Xero’s capital raising


While I still believe that Xero’s IPO was expensive, I also believe in the business opportunity and how Xero is going about pursuing it.

While the latest round of share issues at $0.90 is dillutive to the original $1.00 IPO,  it is an excellent price nonetheless:

  1. The IPO was expensive – and that was proven as the price languished well below the initial price of $1 for most of Xero’s listing period. As an early stage deal the offer should have been for a larger share of the company per share as the information available (actual results and plans) was sketchy.
  2. Times have changed, and changed for the worse in for the economy and particularly for the money raising game. Getting any money at all is hard these days, and finding over $23 million is an excellent acheivement.
  3. The source of the funds is telling – one of the founders of MYOB, a lumbering giant that owns the top end of the market that Xero is intent on stealing. They must be feeling pretty desperate right now. MYOB have proven, and will no doubt continue to prove, that they are  culturally incapable of  replying to the threat from Xero.

Xero has managed to execute well on their business plan, with features coming out at a steady rate and after a slow start, pleasing customer growth. They have also cracked their approach to selling – convert the accountants and they will bring along their clients. That’s not exactly viral for now, but it’s a path to sustainability.

Well done to the entire team at Xero.

The money eases pressure for Xero, and means they can focus on the three tasks at hand:

  • Keep the feature improvements coming, becoming clearly superior in feature volume and usability than the competition. Also have some fun and offer features that the MYOB’s have no answer to.
  • Sell sell sell – expand within Australiasia and in particular the UK, and make a beachhead into the USA.
  • Become sustainable – in theory this should be the last capital round required for sustainablity, although the option remains for a much larger further round to really launch hard into the big Kahuna – the USA.

A great story.

Published by Lance Wiggs


10 replies on “Xero’s capital raising”

  1. If you’re valuing a company with the revenue growth of xero at it’s book value, you’re really missing the point. I’m not sure whether the 90c valuation is fair, but you should certainly be looking at xero in terms of net present value of the future revenue stream, not the value of the desks and chairs.


  2. Ok so what’s going to be your share of future revenue and profits.

    Everytime xero capital raises you either front up with more cash or your holding is diluted. As a reasonably early stage business with considerably cash burn this will not be the last capital raising.

    So how much more money will an investor have to front up to return their 80 cents of future value? I’m doubtful they’ll get it back faster than the risk free rate in the bank.


  3. @emissive: I didn’t say I thought the valuation was fair, I explicitly said I didn’t know.

    What I do know, is that your mentioning book value isn’t relevant. Xero’s revenue per employee with green hair is also a figure you could quote, just wouldn’t help the decision of whether 90c/share is fair :).


    1. A bit flippant Koz. Knowing book value allows you to understand how much money you might get back if they burn through all their funds and go bust. There were a lot of Bubble start ups that went public valuing themselves on NPV far beyond the book value. After they burned through their cash and went bust, all they had to sell was the formway chairs, moon balls and razor scooters. You seem to believe there is no risk of xero going bust when it still has a huge cash burn with revenues smaller than the starmart on willis street.


  4. guys, guys as with all investments, gut feel is one of the biggest factors in whether or not one invested in Xero initially. It’s at times like this that knowing the pedigree of the founders/exec, understanding the space within which they play and doing some due diligence comes into play. Interesting also to see where Burger Fuel and Diligent who both IPOd at a similar time to Xero are at now. Sure Xero’s revenue needs to grow (although emissive I’m not sure what a starmart turns over so couldn’t comment on that) but look at the plan and how they’re executing upon it

    Fun and games chaps…


  5. If they burn through all their funds and go bust, you’ll get precisely $0 as the creditors will take their stuff, as will any landlords, fleeing staff etc.

    But yeah, I take your point that it’s not *useless* just almost completely useless :)


  6. Comparable company analysis is a common and useful tool in investment analysis, but this is the first time I have seen a publicly listed company benchmarked against an individual convenience store. This is not a case of comparing apples and oranges but comparing apples to Ohai coal.

    For the record, based on industry knowledge, the StarMart on Willis street probably does approximately $50,000 sales per week or $2.6 million a year. Xero’s customer numbers are growing but based on the 6,000+ they had at 31 March 2009 and assuming an average revenue per customer of $50 per month they currently have annualised revenues of $3.6 million.

    Based on the $0.90 equity placement Xero has a pre-capital raising value of approximately $50 million. Businesses (excluding freehold) of StarMart Willis Street’s nature typically sell at a multiple of 10-13 times weekly sales implying a value of 500k to 650k. This difference in valuation by a factor of 100 has nothing to do with the liquidation value of the two businesses but the upside potential. Xero like all early stage high growth companies has downside risk but this represents only one portion of the potential return distribution. As for Xero outperforming the “risk free” rate available from the bank based on the IPO price and the current share price they are well ahead. Sure they could crash and burn but if they do continue to build on their success to date they should outperform the deposit rate at your local bank.


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