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Idealog—in the ideas business

Xero: The numbers are up

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Idealog March/April 2007, page 54. Photograph by Ian Robertson. Manipulated by Adrian Clapperton

That ‘Big Idea’ can take half a lifetime to arrive, so it deserves a bit of fanfare when it does. Hamish Edwards and Rod Drury planned to launch Xero, a breakthrough software accounting system, five years ago. Then they waited. Now their number’s up

Wait. Before you start reading, get yourself a cup of coffee. Rod Drury’s already had eight today and you’ll need at least one to keep up with him. This is his ninth business meeting, or at least his ninth meeting—one might have included breakfast at home. “Personal life, business … it’s all the same,” he says. “Business is what you wake up to do.”

Ironic then that Drury is a patient man. He and his business partner, Wellington accountant Hamish Edwards, have waited five years for “the planets to align” to launch their Big Idea into what they say is a gagging, global market.

The Big Idea is Xero, a web-based accounting package aimed at transforming the way small businesses manage their tax, payroll and financial planning. Don’t let the sound of the product put you off—Rod Drury, last year’s NZX Hi-Tech Entrepreneur of the Year,  has a track record of turning the dull into dollars. The highlight is AfterMail, the email storage company Drury founded and Edwards joined as chief financial officer five years ago. The company was sold last January to US software giant Quest for US$45 million, much of which Drury is ploughing back into Xero in the hope it will become a global company, based in Wellington.

So what’s so exciting about, ahem, accounting? Drury and Edwards anticipate the web-based service will be among the world’s top five within five years, rivalling existing products such as the all-pervasive MYOB. It’s hard to put a financial value on that—especially as securities law constrains what Xero can claim about sales targets and the size of the market opportunity prior to issuing a prospectus—and the company is strongly considering an initial public offering on the New Zealand Stock Exchange later this year. But it doesn’t take an accountant to figure out that, if Xero is a hero with small businesses worldwide, there’s a significant market. In New Zealand alone there are more than 330,000 small to medium enterprises. The founders estimate that each SME currently pays an average of $2,000 per year for accounting systems. You do the math. By comparison, Australasian market leader MYOB, publicly listed in 1999, is now a A$161 million company with tentacles extending into Asia and North America. An even better comparison than MYOB, says Drury, is salesforce.com, a web-based sales and customer management system that by end of January had 556,000 subscribers.

We waited a long time to do this because we knew this was an opportunity that we could take way beyond just the New Zealand market. But in order to do that we had to set the standard and create the culture and brand right from day one that says: ‘This is a global company, and we do things the right way’.

Just what makes Xero better than, or at least different from, alternatives is that the system can handle complexity but is simple to use. The design-led approach results in an intuitive interface, allowing users to understand their business at a glance. And being web-based, Xero is updated in real time and can be accessed anywhere in the world by a variety of stakeholders.

“Small businesses can look at things like their bank accounts, cash books, general ledgers, accounts receivable and payable and you can see exactly where [they] are,” says Drury. “Even better, you can start to plan and predict your next business move based on your cash flow.”

Edwards has been refining the requirements over the last few years. Some 30 beta-test users have been trying it out since January.

If you aren’t thrilled by the product (honestly, plenty will be), perhaps the founders’ passion for growth will persuade you. “We started this company with $1.5 million from myself, Rod, and our founding employees, plus grants from FRST and NZTE,” Edwards says. “We’ll be bringing in additional capital to build out the operational side of the business for our New Zealand launch and entry into [the] UK and Australia. There’s no reason why we can’t be the global leader in this space.”

If Xero is publicly listed in June or July, it will be one of the youngest New Zealand companies to achieve this. Whatever the list price, the founders are adamant that if they go public investors will be getting a good deal. “We’ve spared no expense hiring the best people in the world,” says Edwards. “We’ve got a killer product and global thinking—and a proven track record in software excellence.”   

Indeed, Xero’s conception occurred during the growth of AfterMail. Finding the accounting systems available “just woeful”, the moneyman and the technologist set about filling the square hole in the market. Soon Edwards was immersed in his business partner’s native industry to the extent that he was even speaking the geek language, referring to Xero’s potential as a “binary-big opportunity”.

“If you wanted to do this you had to go really, really big. So one of the reasons we waited was that broadband wasn’t where we needed it to be back then. And we also didn’t have enough real personal capital to exploit the opportunity.”

Enter—or rather exit—AfterMail. The sale added a few zeros to Xero’s binary code. Eleven months later Telecom was nudged into unbundling its phone lines, sending the pair’s second planet, broadband, scuttling into alignment.

“We waited a long time to do this,” says Drury. “Because we knew this was an opportunity that we could take way beyond just the New Zealand market. But in order to do that we had to set the standard and create the culture and brand right from day one that says: ‘This is a global company, and we do things the right way’.”

The right way involved setting aside some serious time for research and development, a business model and a marketing plan. “Because we had our own capital, we were able to do some real R&D, which ordinarily you wouldn’t be able to do,” says Drury. “Normally you’d race to get [the] first product done so you could boot it out the door and get 100 customers on board to make some money.”

But until now Drury and Edwards have been focusing more on growing their internal phone list than their potential customer base. When Idealog visited their Wellington offices, there were 15 desks dotted around the place. When we called a week later, they were rolling in two more. Still there are no plans to take over the whole building: “To be honest, Rod and I don’t know how to run a big multinational company,” Edwards admits. “But we do know a lot about running an SME. So we are applying the principles that have led to our successes in the past to form a bunch of Xero SMEs around the world.”   

This network of ‘mini multinationals’ will be united by one thing—a very well developed product. “We threw quite a few things out before we got to the model that we wanted,” says Drury. “But what we liked about that process is that we were able to demonstrate the huge benefits of putting in a small amount of investment upfront.”

As for people who want to invest in Xero upfront, if you’re a chartered accountant or in the advisory community—the company’s primary target market—you may be in luck. If Drury and Edwards decide to go public they may offer firm allocations to these strategic partners.

There are almost no disadvantages to doing this from New Zealand. In fact, there are many advantages. We are a nation of SMEs so we get it, and this country is a great test market. We want Xero to prove what New Zealand can do with technology. If we’re successful we hope to see another 10 New Zealand companies become successful immediately after us.

Even if they don’t go public, if you’re a potential strategic partner you may well get to enjoy the Drury and Edwards Roadshow, stage one of the Xero marketing plan. “It will be like a rock band going on tour,” says Edwards. “Except we won’t sell tickets. And we’ll be better behaved.”

Xero clearly has its path to business stardom mapped out—but Drury and Edwards are almost equally concerned with yours. They want to establish a model for setting up a successful technology export business from New Zealand for a simple reason: they want to keep living here.

“To live here we need good skills, we need good health care, we need good roads,” Drury cites with the conviction of a Labour politician two days out from a general election. “We need more money coming from offshore—and technology is the easiest thing to export. Plus, there are almost no disadvantages to doing this from New Zealand. In fact, there are many advantages. We are a nation of SMEs so we get it, and this country is a great test market. We want Xero to prove what New Zealand can do with technology. If we’re successful we hope to see another ten New Zealand companies become successful immediately after us.”

“We have no doubt this will be huge,” Edwards adds. “We just don’t know whether it will be huge or ginormous.”

Idealog envisages that when Xero finally goes live later this year there will be a party, but Drury will be the sober one with the briefcase organising his next meeting. He doesn’t drink much: “No time for hangovers”. There are clearly other five-year plans waiting to be begun.

Originally published in Idealog #8, page 54

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