Xero – projecting numbers

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?

Xero – to invest or not

Everyone seems to be talking about Xero – and I’ve been fielding a lot of ‘should I invest?’ queries. So here is what will now be my standard reply:

Do your research.

This is a low dollar early stage investment that would normally be offered to an Angel or Venture Capital investor. That means the risks and potential returns are higher, and that investors should be very well informed and financed.

1: Read about the business

Read the prospectus (offer document). All of it. Make sure you understand where the value of the company is going to come from, what will happen to the money raised, and what the risks are.

Read Mark Clare – who has blogged about Xeros IPO over on Valuecruncher. Read other analysts comments as they emerge.

Read a book about the dot com boom and bust. Pick any one. There is value there, but only a few win.

2: Assess the business

You’ll need to drive a spreadsheet for this.

Form an opinion about the size of the potential market for Xero’s product, and then form another opinion about their ability to capture that market in the face of competition that is not standing still. How long will it take to make money? How much will it take to get there in time? Money? Could this make $100m a year, and so be a billion dollar company? what are the underlying assumptions to get there?

What is the probability of Xero becoming a billion dollar company ($100m ebit a year)? a hundred million dollar company ($10m ebit per year). A $50m or less company? ($5m ebit or less). Worthless (they spend all the capital and close down). Assign probabilities to each of these based on what you read and know.

Remember that the current Xero product may fail – so will the team be able to redirect to another more profitable line and still become big? VC’s sometimes (not that often) invest in great teams that have average products.

3: Assess the investment

What sort of multiples of earnings would this get on a US market? (Look up INTU)

Who are the logical trade buyers? What sort of earnings multiples would they pay? How much money do their competitors stand to lose if Xero executes well? (They’d be willing to pay that). How much money could a larger competitor make out of migrating their customers to Xero’s product? (they’d pay that much).

Remember that there may well need to be another financing round between your investment and maturity – so your percentage of that hundred or billion dollars would be squeezed down. Assess how much capital Xero will need in 18 months time to keep going for the following 18 months until profitability, and guesstimate what percentage of the company, if any (loans instead perhaps?) will need to be sold to get that.

The work out what percentage return will you make if this becomes a a hundred million dollar company? a billion dollar company? $50m? $0?. Take your probabilities from above and multiply out to get your very own expected return.

It had better be greater than 12%. Hell – it had better be great than 20-50%, because you have a very real chance of losing everything. Remember your money could be safely put with someone like Gareth Morgan and earn 8-12%, without a chance of losing it.

One more thing. You may feel that the demand for these shares will be supernatural, resulting in a massive initial hyped up appreciation of share price, and you may like to take a punt, and exit quickly. Do that only if you see real evidence of the required frothiness amongst your peers and bigger investors. Be very wary though – many others may have the same idea.

Still with me? Now invest only if you already have a diversified portfolio of stocks and fixed interest investments, can afford to hold this investment for a while, and walk away from it if you have to.
If you didn’t manage to get through the analysis above, or to do your own version of it, then you will not be an informed investor. The informed investors are the ones that win in the markets – something Warren Buffet is very good at. The uninformed are either investing on emotion, or on someone else’s advice. Neither are recommended – stock tipping is about the same as horse tipping (though quite different from cow tipping), while investing on emotions is … dangerous. If you don’t want to do the research but still want to invest in stocks that’s not a problem – go to someone like GMI and get them to buy you a diversified portfolio of stocks and bonds.

Will I invest in Xero?

Right now it is too hard. Not only would I actually have to do the above research, but I’d also need to open a NZ trading account to invest in stocks, which seems difficult. The forms are long, involved and on paper – requiring such antiquities as stamps and envelopes. Plus I don’t really trust a market where you cannot easily short. I’d rather spend my research time on companies and industries I know, and give the diversified portfolio bit to someone else (GMI in this case). Right now I am long eBay and AAPL, and short EQR and MSFT.

<update – En avant has some comments on the deal>

Infratil stock split

Why does Infratil need to split their stock at $6.52, when everything I buy on the US markets is above $30?

Meanwhile it is good to see Morrison and Co. staff being rewarded with a $14m payout. That is difficult to do in the society, but essential if you want to attract and retain the required quality people. Lest we get too excited – $14m is not actually a lot in this kind of business overseas.

eBay firefox extension toolbar

Just to add some more fuel to Rowan’s on-going discussion of a Trade Me API and gadgets, a group of Stanford design(!) students releases a Firefox eBay toolbar (actually a hacked version of Firefox) with big implications.

The toolbar does the basics, but also removes all paid advertising and shows photos for all results of a search – not just for featured items. Those are two big sources of revenue for eBay, and if the product takes off then watch out..

It appears the motivation is that eBay has been so slow in delivering their own product. Why a toolbar is a must have, I’m not sure, but there you go.

Of course it isn’t going to take of… unless of course it gets featured on, say, Slashdot..

Drop off stores – will they work here?

Thinking of opening some Trade Me drop-off stores? After all – there is a gap in the market right?

Drop off stores are big in the USA – they are places where you bring items for sale on eBay, and they list and sell them on eBay for you. The stores necessarily take a huge cut (say 30%). The items need to be of a certain value (say $50), and easily salable, which means you cannot just empty out your garage..

Well – read this first. 74% of respondents (yes – self selection makes it biased) to a drop off store survey said they made a loss after salaries.

And then think about the dynamics of the NZ market versus the US market. Kiwi’s tend to be more careful with more expensive items, and far more pragmatic than Americans. Perhaps we’d tend to list expensive items ourselves, whereas cheaper items are the ones we’d like help with listing.

I’d love, for example, someone to come and list about 100 items of mine with an average value of $5-$10.

I’ve been a fan of drop off stores in the past, but I am beginning to think that drop-off stores are going to be a tough way to make money in NZ. Of course I’d still love to use them.

The auctionbytes blog has some store owner’s comments, mostly expressing frsutration at not making money. The main response is this insight:

‘The formula is simple, open in a high traffic plaza in a community where people actually make money.”

DPReview falls to Amazon

DPReview is the site for checking out the latest hotness in digital cameras.

I’ve been using the site for years as I tend to lose, drop, vibrate to death or otherwise attempt to destroy the digital cameras I own. Strangely enough they don’t totally die (I look for robustness), but they are broken enough so that I can convince myself I need the latest hotness.

DPReview is London based, and has 7m UB’s and 120m PI’s each month. Sadly no word on price as I guess the price isn’t material for a $25bn market cap company.

Anyway, enough digressing – Amazon been very smart and purchased the site, which they will now link, one hopes, to products on Amazon. So – we can go check out the latest cameras on DPReview, click the buy on amazon link, use the not-exactly patented one-click to buy, and then we Kiwis can use Shipbuktu to ship the electronic goodies to us.

Simple! and very very dangerous.

White pages being stolen?

A strange press release from newly independent Yellow Pages, who are:

“approaching a number of large New Zealand businesses and government organisations believed to be misusing information from White Pages online.”

They are saying it is part of an “industry move”, with quotes from IAB’s Josh Borthwick and Keith Norris from the Marketing Association.

So which businesses are going to get cease and desist letters? Well – I fancy a quick Google may help.

Sturm.net host a wap service for searching white pages.

and that is it. It cannot be surely.

So I read through to the very endo of the press release (and updated this post as a result). At the end is the vital information:

“… if an organisation wants to verify its own contact database or create a database of potential customers using White Pages online, this is an example of business use and therefore that organisation will need to enter into a formal agreement with us and adhere to certain terms and conditions.”

It sounds like if I check one individual’s address then I am up for some sort of contract with WhitePages. Surely there has to be a level of materiality.

A separate, and potentially more serious, breach of terms and conditions is ‘scraping’ is where companies or individuals deliberately copy or scrape data (e.g. pages from internet sites) and use this information for their own gain, sometimes passing it off as their own.”

This I will give them – scrapping the entire or chunks of the site is pretty bad.

The question then is which companies would do either of these activities. It could be any really – from small companies trying to get a Direct Marketing list together, to utilities, and any one of a number of  web companies trying to build a directory of, say, businesses.

The press release seems pretty Orwellian at times:

“We need big business to step in for the benefit of all smaller publishers who simply can’t afford to defend their rights and content from negligent use,” said Mr Borthwick.”

While Mr. Wright, in an unfortunate turn of phrase, sounds like he wants to stop businesses using the White Pages online for anything:

“Organisations are using White Pages online to benefit their own business activities, says Yellow Pages Group Chief Information Officer, Karl Wright.”

They are very careful not to name names – but expect the salesmen and lawyers to come calling if you have a large mailing list(s) and employees that hit Whitpages a lot.

The end of newsprint is nigh..

..well it isn’t nigh, but the first signs of the end of newspaper are out there.

Yesterday saw the announcement by LG.Philips of the first A4 colour e-paper. The ePaper is a flexible panel that is as thin as paper and is best used to display reading material. It only uses power when the page content changes, and the quality, at least for the black and white versions, is meant to be awesome – indeed for this “the images displayed are comparable in quality to printed pages”

When this technology matures you will be able to read your books, newspapers and magazines as and where you do now, but the content will be loaded electronically.

Right now the prices are too high, but the future is coming, with Displaybank predicting almost US$6 Billion will be spent on these things in 2010. Don’t believe those numbers? Judge for your self – and read the handy 160 page DisplayBank report on the Flexible Display Technology and Market (2007-2017). Don’t forget to pay the $US6500. (and send me a copy)

Improving airport security efficiency

NZ recently started demanding that travellers remove laptops from bags when flying. This has been happening for a while in other countries, so you’d think it was no biggie. (I noticed the change as the first time it happened to me I happened to have two laptops in my carry-on.)

Unfortunately the screening system has slowed considerably, resulting in queues by the gates at Wellington Airport, and increasing stress for those harassed business-folk..

wellington airport queues

At Wellington Airport they now need to move the screening back toward the airport center, and beef up the number of channels. The airline lounges and some shops should be  beyond the security gates, so travelers can relax until the last minute.

While shonky regulations are no doubt driving the new systems, I was plesantly surprised to see one tweak. Each time I have been going through the new ‘show us your laptop’ system in Wellington, Auckland or Christchurch, I have been making a polite suggestion that they needed larger trays.  I won’t take the credit – but it was great to see larger trays turn up in the last 2 weeks – even if some of them are exactly the same size as my laptop, making it difficult to remove easily.

I have three more requests for the security staff:

1: Please don’t touch my computer – it is a delicate electronic instrument, and packed full of vital work and/or personal information. I get very nervous when you touch it.

2: Please do not make comments about my computer. You do not make comments about my underwear or clothes when you search my bags, and you should not make comments about my laptop, even if it is an Apple or Ferrari.

3: Please fix the logistics – usually there is one of you loading, one watching the screen, one standing around and one pretending to help unload. How about two loaders?

and some braver strategies:

A: Engaging me in conversation is the best way to determine whether I am dangerous or not, but it is difficult for me to be responsive when you are also treating me like a criminal. So put the security staff outside the system looking at the people, and automate the luggage and body search.

B: We do not all need to go through the scanner every time. As people enter Mexico customs in Mexico Airport, everyone is asked to press a button – if your number comes up you get searched by customs. Do the same in busy times – let the queue length dictate the percentage chance of a search, and keep focused on observing strange behavior. Make sure there is a material chance of getting searched.

C: Get rid of the visible security entirely – but go for 100% surveillance. We all expect by now that once we enter an airport we are required to behave. Copy the way security works in casinos, and monitor from above.

Remember we are all in this as well – treat us as adults and expect us to help you look for and deal with dodgy people. Treat us like criminals and we will treat you like prison guards.

Amazon continues to make me think..

The other day I was surprised that Amazon was going to ship my order of 21 books in 19 different packages.

On Friday night I picked up the first round of arrivals from Amazon. Over two days five boxes had arrived, each containing one book. Four of the books were identical (photo), and all of the books were shipped from the same address in Kentucky.

amazon boxes arrive

The boxes did not have any obvious stock number marking on the outside, which would imply the books were picked up, packed and stickered at one time, and not pre-packed. But I have just noticed the bar-code after the amazon.com logo, and will check the next lot to see whether they vary by book, or whether it is just a reference for the box or the shipping location.

The label states they were sent by USPS (US Postal Service) International Priority Airmail. I am taking that this means they used Letter Post – Airmail, which allows you to send ‘letters’ weighing up to 4 pounds (1.8 kg). Each “Don’t Make Me Think” book weighed 1.35 pounds, for which USPS charges $12.95. I’d assume Amazon gets a decent discount from that.

If they had used Parcel Post – Airmail for a single book, then it would have cost $16.85 to send. However, if they had put 5 books into a box, which weighed a total of say 6.5 pounds, then the cost per book would be $34.40/5 = $7.70 per book. So the postal charges for the 5 “Don’t Make Me Think” cost an extra $30.35. It is very hard to believe that this exceeds the saving in handling and boxing costs.

To be fair to Amazon, ordering 5 of a single book is probably not that common (unless you are a Professor), and most orders for 5 books would have books in 5 different places.

So why did I buy so many copies?

Well the book is excellent – “Don’t Make Me Think” is the easiest way to help people understand and have common goals for good website design – and I tend to give them away as I move around. Nigel and Sam at Trade Me put me on to the book – it seemed to work for them.

Netguide, Stuff, Trade Me, Pimp my plane…..

On the one hand I am not a big fan of the Netguide awards methodology.

On the other hand Stuff managed to glean two awards (Best media site and best homepage), while Trade Me took home three more. Thanks to everyone that voted for us – both Trade Me and Stuff. It was a huge boost for the team at Stuff, and it was also great to hear people during and afterwards tell us how much they love the site – both the design and editorial.

In my short time at Fairfax I have been astonished and encouraged at how much emphasis is placed on the quality and speed of editorial. Even these awards didn’t get in the way. The Privy Council Bain decision came out just as the ceremony ended, so Sinead and Dylan left the post match party and went upstairs to coordinate the online response. The resulting articles were published not only a full hour earlier than NZHerald’s, but also provided much more depth. Sinead and Dylan were only two people in a team around New Zealand that managed to write, sub edit and publish those articles both online and into the dailies. I feel privileged to be part of such an organisation.

Just after the awards we took this photo, after the fold, which Kerre Woodham may not want me to publish, but what the heck – she seems like a good sort.

Continue reading “Netguide, Stuff, Trade Me, Pimp my plane…..”

Comparing Trade Me and eBay by the numbers

I’m not sure how many people realise just how good Trade Me is. Let’s look at some comparative public numbers against eBay. There are plenty of reasons behind the differences, and I’ll write about the publicly known ones sooner or later.
Auctions
Here’s an excerpt from a reply I made to this great post on Rowan’s blog.

“Trade Me has 865,000 listings right now, while eBay Australia has just 1,096,000 listings.

Australia has a population of 20.2m and NZ 4.1m. That’s 0.21 listings per Kiwi and 0.05 listings per Aussie.

eBay demands listing fees, and that tends to depress listing numbers (by about half). But that doesn’t nearly account for the difference in listing numbers…<snip>

…eBay.com itself has 10.5m (0r 11.9m) items located in the USA. That’s 0.035 items per person there. That may exclude store inventory, and it seems really low, and still – pathetic versus Trade Me.

Clearly whatever Trade Me is doing to get listings is superior to eBay. Vastly superior.”

So let’s look at the other business lines.

Motors
eBay Australia has 13,365 cars listed right now – that’s just under a third of the 41,494 cars that Trade Me has listed, in a population almost five times as large. ebay.com.au has just 39 motorcycles listed.

Here’s something really interesting – Trade Me now has almost as many cars listed as giant US eBay.com – which has just 44,335 cars and trucks. eBay’s has 7,190 motorcycles, while Trade Me has 4,081. The USA has a population that is 72 times New Zealand’s, so clearly eBay just isn’t the forum for selling bikes, cars or trucks. So while eBay has managed to sell more than 1 million passenger vehicles since eBay Motors launched 6 years ago, they have not cracked what is essentially a locality based market.

Property
eBay Australia has a pathetic 108 properties in Real Estate, and eBay.com has just 1,582 residential properties listed. Trade Me has 35,995 properties listed, of which 25,759 are for sale – 1,769 of them for more than $1 million. That’s a clear win for Trade Me, even before looking at population differences.

Jobs
eBay does not list jobs. Trade Me has 7,198 listed.

PayPal
Paypal was a huge enabler of eBay’s success, and it did this by allowing Americans to send money to each other quickly, easily and safely. It is also a great earner – a 35% kicker on Net Auction earnings.
Trade Me has no equivalent – in NZ we already had a bank account to bank account system that worked via the banks themselves, although the speed is not instant and a succession of wannabe competitors such as PayGo and PayMate have tried to emerge. None have succeeded so far as the banks are ‘good enough’. I feel they should figure out the instant account to account inter-bank transfer, or risk losing out to a competitor that is smarter than any of the wannabe entrants.

Skype
Skype gives eBay the opportunity to grab a huge chunk of the telecommunications market, and of course Trade Me has no equivalent.

What I have left out
eBay does have a benign and minor stake in Craigslist, and also owns classified sites, Kijiji Gumtree, LoQUo, Intoko, Karktplaats and mobile.de, along with rent.com, shopping.com, and epinions. This are all, quite obviously, acquisitions.

Trade Me owns FindSomeone, OldFriends, smaps and has announced that next up is Travel.

Overall
We should remember that these are both great businesses, but this shows how much eBay can improve. I still own eBay shares, which are doing very nicely.