Venture-backed tech startups have a distinct need for accounting and finance software to manage their operations and communicate with investors.
They do not require the same level of operational support as "lifestyle businesses" that would only survive through customer revenues and personal investment.
However, all venture-backed businesses must keep their financial reporting clean, clear, accurate, and GAAP-compliant in order to survive rigorous due diligence processes and audits.
Very often, a venture-backed tech startup's early choice of accounting software creates systemic issues when the company scales or has an audit performed.
It is imperative for entrepreneurs, particularly first-time founders, to understand how to select the correct accounting platform for their business.
The startup accounting stack consists of the following:
- QuickBooks Online for Seed to Series A business stages, with a starting cost of at least $40/month and primary integrations with Stripe, Mercury, and Gusto (Medium Switching Risk).
- Xero for Seed business (International), with a starting cost of $33/month and primary integrations with Wise, Deel, and Hubdoc (Medium Switching Risk).
- NetSuite for Series B to Growth business stages, with a starting cost of $12,000–$30,000+/year within the Enterprise ERP Ecosystem (High Switching Risk).
- Puzzle for Pre-Seed to Seed business stages, with a starting cost of $0–$150/month and primary integrations with Stripe, Mercury, Brex, and Ramp (Low Switching Risk).
- Pilot for Seed to Series A business stages, with a starting cost of $99/month and a modern tech stack platform (Medium Switching Risk).
- Sage for Series A to Growth business stages, with costs that vary by tier, featuring Banking and Payroll APIs (High Switching Risk).
Traditional retail accounting paradigms do not apply to venture-backed tech startups.
The financial engine of a tech startup is not based on traditional retail accounting paradigms due to the exponential growth of tech companies.
This rapid growth requires them to use more complex accounting software in order to accommodate multiple sources of revenue, enable real-time access to financial data with customizable financial products (e.g., Stripe, Mercury, and others), and support early-stage businesses through multi-currency processing.
Institutional investors will only accept financial reports that have been prepared using Generally Accepted Accounting Principles (GAAP), specifically under the accrual basis of accounting.
Under accrual accounting, the revenues and expenses from business activities are recorded when the revenues or expenses occur, even if there has been no cash transaction between the buyer and seller yet.
As an example, when a customer pays $12,000 up front for an annual SaaS agreement, cash accounting records the entire amount in the same month of the actual cash transaction (Month 1).
By contrast, a GAAP-based accrual accounting method will record $1,000 in monthly revenue for each of the 12 months of the contract, in accordance with the guidelines provided in ASC 606 - Revenue Recognition.
If the ability to automate deferred revenue allocations is not built into the accounting ledger software, the finance department will be spending many hours on manual data entry and analysis every month.
The matrix of modern finance integration
The speed at which an accounting ledger is updated with new transactional data is strictly dependent upon the data pipelines that feed it.
In order for a corporate finance function to be truly "modern," there should be immediate cross-coordination between multiple layers of operational functions:
- Neobanks and Corporate Credit Cards: Systems such as Mercury, Brex, and Ramp directly transfer clean transaction streams to the general ledger in order to decrease the cycle time from cash to cash.
- Payment Gateways: How thoroughly connected a merchant's payment gateway provider (i.e., Stripe) and their App Store are affects how efficiently their merchant fees, gross revenue, and local sales tax can be parsed into the correct accounts in the general ledger.
- Payroll and HRIS: The payroll and HRIS systems (i.e., Gusto, Rippling, and Deel) provide granular employee salary, benefit, and contractor data into specific lines on the chart of accounts.
When these integration points break down, the cycle time is severely disrupted. The time from when the company finalizes its accounting entries on a monthly basis to when the final accounting dispersion is verified gets extended from 3 days (in an automated fashion) to 3 weeks when done manually.
Choosing the best accounting SaaS solution
The decision of which corporate ledger software to use is a path-dependent decision.
The costs of converting a disorganized historical ledger may quickly reach tens of thousands of dollars in required engineering hours and CPA advisory fees.
1. QuickBooks Online
QuickBooks Online and Xero are examples of industry-leading accounting ledger platforms. QuickBooks Online was the first option available for U.S. start-ups and growth companies to manage their financials using a corporate ledger solution on the cloud.
QuickBooks Online and Xero have two of the best workflows for handling multiple customers and vendors, as well as a marketplace. A startup using either platform can integrate their corporate ledger with third-party applications to help manage multiple customers and vendors.
When onboarding a startup to a corporate ledger platform, finance teams will often look at the available market (those customers/vendors) when evaluating where to spend their time with each client.
Therefore, it is common for startup finance teams to help startups find third-party applications to integrate with their accounting platforms to maximize efficiency in managing customers, vendors, and payments.
For teams that conduct multi-currency activities around the globe, the ability to carry out multi-currency activity in QuickBooks is very appealing. The most significant advantage of QuickBooks is its ability to easily conduct multiple transactions in a single account from multiple locations.
However, within the United States, there are still many accountants who prefer to use only QuickBooks for their clients and are therefore less inclined to work with clients who do not use QuickBooks.
This can significantly limit the amount of bookkeeping support that a tech startup can receive unless the startup has already established a relationship with a reputable bookkeeping partner.
2. Xero
On the other hand, Xero launched as an online alternative to QuickBooks Online. Xero was developed primarily to provide a cloud-based accounting platform to small businesses and their accounting professionals outside of North America.
As a result, many of Xero's key features and benefits have been developed with a focus on helping startups around the world with solutions to manage their financials efficiently while maximizing the efficiency of their financial processes.
Both QuickBooks Online and Xero offer a variety of options for startups, depending on the amount of seed capital, funding, and revenues a startup is looking to raise. However, both platforms have similar core principles around efficiently managing corporate financials to help startups grow. These platforms have been designed to help companies manage their financials in a more efficient way so that startups can focus on their business, increase revenues through efficient use of their capital, and succeed.
3. NetSuite
NetSuite is the best enterprise resource planning (ERP) solution available for scaling technology companies approaching a late-stage liquidity event that have raised venture capital funding.
NetSuite is an enterprise-grade ERP system that has been tailored specifically for companies with a large volume of transactions and business structures that involve multiple entities worldwide. The licensing fees associated with NetSuite typically range from $12,000 to $30,000 annually, and implementation costs can exceed $30,000.
Experienced CFOs advise tech startups to consider transitioning to NetSuite once the company's annual recurring revenue reaches between $10 million and $15 million, or if the company has more than 100 employees.
One of the major benefits of using NetSuite is its ability to provide advanced customization options, comprehensive audit trails, and multi-subsidiary financial consolidation capabilities. When preparing for either a late-stage Series C funding round or an initial public offering (IPO), NetSuite will provide tech startups with the highest level of data integrity that institutional auditors are looking for.
The primary risk associated with transitioning to NetSuite is its complexity. If a tech startup transitions to NetSuite too soon, it will quickly consume the company's seed capital or Series A funding on extended periods of configuration development and will require the hiring of a dedicated system administrator.
4. FreshBooks
FreshBooks targets budding business operations with minimalistic invoicing methods and easy ways to manage expenses.
The positioning of this software is that it is designed for the early operational stages of a business for both services and products. In terms of pricing details, they have a tiered pricing structure that averages around $360 per year, which varies depending on the quantity of clients you serve.
There are financial analysis indexes that show that while the software works adequately for solo founders and small service businesses, it does not have the necessary architecture to support growth when utilizing institutional capital.
For pre-seed software businesses that focus mainly on developing an initial prototype, FreshBooks provides an easy-to-use platform to invoice early consultants or track initial founder expenses. But the knowledge base of the software will definitely run out very quickly when venture capital comes into play.
It does not have the features to allow a company to create a balance sheet for investors or manage double-entry inventory controls as outlined in ASC 606 revenue recognition.
5. Wave
Wave provides the same basic functions of financial software but is geared strictly toward early-stage operations and bootstrapped projects.
Wave's unique selling point is that it provides users with free access to the core ledgers ($0), with payment processing and payroll features that generate revenue for Wave. The financial industry generally agrees that Wave is intended for independent contractors and is not designed for tech start-ups that are aiming for venture funding rounds.
Wave serves as a wonderful way for bootlegged proof-of-concept prototyping without any out-of-pocket costs, leaving founders completely free to maintain their personal and business transactions.
However, due to the limitations in the types of integrations, lack of departmental tracking, and inability to handle more advanced equity and debt structures, Wave is not a product that will ever be utilized after any investor funds are received.
6. Zoho Books
Zoho Books serves as the primary accounting solution for the large Zoho suite of software products.
- Positioning: A cost-effective cloud-based accounting software for the mid-market, tightly integrated with the operational ecosystem of other Zoho products.
- Pricing Details: Includes a number of structured tiers that allow businesses to start at the lowest price point or free, while still having access to fully-featured enterprise tiers priced competitively against similar offerings from much larger competitors.
- Verifiable Evidence: Market reports reveal that the majority of corporate users of Zoho Books are engaged within the technology ecosystems of Europe and India, versus the high volume of early-stage startups in the United States.
If a specific business has already implemented Zoho CRM to manage its sales pipelines along with Zoho People to manage its HR operations, connecting Zoho Books can enable seamless data cooperation between the three products by sharing and utilizing the same data from one ecosystem in all three applications.
In addition, Zoho Books incorporates built-in rules for automating certain processes, as well as offering a fair degree of flexibility in terms of handling multiple currencies.
The principal drawback is the independent nature of the products in the ecosystem. Businesses running standalone financial applications such as Salesforce or payroll processors must invest significantly more developer time to create unique integrations to Zoho Books than to connect to QuickBooks Online or Xero.
7. Puzzle
Puzzle represents the next evolution of ledger software built on the principles of an AI-first accounting system. It is driven by technology-enabled start-ups, with an eye toward iterative improvements for companies with venture capital backing.
- Positioning: Purpose-built for tech start-ups, delivering real-time reporting and reconciliation, together with a transparent view of monthly burn rates.
- Pricing Details: Controlled by published operating tiers with values of $0, $30, $50, and $150 each month based upon the volume of transactions processed.
- Verifiable Evidence: Utilizing data compiled from business intelligence tools, organizations are reporting that as many as 40% of their accountants are dissatisfied with their current use of QuickBooks; therefore, they are searching for other applications.
Based on use case testimony provided by companies such as MyRunwayHealth and others, technology teams save hours of labor each month by implementing Puzzle's automated ledger management capabilities in place of their older systems.
With the method used by Puzzle, there is no longer a requirement for technology firm financiers to wait until the end of the accounting period for an accountant to reconcile their prior month’s financial accounts.
The Puzzle program provides real-time data on your organization’s financial activities, including cash reserves, net burn rate, and gross and operating margins. Additionally, Puzzle is designed to help technology companies establish automated operational processes throughout their entire accounting process as early as possible.
8. Pilot
Pilot combines proprietary technology for automating accounting ledgers with a team of financial experts to offer a fully managed accounting service.
Pilot’s services are designed to accommodate hybrid bookkeeping services, corporate tax compliance, and fractional CFO services to assist start-up technology companies in scaling very quickly. Pricing to begin at Pilot is approximately $99/month for basic bookkeeping services for early-stage companies.
The results achieved by Pilot through the implementation of their proprietary Meridian ledger management technology illustrate that Pilot is transitioning towards an automated process for validating month-end data and automating all associated back-office functions.
Pilot serves as both a file management tool and an accounting back-end for customers that use Pilot’s software applications. The use by Pilot of the same platform for all customer accounts eliminates the traditional channels of communication that exist between technology companies and service providers that support outsourced bookkeeping arrangements.
Thus, the primary trade-off for the customer is in the control of the account ledger. If a customer wants to deploy a very customized or non-standard set of billing systems, Pilot’s internal workflow is optimized around Pilot's standard software processes, which may place constraints on the operational capabilities of that customer’s business.
9. Campfire
A new platform, Campfire, has entered the market as a modern cloud ledger option for connecting traditional accounting methods with improved management tools.
In addition to offering an attractive startup accounting software package, Campfire also includes dashboards for tracking cash flow, tracking expenses, forecast modeling, and cash planning tools. Campfire offers custom pricing options based upon the size of an enterprise's corporate assets, as well as the speed at which transactions occur.
Campfire's objective is to replace the complex spreadsheets and manual processes used by most founders when creating financial models using older, legacy accounting platforms.
Campfire aims to alleviate this frustration by allowing the finance department to embed cash-flow forecasts, runway scenarios, and projections into the general ledger so that finance leaders can understand how their organization will be affected by hiring plans and churn.
Although it continues to develop additional partnerships and integrations throughout its ecosystem compared to more established brands such as Oracle NetSuite, it is recommended that readers investigate vendors carefully before selecting them.
10. Sage Intacct
Sage Intacct provides enterprise-quality cloud financial management software designed to meet compliance requirements, enforce internal controls, and provide sophisticated multi-dimensional financial reporting.
It is a corporate ledger tool that emphasizes the need for a precise data structure, with a deep understanding of multi-dimensional revenue recognition methods. It is designed to meet the needs of large corporate teams that require a high degree of data accuracy and reporting.
Pricing for Sage is an annual service contract with standardized pricing formats.
FinTech indexes identify Sage as a leader in providing high-volume, transaction-intensive systems that need to maintain highly secure audit trails yet still have a desire to avoid an extensive Oracle NetSuite deployment. Sage is particularly advantageous for technology organizations that utilize complicated billing models, including hybrid usage-based pricing, bundle configurations for software, and multiple component pricing.
The reporting engine allows users to easily create and analyze operational metrics by location, department, and product line without impacting the core chart of accounts used in finance departments.
For startup managers accustomed to using consumer-grade interface design, using the application may be difficult because of the professional level of setup required to enable the reporting engine's functions.
11. Brex
Brex was born as a startup corporate card provider and has since developed into an all-inclusive financial operating platform with sophisticated accounting automation capabilities.
Brex provides a spend management platform and an embedded automated accounting pipeline for the millions of companies backed by venture capital. Brex's corporate card tiers include all core ledger and spend management integrations into a comprehensive solution.
Corporate product roadmaps produced by Brex confirm that the company's automation technology is designed specifically to eliminate the need for companies in the growth stage to collect receipts and categorize expenses manually.
When a corporate card is swiped, Brex captures employee metadata, receipts, and other relevant business context to generate an audit-ready, fully reconciled data payload at the exact moment of the transaction. The automated data can then be directly integrated with your main general ledger systems, such as QuickBooks Online or NetSuite.
Although it does not replace your core double-entry general ledger, Brex's automation layer allows the month-end close process to occur more quickly and with less effort by finance departments.
12. Fondo
Fondo has developed an integrated financial and accounting solution for startup companies that automates their compliance with tax laws, bookkeeping, and filing requirements at year-end.
It aims to provide a technology-enabled and automated solution that allows startups to be compliant and remain attractive to investors. To enable this goal, Fondo offers a variety of pricing structures that maximize the conservation of early-stage capital.
As evidence of its success, Fondo is endorsed by many of the world's leading accelerators and is continuously ranked among the top financial management solutions for startup and venture-backed tech companies.
It helps founders avoid many of the errors associated with taxes that can destroy their ability to obtain institutional funding, such as failing to submit a Delaware Franchise Tax return or not submitting a Research & Development Tax Credit application.
By combining both automated ledger tracking and proactive management of tax compliance, Fondo ensures that every startup's records are always in compliance with what the venture capital industry requires during due diligence.
Over time, all hybrid managed platforms will see their teams outgrow their automated framework due to the increasing complexity of their customized internal ERP requirements.
Operational and migration triggers
Tech companies should not upgrade their primary accounting software based on vague or arbitrary milestones or merely for the sake of visual appearance.
Upgrading from an early stage product, such as Puzzle or QuickBooks Online, to an enterprise product like NetSuite should be based solely upon real operational pressure points and events that require immediate attention.
There are many different events that can trigger the need for an upgrade:
- Multi-Entity Expansion: The moment a technology startup opens its first foreign subsidiary (e.g., engineering support in Europe), it requires that its ledgers are able to process complex inter-company transactions and, in some cases, automated currency conversions.
- High Volume of Transactional Activity: When a technology company's monthly number of individual customer micro-transactions approaches the tens of thousands, the early-stage cloud-based APIs it is utilizing normally will time out or crash. This, in turn, requires the company to develop processes for aggregating their transaction data.
- Audit Requirements: Institutional investors and potential buyers of Series B or C companies typically will demand the provision of fully audited financial statements and validation of these financial statements by an independent top-tier accounting firm. These audit firms require that the data structure of the financial statements be immutable and that the firm maintains system-level logs within the ERP environment.
The actual cost of messy data
If the ledger is not properly structured at the time it is first created, it can create enormous amounts of technical debt for the overall accounting and financial stack.
If the company's original bookkeeping is improperly recorded or refers to multiple financial accounts, it is very possible that during the due diligence process of an investment or acquisition, the consequence of this early accounting will have a negative effect on the company:
Plaintext
[Early Accounting Errors] │ ▼ [Failed / Delayed Due Diligence] │ ▼ [Required to Correct Historical Errors and Reconstruct Accounting Retroactively] │ ▼ [Delayed or Reduced Funding]
Reconstructing the historical ledger data over two years of back activity involves months of forensic accounting. The process to successfully accomplish such a reconstruction will often significantly delay a company's fundraising efforts and may significantly reduce the terms of any financing from timid investors.
The best balance between technology and compliance
The primary objective of the startup finance stack is to expend the least amount of founder effort on manual entry while constructing an invulnerable set of books for investors.
To keep overhead low for early-stage companies, consider using the fully automated platforms available today, such as Pilot or Puzzle. This enables these companies to get the maximum visibility into their cash burn with minimal time spent on operations.
As transaction volume escalates and international entities are added to the mix of startup funding sources, recognize that realistic enterprise solutions exist.
Begin budgeting for your transition to a full-fledged ERP solution like NetSuite or Sage. Be proactive in your efforts to create reliable and scalable financial systems from your first funding check forward, rather than waiting to find out during due diligence that your financial records are broken.
Understanding the market and answering your technical questions
How does the use of accrual accounting affect investor reports while raising money?
The institutional venture capital community uses accrual accounting to assess the underlying unit economic values of a software startup. This includes metrics like Customer Lifetime Value (LTV), Customer Acquisition Cost (CAC) ratios, and the overall Gross Profit Margin.
If your tech startup only reports its results on a cash basis, your monthly financial statements may show large, periodic swings either up or down, depending on when you collect large one-time customer contracts or pay annual bills for infrastructure.
If an investor only looks at your cash-basis income statement, they cannot get a true view of your current MRR (Monthly Recurring Revenue) and therefore cannot validate whether or not you are improving your software delivery margins over time.
By applying GAAP accrual standards, you will eliminate accounting mismatches due to the timing of cash flow. This provides the investors and board with a clear view of the future financial performance and revenue of the business, as well as the operation of the current working systems.
What hidden costs are associated with implementing an enterprise ERP?
The "sticker price" associated with implementing an enterprise resource planning application (such as Oracle NetSuite or Sage Intacct) reflects only a portion of the overall cost to implement the system. The true cost of implementing an ERP solution is largely upfront. It is based on the cost of the implementation partner’s fees, the custom integration development, and any disruptions caused to the internal team by the migration process.
The migration process requires a mapping of all historical data from the existing ledger to the new ledger, cleaning all historical charts of accounts, and creating a data pipeline from the internal transactions back into the business system.
Because enterprise platforms are very complex, startups will typically need to hire a full-time, dedicated corporate controller or a dedicated system administrator to handle the accounting configuration of the platform. This creates significant fixed salary overhead for the corporate finance department.
Why is it necessary to have a professional accountant oversee the automatic accounting programs?
While modern artificial intelligence (AI) accounting platforms can automatically match all transactions that fall within the 98% match threshold of recurring monthly business expenses, the AI is not able to address the complexities and nuances that sometimes arise in accounting.
Algorithms work well for transactions with a repetitive nature, such as matching a monthly subscription invoice from Slack with a bank transaction. However, the same algorithms will not be able to determine if there are unique vendor agreements to interpret, how to account for capitalizing costs related to internally developed software, or how to structure complex equity-based compensation rewards under ASC 718.
The human oversight provided by a professional accountant ensures that accounting rules are set accurately for automated matches. It will prevent a steady drift toward misclassifying categories and provide the strategic insight needed to produce financial reports ready for presentation to the board.
How should global and overseas subsidiaries adjust their software selection?
When you employ staff members through local foreign entities or establish overseas companies, you automatically create a new set of accounting system requirements. You will need multi-currency ledger integration, as well as the ability to comply with applicable tax laws and intercompany transfer pricing agreements.
Additionally, basic-level accounting software does not provide the requisite tools to handle these advanced multi-currency ledger requirements.
If your software does not have a native multi-currency revaluation tool included, the accounting department will need to do manual calculations to reconfigure all currency value changes throughout the month using the appropriate exchange rates.
With international operations, beginning with Xero is a preferable option because it has the most robust capabilities for doing business globally. However, for companies that expect to be able to operate on an ERP platform capable of handling multiple localized ledgers at the same time under a single parent company, a transition to an enterprise ERP must be planned for quickly following launch.
