US tech investor trend offers clue to Xero's rapid rise

Rod Drury, founder of Xero. Photo / David White

New research from the United States might help explain the meteoric rise in New Zealand tech star Xero's share price over the past year.

A study by CB Insights, a research firm that tracks venture capital investment, found only 2 per cent of total funding in the internet sector went to social media firms during the second quarter of this year.

That's 19 percentage points down from the peak in the third quarter of 2011, when social media companies led by micro-blogging service Twitter took in 21 per cent of the total US$3.8 billion ($4.8 billion) in internet deals by VC firms.

New buzzwords have arrived and "big data" and cloud-computing companies are now grabbing the attention of venture capitalists, said Anand Sanwal, founder of CB Insights.

Cloud computing is the delivery of computer services over the internet.

Wellington-based Xero, which develops cloud-based accounting software for small and medium-sized businesses, has seen a 258 per cent increase in its stock over the past 12 months, making it the best-performing NZX stock in 2013.

Earlier this month Milford Asset Management executive director Brian Gaynor said the massive rise in the company's share price was being driven by US investors who were more interested in Xero's strong growth in customer numbers than traditional methods of analysing businesses, such as earnings multiples.

Xero chief executive Rod Drury has also said overseas investors, particularly those in the US, wanted exposure to cloud-based technology like Xero's.

"In US investor circles they're seeing this massive transition to the cloud like we've seen in mainframes [the computers that pre-dated PCs] to mini computers," Drury said.