by Peter Griffin
In the world of the software start-up, especially one aiming squarely at the fast-changing internet, two months is a long time.
When The Business in late February visits the central Wellington office of Xero, the new venture of IT entrepreneur Rod Drury, the floor of the ornate building looks bare, too big for its tenant.
Two months later, it’s slightly crowded and there’s a sense of urgency in the air that was previously lacking.
The software geeks sit together at tables shaped into a big U. One developer has installed a car racing seat for greater comfort.
Behind Drury’s desk, above a large unused fireplace, is an inspiring photo of a space-walking astronaut hovering hundreds of kilometres above Cook Strait.
Drury has made clear his ambitions for Xero – to build a web-based accounting software service that becomes one of the key players in the market internationally.
“If you think of a business that we really can go global in, accounting delivered over the web is something we can credibly do,” he says.
The last two months have been a whirlwind of software development and personnel recruitment for Xero, which was initially funded with $1.5 million from Drury, his partner Wellington accountant Hamish Edwards and several employees.
Xero’s release has been tightly controlled with the number of customers using the system rising from 30 to 100. A wider public release is looming and Drury says the fact that Xero is internet-based has allowed the developers to constantly tweak it without disrupting early customers.
“We’re improving and re-releasing the product every couple of weeks now, listening to feedback,” says Drury, who last year sold his email storage company Aftermail to US software maker Quest for US$45 million.
The software developers were brought onboard early with Drury just recently assembling his executive team. He poached Air New Zealand chief information officer Alastair Grigg to become his chief operating officer.
Grigg says past “adventures in venture land” have prepared him for start-up life, but that his two year stint managing a 200-strong IT team at Air New Zealand has given him skills that will be needed when Xero gets bigger and goes global.
An unusual hire came in the form of Olympic triathlon gold medal winner Hamish Carter, who retired from racing in March to join Xero as relationship manager.
Anthony Bishop, formerly managing director of the local arm of software maker SAS Institute, joined last month as Xero’s head of global sales. Former National Business Review reporter Kate McLaughlin left journalism to become Xero’s marketing manager.
The Xero board has also taken shape with the addition of Trademe founder Sam Morgan, who Drury has had a close working relationship with as a member of the Trademe advisory board. Morgan is also a shareholder in Xero. Guy Haddleton, a Minnesota-based kiwi expat who sold his business planning software company Adaytum in 2002 for US$160 million, has also been recruited to the board.
“The strategy was to get to a hundred customers to validate that the software works,” says Drury.
“Now we have to build up the operational expertise.”
Then the focus will be sales, sales, sales.
Xero has not unveiled publicly any revenue targets as it is in a “quiet period” before releasing the prospectus that will seek to entice investors into its stock exchange listing planned for later this year.
Xero is subscription-based, so a sole trader can sign up to receive a two user licence for $56.20 a month. A licence for an unlimited number of users costs $112.50 a month.
Alone, the software is designed to make book keeping easier for one-man shops and it isn’t necessary that the accountant uses Xero as the data held within the system can be exported to Microsoft Excel and Adobe PDF documents.
It’s perhaps best imagined as bringing the Google philosophy to accounting – using a simple web browser to deliver simple tools that do the basics of accounting and mine your data for better quality information.
“We really bring accounting back to a small amount of work every day,” says Drury.
“We know cash flow is a daily thing. Being able to do a small amount of work each day and stop that big four hour catch up every third Sunday night is key.”
If making accounting software simpler and more flexible for the business owner is one of Xero’s goals, introducing the concept of the “virtual CFO” is another.
“It enables more people to be actively involved in doing things with the information within Xero, which means the business owner doesn’t have to do it all any more,” says Edwards, who was Afermail’s chief financial officer before the Quest acquisition.
“They can involve their book keeper or accountant to do more.”
In effect, you give your accountant, staff or external consultants log-ins to your Xero account so they can instantly see, via the internet, the financial position of your business.
But are businesses ready to open the books to that extent?
“They’re happier to open things up to their stakeholders and get them involved,” says Edwards.
The idea is also to have employees also tapping into Xero to help them better do their jobs.
“How can we get employees to do more while at the same time keeping sensitive information away from different users?” Edwards says was one of the key questions the development team asked itself when designing Xero. He claims they’ve answered it.
“That’s not a function MYOB currently provides,” he adds.
MYOB – Mind Your Own Business, is the Australian-listed king of the market for small and medium-sized business accounting software in the region. It turned over AU$182 million last year and has tens of thousands of local customers who use off the shelf packages such as the $249 MYOB BusinessBasics to manage their accounting.
It’s new managing director, Matthew Lynch, a former logistics manager for freight company UPS, says Xero is “in good company” among the numerous players competing with MYOB for a slice of the market.
“MYOB’s success has been built on providing what our customers need. Offering it online is just another way of doing it,” says Lynch.
If Xero and MYOB fundamentally do the same things, the way they go about doing so is philosophically different. While Xero’s services are entirely web based, MYOB’s are centred on the software packages loaded onto its customers computers.
Asked to outline what MYOB is doing in the internet space, Lynch refers to “training and support programmes” rather than core accounting functions.
MYOB currently enjoys strong use among accountants.
“It’s an Australian product but a lot of it was written in New Zealand, particularly the general ledger product,” says Judy Knighton, a spokeswoman for the Institute of Chartered Accountants which has 29,000 members.
Quicken and BankLink are other major competitors Xero will face, says Knighton.
Xero and the institute share common ground in one key area.
“The way of the future for our members is the virtual CFO model, where it’s not just a matter of doing the books,” says Knighton.
“The bottom line for accountants, is how will [Xero] make them more efficient?”
Wellington accountant Peter Isaac, who writes a technology column for the institutes Chartered Accountants Journal, questions whether Xero really brings anything new to accounting software.
“This is a reprise of the [application service provider] fervour which peaked just before the dot com bust,” says Isaac.
“Rod is going for the SMEs and this is exactly where so much cheap and packaged software already exists.”
Businesses, says Isaac, would likely struggle with the security implications of having all their sensitive financial data held on the computer servers of an external provider.
“You would have to look at the possibility of unwanted elements infiltrating the software.”
Overall, he believes small and medium-sized businesses are reasonably well served by accounting packages but that “enterprise grade” systems for large businesses, particularly in enterprise resource planning, are still too expensive.
Isaac was keen to see what Drury’s differentiating factor would be.
“After Aftermail he may have some archiving [technique] that he intends to build in. This would be the big selling point. But again it may be countered by web security matters.”
Drury for his part says Xero grew out his frustration with accounting software packages. He believes other entrepreneurs share that frustration, which may lead them to Xero.“We’ve built the accounting system we’ve always wanted.”