I really hope there is only one or two trolls behind the despicable comments on the recent NBR article on Xero results.
Healthy debate and skepticism can be good but, this series simply shows that tall poppy syndrome is alive and well in NZ. And that’s sad as Xero is poised to be a genuine breakout success.
The business model of Xero is pretty simple and being executed well:
1: Build a good enough product and launch. Xero did this by hiring well and focusing on usability.
2: Push to early adopters, learn from them and continuously improve the product to meet their needs. Early adopters were listened to and the product continued to change.
3: Try different ways to sell until you hit the most cost effective one. Turns out that’s through accounting firms, which was probably the most important Xero insight.
4: Double down by raising capital and investing heavily in the sales and development processes. There were a couple of major fund raising events – when MYOB founder Craig Winkler jumped in hard, and when Peter Thiel’s Valar Investments came over more recently.
5: Watch as sales become easier due to word of mouth and end-user expectations. The NBR article is part of that, but the real selling is done by accountants seeking to make their work with clients easier, and by end users wanting to wrest control of their finances.
6: Expand to other territories and learn how to sell there as well. New Zealand is on a great growth curve, and Xero started progressively pushing into other markets. Australia and the UK were first, but the USA is the big prize.
7: As you work out how to sell and grow inside each territory, then raise more funds and sell hard.
This, like Amazon, is about the endgame, not the path. The endgame is that Xero has millions of customers, each paying a monthly subscription. The path to get there is one of spending as much money of effective selling and product development as possible so that the endgame is reached earlier. This means shareholders shouldn’t expect early profits, as there is much higher net present value to be found by continuing to reinvest.
Thus the numbers to watch are things like cost per customer acquired, growth rate in customer numbers by region, average monthly revenue per customer, sales made per year per sales staff member and and EBITDA before marketing spend.
It’s still very early days to pick winners – but Xero offers Kiwis a rare chance to have a shot at owning a piece of a huge software firm early in the land-grab phase. I’m not a direct shareholder as I don’t own any shares on the NZ or Australian stock markets and prefer to put my money into privately held start-ups.