Jim Donovan’s En Avant suggests that picking Xero’s customer number is the same as picking Trade Me’s. Not so.
Picking Trade Me’s potential customer base was not that difficult. Trade Me is in a winner take all geographically constrained C2C game. Once they were ahead it was pretty easy to make assumptions about how many people would and will eventually be involved in eCommerce and auctions in New Zealand – there are even a whole host of overseas examples.
Xero on the other hand is in a highly competitive B2C market, across different geographies, with strong competition already in their space. There are strong reasons for users of other accountancy solutions not to change, so the Xero product needs to stay consistently superior in the face of competition that is not standing still (but that is perhaps ossified and unable to move).
So Xero has an entirely different model from Trade Me, predicated on offering a vastly superior accounting experience (bring it on) to the that of the competition’s. Will people, particularly small businesses, get past the privacy aspect of placing their accounting data online? Will the product stay slick? Will it go crazy viral?
The confidence intervals around projections are much much broader than Trade Me’s – Xero could get to be many times the size of Trade Me – or it could fail to achieve critical mass.
Undoubtedly the Xero management and team are very strong, the product looks very very cool (I’d use it), but the valuation seems high. So is Jim Donovan investing based on facts or emotion?
Lance Wiggs 
Or is he supposedly investing to garner support for Fronde’s assistance in providing infrastructure to support Xero’s SAAS model?
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I think the comments about privacy of data are overblown. Sure right at this very point you will have people who can’t get their head around have this data on another server but this will change. In the 70’s companies outsourced payroll, in the early parts of this century we are outsourcing CRM (salesforce.com). Imagine that your entire customer base including all your contracts, opportunities and payment schedules on someone else server available over the web. If you asked someone that a few years ago you would have been labeled as crazy. Over time I think people will think it is crazy to host the solution in-house. How many people actually back up their data daily? How secure are your servers from other staff, hacking, fire, and theft?
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barnclebarnes – I think you are right – good points. Small businesses may well already be using yahoo, hotmail or gmail, which store their data elsewhere, and this is another step.
The killer question will be whether accountants for small businesses start pushing Xero, and given the relationships already formed by Xero this may well happen.
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Anon – can you explain? is Fronde already a partner or are these speculations?
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Xero Privacy – Hmm.. I have decided not to use planhq in part because of privacy concerns and I think xero faces and even bigger challenge. The heart of competitive advantage comes from institutional IP. Given that xero, planhq et al are able to view detailed financial and strategic execution information on their clients that’s a risk I just don’t need to take. Its not that I distrust the management teams ( staff, sysops, hackers etc) its just that the risk/reward balance simply doesn’t make a compelling argument – IMHO.
Xero Numbers – Xero $15m? – I just don’t get it.. nifty idea, but so were hoola hoops and betamax, smart guys for sure – but so were any number of other ventures. I just don’t get the value proposition for it. Do they really think that they can consistently out innovate the other players in the market simply because they are SaaS’d..
Xero Sustainable competitive advantage – I’m yet to hear any strategy to deal with how their competitors will respond. MYOB are no slouches when it comes to innovating – especially thru acquistion and they don’t need a float to find $15m. ref takeovers of exonet, comacc, solution6 in the past few years, there is no way MYOB will sit back and let Xero poach their market without a serious fight. Sorry but a tech advantage just ain’t enough when it comes to markets, channels rule and MYOB’s got the channels sussed.
A key and fundamental part of Trademe and ebays growth is because the punters create the content which draws more punters, and as a punter I want you to know about and look at my content/auctions – its a topic of conversation and constantly changing. As a client of xero theres no driver for me to virally spread or contribute to the product offering, growth and innovation and content is limited to inhouse teams. So with MYOB covering the channels and no viral element its a pretty pedestrian marketing proposal.. again IMHO!
;o)
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All fantastic and valid comments. The difficulty I see is that in our country it is impossible for people to divorce investing in Xero for emotional reasons from investing in Xero for valid value reasons. My pick is that the IPO will be oversubscribed, the share price will initially rise but then fall to below listing value and remain there until Xero has created the momentum to scale their business. This will only occur if the incumbent providers (MYOB etc etc) sit on their bums. Methinks that MYOB has a hosted app ready in the wings and will roll it out in the very near future. The the question for an SME is to go with Xero’s product or MYOB’s. Given the reluctance of bean counters (and I’m one so I know!) to jump ship – my vote is with MYOB. They’ll buy the people to give them the ability to make a product offering that rivals Xero’s but make business owners feel that it is an evolutionary step. Now THAT is a compelling story….
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I have no prior links with Xero, other than I know Rod Drury, and had a tour of the place. Fronde is not a supplier to Xero, although, as I’ve declared before, we’d like to be. In any event, my rational, not emotional, conclusion is that they are worth a modest bet, but not a big one at this price.
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Jim
thanks for clearing that up.
Lance
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benkepes & Grant
We may be in danger of overestimating MYOB’s ability to transform itself into a worthy competitor. Will they do so or just sit back like AutoTrader and watch their business migrate to a better model. On Xero’s side are some pretty worthy designers. MYOB on the other hand is not simple to use, and a SAAS will probably not change that.
Very good point Grant on the viral nature of Trade Me versus Xero.
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Cheers Lance, you are right about their ability to transform themselves, this is always a big ask and so damn fluid and time dependant.. I guess that’s the advantage of the M&A approach, which as Mark points out in the valuecrucher blog is the most likely true exit scenario that is behind choice to the IPO route. 25k customers .. hmm
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