ExpensifyDavid Barrett, co-founder of Expensify, is enthusiastic. His small Web startup that offers "expense reports that don't suck," is taking a whole new approach to sales, and specifically customer acquisition.

Expensify, which on Wednesday, Sept. 8, will announce a Series A round of $5.7 million in venture capital funding led by Redpoint Ventures, is using blogs, social networks and online word of mouth to market itself to small businesses -- its intended target -- through their own employees. About 100,000 of them so far, and growing.

"This is a new sales approach, from the bottom up," Barrett tells DailyFinance. "Call it Sales 2.0. We're using consumer sales techniques to sell into the business and sell at incredibly low customer-acquisition costs."

The model works like this: Consumers download Expensify's expense-report app for their iPhone, Android, Blackberry or Palm device. That consumer is most likely also an employee of a company and may start using the app to track his business expenses and exposing the product to the boss. Perhaps the boss implements it companywide and begins using it for contractors and external accountants. This viral, ground-up user adoption is what Expensify is gunning for. (Expensify made DailyFinance's Top 10 Tech Startups of 2010.)

"The employee signs up, and hopefully everyone else in the company is like, 'This is great!'" says Barrett. "Redpoint has been doing this for awhile. They're already a believer."

"Consumerization of IT and IT Services"

Redpoint approached Expensify, which had raised $1 million in angel investment in May 2009, about a Series A round in May of this year. In addition to leading the $5.7 million investment, Redpoint will add founding partner Tim Haley to Expensify's board.

"David is a classic entrepreneur," Haley tells DailyFinance. "He's creative, innovative and very smart." Haley and Redpoint are investing in companies like Expensify based a thesis they describe as the "consumerization of IT and IT services." (Redpoint invested in Zimbra, an open-source email and collaboration company that was sold to Yahoo for $350 million in 2007.)

"It's pretty clear that the model for innovating with product and getting that product into the hands of customers has changed," says Haley. "The old model of direct sales was very inefficient and expensive. Zimbra used an open-source angle that was very useful for marketing and customer lead generation. Consumers could use it for free and then upgrade to an enterprise version very easily because they were already using it."

"The bottom line is enterprise companies learning from consumer techniques," Haley says. "The goal is to try to make product adoption frictionless for consumers. And as it becomes useful to them, it can become viral and spread to their colleagues and others."

Unlocking a Highly Fragmented Market

"In aggregate, the small-business industry is massive," Haley says. "And there are no clear channels of distribution to get to these small businesses because it's an inherently fragmented market. So by definition, it's the most difficult of all the segments, if you can even call it a segment."

"Unlocking" that highly fragmented segment is "super-exciting now," Haley says. He isn't the only one jazzed by the concept. Describing the interest in Expensify's Series A round, Barrett says: "We got hounded by investors," including prominent Silicon Valley VC's he declines to identify. The angel investors are still in, and the company -- which has yet to generate much revenue -- is valued at an estimated $20 million by its investors.

Right now, Barrett is less worried about revenue than attracting new users. "Monetization isn't the risk here," he says "The risk is customer acquisition."

Barrett says that unlike some Internet business models, Expensify is pretty straightforward. "Expense reports aren't some crazy thing," says Barrett. "It seems like such a humble space, but there are billion-dollar companies that are doing this."

"Terrifying" at First

A lifelong programmer, Barrett worked for several years at startup Red Swoosh, which was purchased by Akamai. Barrett left two years ago with some money in the bank. Boot-strapping Expensify with a friend, Barrett launched a closed alpha test in September 2008 and won the DemoPit second prize at the 2008 TechCrunch 50 startup competition. In the first half of 2009, Expensify opened a beta test and raised $1 million from angel investors.

Then came the panic.

"For about a year, we were flat in terms of user growth," Barrett says. "We had no idea how the [small-business] space works. We tried [Google] AdWords but didn't get enough volume, and when people came to the site, they weren't really using the product." Add Barrett: "That was terrifying, initially. So we were like, we're screwed."

Then he realized that the path to the small business -- the target company has between 20 and 100 employees, though one client has 700 -- might be through the consumer, or more specifically, the consumer's smartphone. "The apps are completely free because they're targeted to [expense report] submitters," says Barrett. "We love submitters because they're our lead generators."

"And yes, we charge the [expense report] approver once they go over a threshold of about 10 employees." It's free to approve reports for the first two employees in a given month, and it's $5 for each additional employee. Given that about 25% of a company submits a report in a given month, most companies under 10 employees never exceed the free threshold.

"People Just Want to Get Things Done"

"Mobile apps are super-powerful channels to get to the employees," says Barrett, noting that the company was a launch partner with Google's Android apps marketplace, and it has free native apps for iPhones and Palm OS as well. Expensify also has partnerships with Salesforce.com (CRM) and Intuit (INTU) Quickbooks. ("This allows us to get straight to the accountants.")

The company is compliant with Payment Card Industry (PCI) standards and has relationships with major banks and credit card companies that allows it to do things like direct deposit and credit card verification.

"The bottom-up approach is a major asset for us," Barrett says. "It works especially well in the small-business space. People just want to get things done." As it passes 100,000 users, and with its $5.7 million in new funding, Expensify is hoping to get things done as well. "It's a sizable investment," says Haley. "It's a statement of confidence in the entrepreneur."

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