Xero cops the flak – but is doing things well

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.

Monitoring success
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.

Published by Lance Wiggs


11 replies on “Xero cops the flak – but is doing things well”

  1. The comments on NBR often feel like they belong on YouTube, I wish the NBR forced commenters to log on to the site first.

    In saying that, I thought Rod’s initial comment set the tone – calling out Ben as a cloud commentator who gets free flights was very dismissive and a bit childish.

    Among the flood of “Anonymous” comments, there were some good points raised, but it feels like anyone who openly disagrees or questions Xero’s strategy is labelled a hater.

    I’m a Xero shareholder and was one of the first beta testers – I love the product and desperately want it succeed. But at the same time I’d be a lot happier if Rod would acknowledge the criticism with helpful responses instead of antagonism.


  2. I won’t comment on the NBR blog until they remove anonymous commenting. I would hate to think the environment would put young entrepreneurs off following our path.

    I’m quite disappointed in the unmoderated approach of the NBR as I would like to see more CEO’s openly engaging. I think their current approach discourages engagement. I have mentioned this to them today.

    On the Ben comments I don’t see the issue. Ben has been commenting on my posts for many years and has set himself up as a cloud commentator. His commentary is usually neutral to positive on us so it’s not that he doesn’t agree with us. Our opinion, formed over many years, is that he has not demonstrated significant insight into the industry nor is qualified to comment. He has not attended any of our public strategy events or referenced our strategic presentations which are all available on the Xero website.

    Surely a principle of social media is that I can comment back on those who passes comments on us. It’s a two way street. So it’s certainly not because he’s negative on us. He’s simply not.

    The whole sentiment that we shut down negative stuff is rubbish. We directly asked for comments, good and bad, as we usually do.


    We go out of our way to explain what we’re doing. We wants others to learn from our experience.

    The question of software amortization is a good one. We’ve covered that off in our comments on the link above. No one can hide from the numbers so we’d gladly take that question. It’s a bit rough just assuming that we’re trying to sneak one past the goalie and we’re unethical. That’s silly.

    Some of the comments were bizarre. The celebrity speaking for example. I don’t charge for speaking and my job is to get the word out there so I speak several times a week. Always about Xero, Small Business, Entrepreneurship and Broadband.

    We welcome criticism and always have on our blog. Who else in our industry has been as open as we are?

    Always happy to take questions but I’m not responding to anonymous ones.

    I think this is a very relevant discussion and an interesting case study. We love talking about this stuff.




    1. Quick correction – I have attended some of the Xero presentations and have referenced some of the strategic data Xero puts out. As always I’d be more than happy to receive relevant information that would help improve the analysis… but that would take a two way engagement. I’m up for it….


  3. Rod, I thought your comments about Ben on the NBR thread were unfortunate. It came across to me as ‘belittling’ and I would rather have seen a positive reply countering some of his points rather than an assertion on his credibility. Just saying.


  4. Hi Simon,

    Yes a was a bit frustrated by the NBR headline and commentary. Probably not my best work.

    However, I have been biting my tongue for some time as I’ve watched people build profile as commentators without adding value or insight.

    Ben said “I’m looking to see some clarify around a plan to really build customer numbers over the next 12 months.” Ben has not been to any of our strategic presentations, nor referenced them. Why would we signal our detailed strategy publicly to competitors. We’ve said all we are comfortable saying publicly.

    He makes the sweeping statement “Their burn rate is high and the only way to offset that is through higher revenue. The real opportunity is in the US and in (t)hat market Xero faces both incumbents looking to innovate and more agile startups with a home advantage.”

    1. No commentary on what it takes to build a business of the scale. We are very very lean compared to the incumbents. (What does Intuit spend on R&D?)
    2. Where have the incumbents innovated? What shots have they fired at us? Isn’t it that the Incumbents have spectacularly failed so far? How many real online customers does Quickbooks have? How many countries? When/will they deliver in Australia?
    3. What more agile startups? Who else has raised money? Who else has delivered 60+ releases? Is Xero not the most agile?

    We deliberately made a number of big assertions in our release. No commentary on that. Are we right or wrong? What is the impact? Are we disruptive?

    There is no evidence of a framework to map the market. For example I’d like to see a table of money raised versus revenue.

    Also there are mega trends happening with FinTech companies getting funded north of our valuation. I’d expect to see M&A pick up this year in the sector. Again nothing on that.

    Nothing on MYOB? How’s LiveAccounts doing? No mention of their ongoing delays? When is their PE exit coming? No mention of Reckon or Banklink.

    So it sounds harsh, but where is in credible commentary on our market?

    So I found Ben’s expert commentary to be not negative, but meaningless. Our numbers show that Xero is becoming a serious business and this time I chose to call it out.



    1. Some specific answers (sorry, only just seen this follow up comment)…

      1. No commentary on what it takes to build a business of the scale. We are very very lean compared to the incumbents. (What does Intuit spend on R&D?)

      I’ve covered Intuit’s R&D at length (refer posts about IPP). They are already a business of scale and a well executed strategy that sees them provide some kind of hybrid cloud/desktop offering could become the default solution (because of their incumbency). So, Xero sits in an interesting space. On the one hand it doesn’t have the market penetration that the incumbents do (regardless of spend on R&D), on the other it has a significantly higher burn rate than SaaS competitors (kashflow, freeagent etc etc etc). That’s fine as long as the burn rate translates into customer acquisition cost (CAC) below the competitors – at this stage that is not the case with those I’ve talked with.

      This isn’t to say that Xero can’t do it – they certainly can, but, as per my initial question, I’d like to see some strategy that gives me confidence that they can scale faster (in relative terms) than the competition. I’ve not seen that as yet.

      2. Where have the incumbents innovated? What shots have they fired at us? Isn’t it that the Incumbents have spectacularly failed so far? How many real online customers does Quickbooks have? How many countries? When/will they deliver in Australia?

      Quickbooks online is a red herring. I’ve reviewed it and clearly it’s not a winning model. The Intuit Partner Platform is and this is absolutely where Xero should be giving attention. Calling out QBOE is a diversionary shot that is meaningless. Sage and MYOB are the unknowns (disclosure – I’ve done some consulting work with MYOB around their cloud strategy) – I’m not seeing anything impressive from them yet but their cash reserves and massive customer numbers create a potential risk for Xero, should they prove able to execute effectively.

      3. What more agile startups? Who else has raised money? Who else has delivered 60+ releases? Is Xero not the most agile?

      Agile startups? Well, firstly raising money is a very poor metric for success in the marketplace. On a money raised to customers acquired ration, Xero is falling well behind their more nimble competitors. This is fine so long as Xero scales their customer acquisition up in line with their spend. But to claim that raising money is a proxy for success is simplistic. As to agility – product releases where, in my view, significantly more impressive before Xero took what I believe was a futile side move to create Xero personal (that in itself deserves its own post but to summarize, personal financial management products have proven to not be a sales tool for SMB financial products). The Yodlee integration took longer than ideal and, more importantly, longer than Xero promised. SSO integration with Google apps has now happened, but it took a year and Xero went on record saying that they wouldn’t do it because of “security risks”. So yes, Xero is undeniably more agile than the triumvirate of incumbents (Sage, Intuit, MYOB) but I don’t believe it is significantly more agile than it’s stable-mates in the SaaS accounting space.


  5. Rod, Xero is a great company. Remember to be honest but not harsh to those who seek your help/opinion. I saw you shoot down some young guys earlier this year. All the best!!


  6. I note your efforts to be objective in this post, Lance, and you have succeeded, but it would be useful – and more transparent – if you also disclosed that Rod is a business partner in Pacific Fibre. This could be perceived to influence your position.



    1. I did have that in – and then took it off as there are plenty of common investors and directors in Xero and Pacific Fibre. It’s al a matter of public record.

      Overall on this blog I generally either say what I think and feel or, if conflicted, don’t say anything on the topic at all. L


  7. I read the article at NBR – reminds me of the amazon days, when people were saying they were to “fall over” – Jeff Bezos came back with- “he had just added a million more customers…..”

    Controvesy makes news headlines, I am a xero user, and like it. I also understand it will have some hickcups (its on a computer after all!)

    Go for it Rod



  8. It is delightful to see this. The more others challenge us, the more likely we all will do better.

    QuickBooks made me a prominent CPA. I helped give Intuit tech-support-backed user-to-user forums. These gave users better and faster answers and let Intuit cut one-seventh of staff. I also helped push Intuit into QuickBooks add-ons, which are still growing explosively (though QuickBooks is near static). However, QuickBooks add-on limits (payroll) will let Xero add-ons grow at relatively faster rate and accomplish far more. Simple multi-company data tables can help Xero let even small businesses improve on an old U.N. Committee projection. It estimated trillions in annual savings from uniform forms and electronic data interchange.

    Xero, of course, is a Yodlee add-on, not a crippled (read-only) Mint feed. Yodlee, with 30 million users and major bank support, may be Xero’s most dangerous competitor.

    It is amazing that Intuit spent $170 million on Mint, to defend a failing Quicken Online, three years after buying Digital Insight for $1.35 billion. Digital provided online banking services for mid-sized banks and credit unions, while Yodlee provides banking services to 200+ top banks, including 5 of the top 10. Bank of America alone invested $20 million in Yodlee, but its capitalization may still make Yodlee especially valuable to Xero. Of course, an attempted Intuit (Mint) purchase of Yodlee would carry serious U.S. anti-trust issues.

    Except for this, Xero should soon revolutionize accounting for many. Bank feeds and multi-currency will quickly give Xero far more users than the terrible QuickBooks Online (I prefer time with a dentist to QuickBooks Online time). Even if QuickBooks soon automates bank feeds for its desktop version, it has separate out-of-sync code bases for its seven international versions, so it was a shock to learn that Xero is in 100 countries.

    Here is the single best way to understand the future of Xero. Intuit CEOs wrote this to me, “You’re fantastic Mike. Absolutely fantastic!” and “Keep raising hell when Intuit does something wrong!” They also let me post this to my website. My lead person has an MBA in finance from a top school. She has been an outstanding QuickBooks user, teacher and professional consultant for MANY years. Her initial reaction to Xero was, “OMG! Xero is the future of accounting!” She did not know I also concluded that, after reading an article by Doug Sleeter, the most prominent teacher of QuickBooks professionals, and doing my own investigation.

    This can only lead to continued explosive Xero growth.


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