to see the values of the company at Bill.com because it’s up on the wall, and you give awards to people who do something that represents the value up on the wall. And I understand how that reinforces the values, and I understand how values help a company. What I’m curious about is how do you know, how do you understand the values you want to live by? It’s so hard to get to know who you are as a person and then to get to know how that translates into what values your company should perpetuate.
Rene: Right. I think that’s a great question. I mean, this, again, helps being a second-time CEO, right, having done this before. And for me a big part of the values are things that can help me manage the company more successfully, the reminders that I might want to have. So one example, and I think this is probably true for a lot of people, managing conflict is not easy. When you have employees, there are times when they’re not performing, and managing that, giving them the feedback, is not easy. And so one of our values is to be proactive about what you say and proactive in your communication to each other and to our customers. So that, to me, was a reminder. Another example is I have passion about what we do and the way we do it because I want to hire people that were passionate about their job. They don’t necessarily have to be passionate about personal finance or business finance or automation tools. That’s my job, right, to be passionate about that. They have to be passionate about writing really great code, or serving customers with the best quality that they could ever do. And so, how do you find those things? It is a lot of self reflection. It is just saying, what are my weaknesses? What are the things that are my strengths? And having values that help you leverage your strengths and manage your weaknesses.
Andrew: Oh, that makes so much sense. What do I need in order to manage this company, what kind of help can I get from people around me, and then that’s what you reward when people do it.
Rene: Yes, exactly. We give out employee awards for demonstrations of passion, or if they listened to the customer, or if they’re dedicated to success. All of these things, we have and we identify them and say ‘this employee did this’ and it was really a great example of how these are important to the company.
Andrew: All right. What I wanted to say, was first, for anyone who is interested in this way of building a business, that I did an interview with the author of ”Running Lean”. Ash walked us through the process of the Lean Start-up methodology and I asked him the kinds of questions that you’ve heard me ask Rene, here in this interview. And I hope if you want to dive deeper, and you want more of a framework, and to see it work step-by- step, the way that Ash described it in his book ”Running Lean”, I recorded that course just a few days ago. It’s being edited and prepared for you as a premium member. Just go to MixergyPremium.com and it’ll be there soon. Actually, should be there by the time this interview is up. And if you’re not a premium member, that’s another reason to sign up. These interviews, we hear entrepreneurs tell the stories of how they did it. In the courses, I bring entrepreneurs to teach the process. To take a step away from their business and to say, ‘here’s the process that works in our business, and that we’ve found works in other companies, too’.
There’s a recommendation based on this interview. If you like this thought process, that course by Ash, at MixergyPremium, will be really helpful for you. And also, his book, ”Running Lean”, is fantastic. All right, one more thing and then I want to ask you that last question. I got this box. I don’t know how to acknowledge it, Rene, except to just bring it up in this interview. I was on my way out the other day and I saw this box. I’ll explain what’s in here in a moment, but I’ve got to read this letter. Just as a way of saying ‘thank you’ to someone who I don’t know how to thank any other way. Where is that card I just dropped . . .
It says, ‘hey, Andrew, I hope you’re having a great start of the year. As a fellow runner, I wanted to share some of the supplies to keep you fueled on your morning and evening commutes. I run into work every day, including today, and then I shower at the local gym and walk right a couple blocks to come into work. So, I guess he does it too. If you find yourself in LA, and want to put some miles on the trails, drop me a line. Big ups to you and the whole Mixergy crew. All the best from Stu. Stu, runs a company called ‘And Then What, Creative’. There’s his card. What they do is experiential marketing. So, instead of helping Microsoft promote XBox with more billboards and ads online, he creates a living room, essentially where people can sit and experience XBox, and play with it. And then if they want, they can go and buy it. That’s the product. And he’s also creating something called Trail-box.com, trail dash box dot com, where I guess he’s going to package things for runners like me. And it’s just all the gels that I need on my run, and the Clif bar. Man, you overwhelm me. I’ve had it here for a few days, because I didn’t even know how to say thank you, to you Stu, so I thought, I’m just going to do it here, in the interview, and I’ll do it privately, also. Thank you, Stu.
All right. So, Rene, here’s the final question, speaking of food. You cook, as you said earlier. And you cooked for your team once, to celebrate. Can you talk about that?
Rene: Well, I love to cook. I don’t get to cook as much as I like, but a couple of things that I do for the office is that I make cookies every now and then. More often than that, I make guacamole and margaritas, when we want to celebrate. It’s just a fun way to, I think it’s really important for anybody who is in the leadership position, to remind folks that they are no different. And that I am willing to work for you. Thank you for working for me, and I am willing to work for you. Right? That’s what we’re all doing. We’re working for each other every day. Sometimes people forget that he’s the boss. It’s good to remind folks that I’m happy to clean up, I’m happy to cook, I’m happy to feed and make great food. And so we’ll make margaritas and guacamole. I have my own recipes for both, and it’s always a good party.
Andrew: Well, congratulations on all the success. You must have had several celebrations, many, many from what I’m seeing. And the site that I’ve been using that I talked about earlier is Bill.com, that’s Rene’s latest company, and if you’re having the kind of issue that I had, where you just want someone to help pay the bills, actually, that’s the issue for me, Rene, that, I just was going crazy, with all the different ways that people were sending in their invoices. Some people were using FreshBook, others were sending me Excel spreadsheets, others were sending me Word docs, and each one wanted to get paid differently. We hired several writers at the time, and I couldn’t go and see how many articles each one of them had work. I just wanted Andrea, who works with me here, to just go and check, is this all real? Did they write all of this, or did they make a mistake? Or did I screw up somewhere? And then she checks it. Now, will Bill.com, she can check that, she can approve it. All I do is hit a button and they get paid anyway they want. This isn’t a commercial for it, I just like Bill.com. I’ve used it for a long time, and it’s so cool that I get to talk to the founder of this software that we use everyday.
Rene: Well, thank you very much, Andrew. It’s great, great conversation. Thank you for doing what you’re doing. I look forward to seeing this and other interviews up on the site.
Andrew: Thank you very much, and thank you all for being a part of it.