Fireside Chat with Layer

At our recent AGM, Sheel moderated a fireside chat with Justin, the Co-Founder of Layer. Transcript from the session copied below!

Sheel: Before we dive into Layer, tell us a bit about your background and the pre-Layer story.

Justin: Absolutely. Before starting Layer, I was at Square for six years and spent all six of those years building out Square's suite of cash flow and banking products. This meant any tool we would give one of our customers after they had taken a payment with Square to help them better manage their money, such as instant access to funds, a debit card, a checking account, or loans.

One of the most consistent pain points I saw was related to accounting. Customers kept coming to us saying how much they were struggling to get all of this data into QuickBooks.

Sheel: It sounds like you started thinking about this problem while you were still at Square. Why specifically this problem, and what is Layer?

Justin: As I mentioned, this problem kept coming up again and again. As we started pulling on that thread, we realized how much dissatisfaction there was with QuickBooks.

In a lot of ways, accounting is one of the final frontiers of SMB tools. Small businesses now have much better tools than they did 10 or 15 years ago in other areas. For payments, you can accept a payment on your phone with something like Square. You can get better access to payroll tools or capital. Accounting, on the other hand, has basically been done the same way for decades in tools like QuickBooks. Often small businesses do not even want to deal with it themselves. They hire someone to do it for them.

At Square, this kept coming up. In many cases, customers were explicitly asking us whether they could do their accounting and bookkeeping inside Square. When we started pulling that thread, we realized this was not unique to Square. This was true across the broader ecosystem of SMB software platforms, such as Toast, Shopify, and many others, where SMBs now actually run their businesses.

We realized there is a broader platform opportunity here. At its core, Layer is an AI-native accounting and bookkeeping platform that works through these vertical SaaS systems. We help these platforms become the financial home for their customers and replace QuickBooks for the end small businesses.

Sheel: What makes a good platform for you guys? You mentioned platforms like Toast and Shopify. Obviously those are huge companies and great partners, but what kinds of companies are a natural fit for Layer?

Justin: Within the vertical SaaS space, our sweet spot is a platform that helps the small business process revenue. What that looks like depends on the industry.

If it is field services or trades, that could be an invoicing platform used to generate and send invoices to customers. For restaurants or retailers, that is usually a point-of-sale system like Toast or Square. For barber shops or beauty and personal care, it could be appointment booking.

We prioritize those kinds of workflows because they position the platform as the hub for the small business and their central operating system. Most of what running a business is involves accepting revenue. These are the systems where an average small business is logging in dozens of times a day. That is where they get the most value when you plug in additional financial services.

The same place where you are checking out customers and seeing your daily sales becomes the place where you can see your profitability and do your accounting workflows all in one space.

In terms of maturity, ideally these platforms are Series A or later. We want platforms that have achieved some scale, found good product-market fit with their core offering, and are ready to expand beyond the initial workflow. On the end-customer side, we want them serving "main street" SMBs doing hundreds of thousands to low single-digit millions in revenue. Some vertical SaaS platforms serve mid-market and enterprise companies, which is less of a fit right now. The opportunity we are focused on is replacing QuickBooks Online for these smaller end businesses.

Sheel: What kind of impact are your partners seeing? How do you measure success, and what are you actually seeing in the numbers?

Justin: There are two main value propositions for these platforms.

• First, they become the financial home for their businesses, which drives retention and engagement. When you offer accounting and you are the ledger, your customers are very unlikely to churn off you as a vertical SaaS platform. We have customers who have seen churn drop by 25 to 30% after offering accounting. Those are really significant reductions.
• Second, you can directly monetize accounting and bookkeeping. There is already a well-established willingness to pay, as you can see through QuickBooks and human bookkeepers. People want to pay to get a clear picture of their finances. We see platforms making an additional $1,000 to $5,000 per year per end SMB by offering accounting and bookkeeping. In some cases, that can double their average customer value.

Sheel: Talk about bookkeeping. How did you get into that side, and how do you see the opportunity there?

Justin: Originally, the ecosystem of small business accounting in the United States consisted of the accounting software, such as QuickBooks or Xero or other tools where you aggregate all of the financial data together. You categorize your bank transactions and you build your P&L and other reports. That is the surface area where you build your financial picture.

Accounting software needs to be used, and it requires work. Someone has to go in and do this work to put together that picture. In some cases, a small business owner will do that themselves. In other cases, it is so much work and the small business owner is so busy that they hire a bookkeeper to do it for them. Approximately 40% of small businesses in the United States hire a bookkeeper and have someone doing the books for them.

The job to be done of accounting software, the core need, is that people do not want to do that work. They want to get to the end value, which is seeing a complete P&L and understanding where they stand financially. We realized that accounting software is, in some cases, a means to an end. The end is having complete books.

With advancements in technology and the way that we plug into platforms, we realized that we can provide more than just the software. We can do the books for these small businesses and provide even more value by saying, "You do not need to do this yourself. You can work with Layer or through one of our partners and their bookkeeping services, and you will receive a great bookkeeper who completes the work end to end." This means a small business can receive complete financials at the end of every month that they can use to run their business.

Sheel: There's a VC trope that every company has an AI angle. So, what's yours?

Justin: There are huge opportunities in accounting and bookkeeping to use AI to automate these workflows and to perform tasks that historically required a human, and in our case a human bookkeeper.

This takes many forms, but there are two fundamental areas.

First, a lot of accounting and bookkeeping involves taking in unstructured data and converting it into structured information. You need to know what is revenue, what is an expense, and what is a loan. The data does not always come directly from the platform. The platform may have a lot of the data, but it does not have all of it. People might have loan statements or a receipt for something they purchased on a personal card. Sometimes you need additional context about a transaction. For example, you might ask, "You went to Costco and spent 200 dollars. Can you tell us what that is?" The person might respond, "I bought an office chair." Turning that type of information into a structured classification, such as recognizing that it was an office expense or that something is a loan with a specific amortization schedule, used to be a very hard problem. AI makes that significantly easier. It allows us to take in that data and flow it into the ledger.

Second, AI allows small businesses to interact with their data in ways they never could before. People can chat through their P&L and ask questions such as, "Walk me through the trends in my top expenses." In addition to traditional charts and table-based reporting, they can receive text-based summaries of the performance of the business. These summaries resemble the way a human would walk them through the P&L, similar to how a bookkeeper would.

Sheel: Tell us about what you are building now and where you go from here.

Justin: Right now a major focus, and what will continue to be a top focus going forward, is automating these workflows end to end. We believe that small business accounting is going to fundamentally change in the next three to five years. There is a lot of discussion about the disruption AI is creating in accounting because the opportunity is so significant.

We want to reach a point where a small business owner can come in and get a bookkeeper through one of these platforms who is an AI bookkeeper that performs just as well as, or better than, someone they would hire locally. That AI bookkeeper should be able to complete their bookkeeping end to end and provide the service at a fraction of the traditional cost.

A major problem in the industry today is that many small businesses are priced out of traditional bookkeeping. Bookkeepers often charge several hundred dollars a month, and many small businesses cannot afford to pay that. We see a huge opportunity here. Our primary focus is automating bookkeeping end to end, achieving automation for more than 99% of these workflows. We believe that level of automation is fully achievable for many use cases.

Once you own clean books, you are positioned to add a wide range of additional value for small businesses. You can expand into tax filing. You can offer advisory services and help business owners interpret their data. Clean books also create a strong dataset that platforms can use to lend from. We believe we are already far along on this journey, and we are excited to reach true end-to-end automation.

Sheel: Over the years, since I have been in fintech, I feel like I have been pitched many efforts to rethink QuickBooks. There have been successful companies like Xero, but not really at scale in the United States. How do you get in there when accountants are so used to QuickBooks?

Justin: QuickBooks has maintained its dominance for a very long time. Xero entered the market more than ten years ago, invested heavily in trying to disrupt QuickBooks, and still holds only single-digit market share today compared to QuickBooks' seventy-plus percent. This comes down to two fundamental reasons. No one has offered distribution that is ten times better, and no one has built a product that is ten times better.

On the distribution side, QuickBooks' key moat is the brand it has built over several decades and the relationships it has developed with accountants and bookkeepers. QuickBooks hosts conferences for them, offers certification programs like becoming a ProAdvisor, and has large referral partnerships with many accounting and bookkeeping firms. QuickBooks positions itself as much as a tool to run a bookkeeping practice as it is a tool for the end small business. That relationship is extremely hard to disrupt if you plan to run the same playbook, which is essentially what Xero did and saw limited success.

Embedded solutions fundamentally change that model. The only entity a small business trusts more than a local accountant to recommend accounting software is its vertical SaaS platform, the platform it already relies on and that understands its industry very well. For example, if you are a restaurant and Toast comes to you and says, "We have a dedicated accounting solution for restaurants built around your use case," you take that seriously because you know they spend all day thinking about how to serve businesses like yours.

For us, once we are embedded within a platform, we can distribute to their small businesses with zero incremental customer acquisition cost. That is what 10x better distribution looks like.

On the product side, the real need for small businesses is simply to have their books done. QuickBooks is fundamentally a tool designed around accountants and helping them do bookkeeping. It is not designed to use AI end to end to automate bookkeeping for small businesses at scale using the latest advancements in AI. A 10x better accounting product is a product that does the books for you.

By building that, and with our bookkeeping service, we are already seeing customers excited to move from QuickBooks and a traditional bookkeeper. They save money, they get more value, and their books are completed about 3x faster and more accurately than with a traditional bookkeeper. We are seeing very easy switches.

Sheel: How easy is it for a partner to get onboarded with Layer?

Justin: We have put a lot of effort into this because every platform we work with has a full roadmap. They have many things they could be doing across both existing products and other embedded products, and it ultimately becomes an ROI calculation. We put a lot of work into making our integration as lightweight as possible.

There are three main things we do:

1. We provide embedded front-end components, product UIs that customers can drop directly into their product to deliver a complete accounting experience out of the box. We also offer APIs, and customers can build their own front end if they want to, but many prefer to take these prebuilt components because they are battle-tested and optimized for a great customer experience.
2. We provide a high degree of configurability so that customers can make the product feel like their own. They can adjust colors, fonts, and branding. That way they get something that feels integrated with their product without needing to build it themselves, and they can drop it in quickly.
3. We focus on simple implementation. We structure our APIs and integration touchpoints so that an engineering team can look at them and recognize that it will take only a week or two to plug Layer into their system.

Sheel: With embedded fintech, you have to sell to the partner, but then they have to sell it to their end customers. How do you help them do that?

Justin: We help them a lot and really lean in here. This takes many forms because these vertical SaaS platforms have often never launched an accounting and bookkeeping product before. They are not as familiar with the value propositions or with what will resonate with their end customers about why they should switch from QuickBooks or why they should use a bookkeeping service offered by the platform.

We provide a full suite of go-to-market and enablement tools, including:

1. Trainings for their sales reps and battle cards that help those reps navigate customer conversations.
2. Training for their customer support teams so that, when they launch the product and customers call in with questions, their teams can speak to the product clearly.
3. A rollout roadmap and marketing copy for email campaigns and other launch channels.

Some platforms have launched multiple add-on products and already know how to bring a second or third product to market. For example, at Square we had more than twenty-five products from marketing to rewards, and teams were very familiar with launching new products. Other platforms are launching their second product after their core payments and workflow offering. We help them think through how to deliver across those channels as well. We stay very close to them throughout this process.