Is Rod Drury's software company designed for global success, or just another bright idea?
Xero investor Gareth Morgan's question to directors at the listed company's annual general meeting in July was simple enough: when would it record a profit?
It was a pertinent query, posed after Xero had recorded a full-year loss of $7.6 million (which would have been $8.48 million, but for accounting changes). Xero's share price may value the company at $245 million, but it continues to lose money and at the meeting founder Rod Drury withdrew a promise to break even by year's end.
So, if not this year, Morgan wants to know, when? No answer is forthcoming from Drury and his board - comprising almost a celebrity who's who of New Zealand business, including Trade Me co-founder and Gareth's son Sam Morgan, former Kiwibank chief executive Sam Knowles and Craig Winkler, founder of MYOB, the much bigger Australian rival to Xero.
The investors are no slouches either; there are the Morgans and Trade Me co-founder Rowan Simpson, and US billionaire and Facebook entrepreneur Peter Thiel (played by Wallace Langham in the movie The Social Network) put in $4 million last year.
Morgan senior now explains that his question about profitability was prompted by his belief that the board should give investors some certainty about Xero's future course.
All the investors understand the rationale behind the decision to put growth before profit (Morgan calls it "a no-brainer") but surely the board has a timeframe for profitability? Apparently not.
"I'm hoping that the next meeting they have - whether half-year or annual - they'll address that," Morgan says. "And if they don't then I'll probably get up and ask it again - I've got money in the company."
Drury is an entrepreneur with a proven history of building successful start-up companies, the first of which was Glazier Systems in 1995, sold in 2000 to Advantage Group for $7.5 million.
As Drury notes in his blog (more on that later), the people involved in Glazier have gone on to create myriad companies, including Utilyx, Viatx, Context Connect, AfterMail, Intergen, Xero, ActionThis, Navitas, Provoke, Ponoko, Get Staffed, Plan HQ, WhatsInPlay and Mindscape.
Aside from the regrettable misuse of the English language in the choice of company names, it is an impressive roster, albeit one generated from a small group of Wellington entrepreneurs.
The incestuous nature of New Zealand's high tech sector prompted tech columnist Peter Griffin to recently coin the phrase, "Glazier mafia", in a piece titled "Silicon Welly". If New Zealand's a small town, then Wellington's a petri dish.
Tech sector observers say Drury's post-Glazier project AfterMail (an email archive system) was a genuine world class innovation, eventually sold in 2006 for US$45 million (some reports put the sale price at US$65 million if earnings targets were hit).
That money helped underpin a $50 million capital raising the same year to establish a listed company that Drury, who owns a quarter of the stock, predicted would eventually become a New Zealand-based global tech leader: Xero.
Xero's cheerleaders have championed its cause, pointing to the founders' credentials, the big-name investors (people who, Drury readily admits, all know each other) and its vision in predicting the rise of the "software-as-a-service" model that is the basis of its accounting software package.
Five years on, critics (many of them anonymous) are lining up to take potshots at the company, and Drury in particular, raising the question of whether, on the evidence so far, Xero is on the road to success, or a one-company New Zealand tech bubble?
Drury has been assiduous in ensuring his voice is heard - and read - in print media, websites and blogs.
He has publicly derided his rivals as "sunset technology," despite MYOB and others' well-publicised move into online services. Drury is also quick to slap down local technology critics. For example: "While I respect how [he] has built up a profile as a cloud commentator and gets the overseas trips, I'm yet to hear him say something insightful that demonstrates an understanding of business strategy or the market. Cheers, Rod."
The subject of Drury's scorn responded with sarcasm: "Classy." It gives credence to the accusation that Drury has a thin skin and can lash out at even well-balanced criticism.
Still, Drury gets as good as he gives. MYOB general manager Julian Smith has repeatedly drawn attention to Xero's lack of profitability, ignoring Xero's stellar growth from a standing start and cannibalisation of MYOB's New Zealand market. Smith continues to draw unflattering comparisons to client numbers, which perhaps aren't relevant, but more on that later.
Other bloggers have also weighed in: "Maybe Rod should stop gossiping like a 13-year-old girl ... and try to turn a profit for shareholders sometime this decade."
Many in the investment community, including Morgan senior and market analysts, find the spectacle of executives from listed companies verbally pulling each others' pigtails in public somewhat unseemly.
One analyst, however, supports Drury's role in the spat: "It was fairly ballsy but that's the way you get attention. What Drury has proved himself to be is a reasonably canny or, if it's intentional, a good manager," says this person. "Because the smart thing he's done is get himself noticed by making a few comments about key competition - and he was reasonably well-informed about them."
Drury himself evinces more than a hint of embarrassment about the fracas but remains defiant: "I wouldn't say it's slanging but we've got the Bunsen burner under our toes [over profitability].
"As a public company we have to be aggressive and we've done it on our blog in an educational way - but then it gets picked up by the other blogs and it becomes a bit of a slanging match.
"We make no apologies," he says, lapsing into third person. Even so, Drury has recently entered into voluntary blog retirement after "five years, 1626 posts, three companies, three children and 10 kilos." Some of his backers will be relieved.
Even Xero's blogging critics admit its potential is huge. Xero could become a genuine global tech company, New Zealand's first, they say. But part of the problem in accurately assessing the company's progress is the lack of stock market analyst oversight - it's too small.
As one analyst puts it: "they need so much scale to make their operation profitable, they're still burning cash, [and] that's why they can't attract the support of the institutions.
"They haven't got a business at the moment; they're just burning money," he says.
But analyst oversight is coming. First New Zealand Capital and Forsyth Barr will in future cover the stock. Four analysts gave the Herald their assessment but only one spoke on the record: Forsyth Barr's Guy Hallwright.
"You're judging a company by its long term earnings potential," Hallwright says. "We like what we see to date and it shows promise but our task is to put some valuation analysis around it and that's not [yet] complete.
"You have to look at what's been achieved to date and give them some credit - they've got the skills to achieve some reasonable growth prospects over the medium term and that's what the market is focussed on, not what current earnings are but its prospects.
"When Trade Me was sold for $750 million, I don't think it was making a lot of money at that time," Hallwright notes.
"People seem to fall into one camp or another," says another analyst, of investor attitudes. "There are those who are in there, boots and all, and those who think it's overhyped.
"But a number of people who should know the industry, have been happy to put money in," he adds. "Rome wasn't built in a day; it does take time."
A fourth analyst says: "They've got some seriously smart boys on board here and the investment community watches it with interest. The problem we've got is we were too bloody late [to invest in the company]."
Drury says the company was deliberately engineered as a low liquidity stock so "the institutions can't buy a whole lot of us. We don't want to have a float because we don't want to get bought out - and it's not holding us back."
Last month Xero exceeded 50,000 paying customers. In August it was 45,000; in July, 36,000. It now has 200,000 active users (each customer can have multiple users) and has processed more than $50 billion in customer transactions.
Revenue has grown from $3 million to $9 million in 18 months and, Drury says, "we've signalled we're doing over $1 million a month". There is no question about the company's growth.
Morgan senior: "Their growth, in terms of sign-ups, is still accelerating. We haven't even hit the point of inflection yet, the point where the thing's still growing but at a slower rate. It must be like being on the back of a bucking bronco."
But there will come a time when the company must decide whether to chase further growth or concentrate on profitability, Morgan argues.
"It's an issue that faces all these exponentially growing companies and Trade Me had that too," he says. "It seems a bit picky, when you're on the back of such an exciting outfit, to be the sort of wet blanket.
"It's just that we've seen firms ride up exponentially and ride down just as spectacularly."
Xero's main rivals are MYOB and US firm Intuit (QuickBooks), both of which are dominant accounting desktop application companies. To counter Xero's software-as-a-service threat, where clients pay a monthly fee instead of an upfront charge and data is stored in a computing cloud and accessed via a web browser, both have launched online versions.
MYOB, recently acquired for A$1.2 billion by private equity firm Bain Capital, launched a basic online package, LiveAccounts, and next year will unveil AccountRight, the fruit of A$75 million worth of research and development. It claims 20,000 customers for its online service and more than 1 million users of its desktop software, which will continue to provide the bulk of its revenue.
QuickBooks Online came out in 2009 but it has been plagued with problems, and speculation is rife after a director sold his shares for more than US$200 million.
Of course, Xero has its own challenges in the US, where "they don't have full electronic bill payment in the way we have here in New Zealand and Australia," Drury says. "The reason we haven't put our foot down on the accelerator hugely in the US is we're still building up those cheques and payments [facilities]."
"Quickbooks puts out a number - a couple of hundred thousand - but we don't know if that's customers or users," Drury adds.
As the analyst community notes, opinion about Xero is sharply divided between believers and those who dismiss the company as hype.
Morgan: "The only reason I believe is we use it here, it's our accounting package and it just pisses over anything we've had before, including MYOB at one stage."
A more disinterested view is perhaps offered by Bain Hollister, consulting director for Auckland-based IT services company Clearpoint, who doubts the ability of the dominant companies to adapt quickly enough.
"In much the same way that it's difficult for a traditional airline to become a low-cost player, it's very difficult for a traditional player like MYOB to become a trendy online platform," Hollister says. "[Xero] are building a really easy-to-use product and it really is a new paradigm, albeit in the same business [accounting] space.
"It's really exciting to see a Kiwi company doing that and it's hard for those other guys to compete because they have a revenue stream already from a traditional market, which shareholders guide them back towards."
Drury says Xero is now used in 100 countries and in New Zealand he estimates the company holds about 15 per cent market share. Australian clients include ANZ and Telstra, while it has also netted BT Group (formerly British Telecom) in Britain.
The biggest online market, beyond consumers, is small business, Drury argues. They are different markets - in the consumer space, such as Facebook or Twitter, nobody wants to pay for anything, he continues.
But "small businesses pay for stuff because they have money coming in," he says. "We think the small business market is the biggest monetisable opportunity on the web. The accounting software, as we've proven, is the key application that gets them online."
Now comes the big push in the US, crucial to which will be the involvement of Peter Thiel (see right). "He's such a well-known person in the US," comments Drury. "Those Kiwi guys [are with] the guy from Facebook and he must know something. It's like having a Willy Wonka golden ticket."
He is adamant that Xero is on target to become a global company - but one still based in New Zealand: "We've delivered and we're at a point where people can say, 'those guys [have] done what they said they would and maybe they will smack it out of the park."'
The last word goes to Morgan senior: "If they do become a global platform - well, shit, the shareholders will treat these guys like Gods."
Billionaire backer has big ideas
Right-wing American political rhetoric is often shaped by the mythology of the country's frontier past.
So it should come as no surprise to learn about the Seasteading Institute, a body formed to promote and build floating cities that are unencumbered by traditional notions of government - and in particular, taxation.
One of Seasteading's most ardent supporters is Peter Thiel, the billionaire Facebook investor and founder of Paypal, sold to eBay for US$1.5 billion in 2002 - and a keystone investor in Xero.
A project to establish a district of offices on an oil rig off San Francisco is due for construction next year, according to Details magazine, which interviewed Thiel. Permanent housing settlements are planned by 2017.
The project is partly funded by the US$1.5 million Thiel donated to the organisation. The billionaire also sits on the Seasteading board.
Xero founder Rod Drury, when asked about his backer's political views, says: "That's the luxury of being a billionaire - you can put this stuff out there."
Drury points to Thiel's record: "he smacked PayPal out of the park and he saw the potential of Facebook ... and when you have that much money, you can think about long-term things and put them into action.
"He's just thinking super long-term, macroeconomic stuff and he can afford to take a position," says Drury.
Asked directly for his opinion of Seasteading, Drury instead says that the affluence of the movement's members "allows them to have some views that a lot of us would think are ... [very long pause] ... kind of interesting."
Politics does not intrude on the investment community's perception of the value Thiel brings to Xero: "It was damn smart to go and get Thiel and have a cornerstone shareholder who was able to introduce you to the rest of the world and give your business credibility," says one analyst.
"It didn't cost [Drury] a lot to do that, so that was smart."