The Exchanges

Q And what were the very first days of Xero like? I mean, you IPO'd from the start, so how was that, and why did you choose that as the funding route?

A So New Zealand, back sort of 10 years ago, And before, there really wasn't a sophisticated, ah, venture capital market. So probably the largest deal done had been maybe two to three million, and there wasn't a lot followed on something like that. So when I started my last, I mean, after mail, we had about 23 staff, and when I started planning zero, we realized we needed about 50 staff from day one. So that's like half a million bucks a month. So we needed three years to build a product, you know, start to sell all those things. It was sort of fifteen million dollars, so it was way out of, of the sort of funding which had happened in our part of the world, but what we had seen was a few other companies, there was a vodka brand called 42 Below, which had told a great story on the stock exchange and managed to, to float. They had actually sold to Bacardi after about two years. They gave shareholders a pretty good return, so what we saw was, uh, because we had a bit of success, um, we had really good business reputations, we were able to Build up a business plan, basically bank out replications, and go public from day one. So we raised, um, uh, fifteen million dollars at a fifty-five million dollar valuation, which some people thought, ah, was crazy, but, you know, now, even in this depressed, crazy market time, you know, in a short time, ah, our company's worth over two billion do…

AI assessment note: “there really wasn't a sophisticated, ah, venture capital market.”

Q And what were the very first days of Xero like? I mean, you IPO'd from the start, so how was that, and why did you choose that as the funding route?

A So New Zealand, back sort of 10 years ago, And before, there really wasn't a sophisticated, ah, venture capital market. So probably the largest deal done had been maybe two to three million, and there wasn't a lot followed on something like that. So when I started my last, I mean, after mail, we had about 23 staff, and when I started planning zero, we realized we needed about 50 staff from day one. So that's like half a million bucks a month. So we needed three years to build a product, you know, start to sell all those things. It was sort of fifteen million dollars, so it was way out of, of the sort of funding which had happened in our part of the world, but what we had seen was a few other companies, there was a vodka brand called 42 Below, which had told a great story on the stock exchange and managed to, to float. They had actually sold to Bacardi after about two years. They gave shareholders a pretty good return, so what we saw was, uh, because we had a bit of success, um, we had really good business reputations, we were able to Build up a business plan, basically bank out replications, and go public from day one. So we raised, um, uh, fifteen million dollars at a fifty-five million dollar valuation, which some people thought, ah, was crazy, but, you know, now, even in this depressed, crazy market time, you know, in a short time, ah, our company's worth over two billion do…

AI assessment note: “there really wasn't a sophisticated, ah, venture capital market”

Q And we said about spending our way to success there. I'd love to discuss the sales and marketing side of the business. So for a complex SaaS solution like, like Xero, what works when selling and marketing the product have you found in the past?

A Yeah. So what's interesting about accounting software in the small business space is it's the only application with an actual channel. So Salesforce hasn't sold a lot at the very, very small end of town because you can't afford to go and sell it. Whereas, um, Uh, for an accounting software, there's a network of accountants and bookkeepers, so each accounting partner has 300 customers, so you can afford to actually go and spend time with them. And then once you have that electronic relationship with them, we've proven with their very healthy, you know, 500 company ecosystem, once you have, um, you know, once they're connected to zero, it's very easy for them to, to buy a whole lot of other business applications that connect into the platform. So I think the first one is having that channel. And that's why we think accounting is the beachhead application. We, we, we also do a lot of, you know, direct to small business using all of the Google things, but what you find is, is in the big categories, the cost of customer acquisition, what you have to buy to get leads and all of that conversion gets very, very expensive. So I think the, the real underlying success and what made has made zero different Is that in our massive category of small business, where we have the application that has the natural channel, and if you look at the sort of pyramid of large businesses down to, you kno…

AI assessment note: “there's a network of accountants and bookkeepers, so each accounting partner has 300 customers”

Q And what do you think it was about the narrative that you conveyed that was so successful from day one? As you said, it was from literally day one, so it must have been a phenomenal narrative to, to IPO and go straight there. So how was that?

A Well, the key thing was a track record of the team. I was involved with TradeMeet, which was New Zealand's version of eBay, and we'd sold that recently for, um, sorry, half a billion US dollars. So, you know, we'd seen some, some really big, big money starting to, starting to flow through. And people were starting to be hungry for tech. Because I, I, I've done a number of successful startups and, and had a pretty good profile and a good business reputation. We were able to, um, have the credibility to sort of tell the story. And the story was that, you know, the, if you look at market sizes, consumer's the biggest market. No one really likes to pay for anything. We've seen a lot of computing focused on the enterprise space, but the biggest, the biggest market after consumer must be small business. You spend trillions of dollars. And there was really no cloud company in that space, so we, we knew the prize was huge. We told the story of It's a once-in-a-lifetime opportunity to take data that's sitting on individual sort of small business computers. It's not worth much, you know, which isn't really of value, and it's just broken up sitting on PCs. But if you bring that into a centrally managed store, firstly, accounting is the killer app for small businesses. They all have bank accounts. The smart ones have business advisors, and they all have, have to have a relationship with th…

AI assessment note: “Well, the key thing was a track record of the team.”

Q And what do you think it was about the narrative that you conveyed that was so successful from day one? As you said, it was from literally day one, so it must have been a phenomenal narrative to, to IPO and go straight there. So how was that?

A Well, the key thing was a track record of the team. I was involved with TradeMeet, which was New Zealand's version of eBay, and we'd sold that recently for, um, sorry, half a billion US dollars. So, you know, we'd seen some, some really big, big money starting to, starting to flow through. And people were starting to be hungry for tech. Because I, I, I've done a number of successful startups and, and had a pretty good profile and a good business reputation. We were able to, um, have the credibility to sort of tell the story. And the story was that, you know, the, if you look at market sizes, consumer's the biggest market. No one really likes to pay for anything. We've seen a lot of computing focused on the enterprise space, but the biggest, the biggest market after consumer must be small business. You spend trillions of dollars. And there was really no cloud company in that space, so we, we knew the prize was huge. We told the story of It's a once-in-a-lifetime opportunity to take data that's sitting on individual sort of small business computers. It's not worth much, you know, which isn't really of value, and it's just broken up sitting on PCs. But if you bring that into a centrally managed store, firstly, accounting is the killer app for small businesses. They all have bank accounts. The smart ones have business advisors, and they all have, have to have a relationship with th…

AI assessment note: “We told the story of It's a once-in-a-lifetime opportunity to take data”

Q Now, I'd love to kick off today by hearing a little about your background and the origins of Xero. I mean, what was the origin story for you?

A Yeah, sure. So I was at Arthur Young before the merger that became EY at school. I got it, and I got to see the magic of computing with Apple II computers, and when I was a young sort of IT consultant, You know, so there was some really neat technologies coming out. That was back when sort of Microsoft Windows first started, and really the game changing tool for me was Microsoft Access, which meant that we could take the results of business analysis and actually build applications that multiple people could use. So I started playing, playing with that at Arthur Young, and then we ended up building our own little software development team. We were doing lots of financial implementations. And I've always sort of been reading the Silicon Valley books, you know, about how IBM and HP, Apple, Microsoft, how all of those sort of companies started, and, um, I was just fascinated, I think, coming from a small country, a small set of rocks in the South Pacific, that you could actually build things with your brain that would sell overnight. So we started a little software development team, and then, um, build file server apps, client server apps, and then, um, uh, we peeled out, started our own company, and I've probably done four or five startups now. And I guess the magic moment with Xero was realizing all of the innovation that was happening on the consumer side Internet, you can, all …

AI assessment note: “I guess the magic moment with Xero was realizing all of the innovation”

Q And having had such a big start in the early days, the time of very few employees didn't really happen for Xero, but what do you think it took then to scale Xero from a 50 man to a 500 man startup?

A Um, I think because we did an IPO early on, I was never working in the operating part of the business. I mean, I was selling the business right from day one, selling the story, working with the bankers. So right from day one, I had to put, put that leadership team in place. And what I've found over the various businesses that I've done is that you really want diversity in that leadership team. You know, you don't want people that are just like yourself. You want people that do the things that you aren't good at. And I think founders and entrepreneurs, you know, can, can be great on the vision. Sometimes they're not great on the operating detail and all of those things, so it's great if you can put people like that into your leadership team, and I think that's been the real secret of Xero, is that I've always, and right from the start, have been working on the business, not so much in the business, so I'm always hiring, finding great talent. And we, um, you know, we run a really active sort of people strategy. If you're growing it, you know, in the early days, over a hundred percent, and then, um, you know, even now, over, I think, two hundred million annualized revenue, our last numbers were around 70% growth. The businesses is operating in dog years, so you really are always upgrading talent, or people get to their level, so you might be bringing people over the top, and, you …

AI assessment note: “I had to put, put that leadership team in place.”

Q And we said about spending our way to success there. I'd love to discuss the sales and marketing side of the business. So for a complex SaaS solution like, like Xero, what works when selling and marketing the product have you found in the past?

A Yeah. So what's interesting about accounting software in the small business space is it's the only application with an actual channel. So Salesforce hasn't sold a lot at the very, very small end of town because you can't afford to go and sell it. Whereas, um, Uh, for an accounting software, there's a network of accountants and bookkeepers, so each accounting partner has 300 customers, so you can afford to actually go and spend time with them. And then once you have that electronic relationship with them, we've proven with their very healthy, you know, 500 company ecosystem, once you have, um, you know, once they're connected to zero, it's very easy for them to, to buy a whole lot of other business applications that connect into the platform. So I think the first one is having that channel. And that's why we think accounting is the beachhead application. We, we, we also do a lot of, you know, direct to small business using all of the Google things, but what you find is, is in the big categories, the cost of customer acquisition, what you have to buy to get leads and all of that conversion gets very, very expensive. So I think the, the real underlying success and what made has made zero different Is that in our massive category of small business, where we have the application that has the natural channel, and if you look at the sort of pyramid of large businesses down to, you kno…

AI assessment note: “there's a network of accountants and bookkeepers, so each accounting partner has 300 customers”

Q And then your most rad blog or newsletter, what's your kind of must read?

A Um, always been into RSS, so really was sad. I'm a Google reader broke, so I use Feedly, so I subscribe to lots and lots and lots. I, I still read Uh, the Apple stuff quite a bit, because it's kind of interesting. I'm fascinated in a battle between Apple and Google. I think Google's far more interesting at the moment because of the data and machine learning. Uh, but the blog I like, which sort of summarizes everything, is TechMeme. Um, I find that's the one that you go to, and you'll find all of the important tech stories. And why that's important is, I think, as an entrepreneur, you build this mental model of what's going on, and if you're reading all that news every day, um, you see little bits that either Prove or disprove part of your model, and, uh, then you start building this really good intuition of where, where the market's going, and what's happening, and that company's not going to work. So, like, interesting watching, you know, like Twitter, and Square, and those types of companies, because, you know, what's sort of happening, if you've been following it for years and years, is really quite predictable.

AI assessment note: “the blog I like, which sort of summarizes everything, is TechMeme.”

Q Now, I'd love to kick off today by hearing a little about your background and the origins of Xero. I mean, what was the origin story for you?

A Yeah, sure. So I was at Arthur Young before the merger that became EY at school. I got it, and I got to see the magic of computing with Apple II computers, and when I was a young sort of IT consultant, You know, so there was some really neat technologies coming out. That was back when sort of Microsoft Windows first started, and really the game changing tool for me was Microsoft Access, which meant that we could take the results of business analysis and actually build applications that multiple people could use. So I started playing, playing with that at Arthur Young, and then we ended up building our own little software development team. We were doing lots of financial implementations. And I've always sort of been reading the Silicon Valley books, you know, about how IBM and HP, Apple, Microsoft, how all of those sort of companies started, and, um, I was just fascinated, I think, coming from a small country, a small set of rocks in the South Pacific, that you could actually build things with your brain that would sell overnight. So we started a little software development team, and then, um, build file server apps, client server apps, and then, um, uh, we peeled out, started our own company, and I've probably done four or five startups now. And I guess the magic moment with Xero was realizing all of the innovation that was happening on the consumer side Internet, you can, all …

AI assessment note: “the magic moment with Xero was realizing all of the innovation that was happening”

Q And what do you know now that you wish you'd known when you started?

A That when I, well, what I've always done when I sold a business, and I've done, like, four now, As I just get so excited, I go and start the next one. In hindsight, what I should have done was, um, actually take three or four months off between them. I think that would, if I look back, there's very few times in your career where you have no email, and, ah, you don't actually have to do anything, and I've just raced to the next one, rather than actually sort of taking the time. The advice I would give is you don't need to do it all in your first few years. I think 20 is after building your base experience. Thirties, you start building your network, and maybe you'll start making some money. Um, my late forties now, and it's still hugely fun, and a really exciting industry, and have no plans to stop.

AI assessment note: “In hindsight, what I should have done was, um, actually take three or four months off”

Q the founder and their role in a, in a company, and do you think, do you take Reid Hoffman's view that a founder doesn't necessarily have to be there for the life cycle of the company, and that sometimes, ah, they might exit before, before the end of the company? What do you think of that? Do you think VCs, not VCs, founders are destined to lead the company forever?

A It really depends. So there's a real shortage of founders with lots of experience. I think one of the benefits of coming from a, a small place is you don't normally smack it out of the park on your first deal. So you actually end up doing two or three, uh, businesses usually before you do things large, even though you always hear the story of the young person that, that does smack it out of the park and does a huge exit in their twenties. So I'm coming up out of 50 my next birthday, and so I've done three or four big things, and, you know, you just have, I think, having, sort of treating entrepreneurship as a series of baby steps, you are building more and more skills, and you're doing some great lessons, you build good networks, you have some of your own capital from exits, so you can drive the business harder and faster. But what I know is that most people are fundamentally flawed in a few ways, so the magic is trying to get a complementary team that really works together, And, and some founders I see, you know, we've got 500 small companies in our ecosystem, so I'm dealing with founders all the time. They're brilliant at getting things going, and I think the really mature ones understand what they're great at, and when the business gets to a certain size, they may need to step aside and have somebody who's come in who is better at that next stage of growth. But it's interest…

AI assessment note: “when the business gets to a certain size, they may need to step aside”

Q the founder and their role in a, in a company, and do you think, do you take Reid Hoffman's view that a founder doesn't necessarily have to be there for the life cycle of the company, and that sometimes, ah, they might exit before, before the end of the company? What do you think of that? Do you think VCs, not VCs, founders are destined to lead the company forever?

A It really depends. So there's a real shortage of founders with lots of experience. I think one of the benefits of coming from a, a small place is you don't normally smack it out of the park on your first deal. So you actually end up doing two or three, uh, businesses usually before you do things large, even though you always hear the story of the young person that, that does smack it out of the park and does a huge exit in their twenties. So I'm coming up out of 50 my next birthday, and so I've done three or four big things, and, you know, you just have, I think, having, sort of treating entrepreneurship as a series of baby steps, you are building more and more skills, and you're doing some great lessons, you build good networks, you have some of your own capital from exits, so you can drive the business harder and faster. But what I know is that most people are fundamentally flawed in a few ways, so the magic is trying to get a complementary team that really works together, And, and some founders I see, you know, we've got 500 small companies in our ecosystem, so I'm dealing with founders all the time. They're brilliant at getting things going, and I think the really mature ones understand what they're great at, and when the business gets to a certain size, they may need to step aside and have somebody who's come in who is better at that next stage of growth. But it's interest…

AI assessment note: “they may need to step aside and have somebody who's come in who is better”

Q And discussing that international competition, how are you doing in the U.S. in terms of fighting into it, and, and, you know, who's winning the war?

A Yeah, so, you know, we think the war is global. You know, all businesses are global. Everything's globalizing. Uber's globalizing. Taxis. Netflix is globalizing. TV. WhatsApp is globalizing. Telco. You know, what we see through our customers is many, many small businesses operating cross-border. You know, when we started the business, you know, it seemed, you know, kind of daunting going against these large companies, but we actually added more small business, small businesses globally to our brand, And Intuit added to their brand last year, and they spent 1.2 billion to do it, you know, sponsor football teams in the UK, and sponsoring the Super Bowl, crazy things like that, had Oprah speaking at their conference. So, so in these, in this new kind of age, You can't just spin your way to it. You really need brand authenticity. So, you know, we've, um, you know, we've got 25% of all New Zealand businesses, 25% of all Australian businesses, and we're a leader there. We're a leader in the UK, and we've beaten Sage to the cloud, and, ah, now it's game on inside the US. The US is a very conservative market, And as we tell everybody, it will take some time, but very pleased with progress, and compared to a lot of other B to B SaaS companies, we're doing very, very well with customer acquisition, but you just see there's a big prize there, which will play out over the next three years.

AI assessment note: “now it's game on inside the US... very pleased with progress”

Q And having had such a big start in the early days, the time of very few employees didn't really happen for Xero, but what do you think it took then to scale Xero from a 50 man to a 500 man startup?

A Um, I think because we did an IPO early on, I was never working in the operating part of the business. I mean, I was selling the business right from day one, selling the story, working with the bankers. So right from day one, I had to put, put that leadership team in place. And what I've found over the various businesses that I've done is that you really want diversity in that leadership team. You know, you don't want people that are just like yourself. You want people that do the things that you aren't good at. And I think founders and entrepreneurs, you know, can, can be great on the vision. Sometimes they're not great on the operating detail and all of those things, so it's great if you can put people like that into your leadership team, and I think that's been the real secret of Xero, is that I've always, and right from the start, have been working on the business, not so much in the business, so I'm always hiring, finding great talent. And we, um, you know, we run a really active sort of people strategy. If you're growing it, you know, in the early days, over a hundred percent, and then, um, you know, even now, over, I think, two hundred million annualized revenue, our last numbers were around 70% growth. The businesses is operating in dog years, so you really are always upgrading talent, or people get to their level, so you might be bringing people over the top, and, you …

AI assessment note: “I had to put, put that leadership team in place. And what I've found”

Q And discussing that international competition, how are you doing in the U.S. in terms of fighting into it, and, and, you know, who's winning the war?

A Yeah, so, you know, we think the war is global. You know, all businesses are global. Everything's globalizing. Uber's globalizing. Taxis. Netflix is globalizing. TV. WhatsApp is globalizing. Telco. You know, what we see through our customers is many, many small businesses operating cross-border. You know, when we started the business, you know, it seemed, you know, kind of daunting going against these large companies, but we actually added more small business, small businesses globally to our brand, And Intuit added to their brand last year, and they spent 1.2 billion to do it, you know, sponsor football teams in the UK, and sponsoring the Super Bowl, crazy things like that, had Oprah speaking at their conference. So, so in these, in this new kind of age, You can't just spin your way to it. You really need brand authenticity. So, you know, we've, um, you know, we've got 25% of all New Zealand businesses, 25% of all Australian businesses, and we're a leader there. We're a leader in the UK, and we've beaten Sage to the cloud, and, ah, now it's game on inside the US. The US is a very conservative market, And as we tell everybody, it will take some time, but very pleased with progress, and compared to a lot of other B to B SaaS companies, we're doing very, very well with customer acquisition, but you just see there's a big prize there, which will play out over the next three years.

AI assessment note: “now it's game on inside the US... very pleased with progress”

Q funding process a little bit as a VC show. It's kind of a must. So before the quick fire round, I'd love to hear how the fundraising process was for you. Uh, I believe you had investment from our friends at Axel, uh, Fred Destin was kind enough to provide questions for today. So how did you choose your investors and what was important for you when making that decision?

A I'm not sure if you like Seinfeld, but I always thought of the, that the, I always believed in the George Costanza theory of management. Every instant you have is wrong, doing the exact opposite must be right. So we did everything backwards. So, you know, because of the situation we described earlier, we did our IPO first. Then we brought in the hedge funds, who, who, because of the compression in the US market with BC's doing most of the big deals, the private, the, um, the hedge fund guys, sorry, had to go out and find global deals. And then it's only really recently that we've actually brought, ah, property season, and it's been great to have the support of Accel and endorsement from them. So, um, I think outside of the US, in the enterprise days, you know, what would normally happen is you'd build a company up to a certain size, and then you'd sell it to a US public company, because, um, You know, it was the U.S. public companies that were listed, so they had, ah, the currency, and also they also had, had the, ah, the global sales channels already in place, which is very difficult, ah, to replicate. So I think, ah, naturally in the enterprise world, everything consolidated and got acquired by the big global software companies. In the internet world, we're seeing companies, um, build for scale from their own country and become truly global companies with truly global financi…

AI assessment note: “It was the only way to really get funded in our own local market”