Rod Drury

Where is the mindset of SMEs with cloud services now? Are you starting to see that mindset change?

We’re starting to, but small businesses are not used to innovation at all. They’ve done things the same way. But one of our insights was that small business owners are consumers at the same time. So with their consumer hats on they’re on Facebook, their kids are on MySpace and all those sort of things and yet they go to install desktop software that was designed before email was even out.

So what we’re doing is taking a lot of the consumer stuff and applying it for that business. For example, we have lots of video showing you how to do stuff.

Short, 90-second-to-three-minute videos, because people watch YouTube at night. Rather than reading lots of manuals, you can show them exactly how to do it. We blog and tweet. You don’t buy accounting software because you’ve heard a catchy jingle. You actually go and talk to other people. So social media is a real accelerator for that for referral marketing. For Australasian entrepreneurs though the cloud’s really exciting.

The last generation software, where trade sales took place, was really the enterprise phase and there’s certainly lots of enterprise cloud examples. But the problem with the enterprise software is that eventually you’ve got to build a global distribution network. And normally that’s American public companies that have that, so there’s a very well trodden path for Australasian to build their businesses up to a certain point and either get a global partnership or exit their business because they need that physical sales force and implementation force.

But with cloud it operates from anywhere. We have 77 staff spread around the UK, Australia and New Zealand. We’ve got what Crystal Adele, the ex-CEO of Microsoft, would call a mini-multinational. And you can actually do your distribution globally and there are very senior salespeople who are kind of looking for their next opportunity where they can be part of a virtual global organisation.

So Australasian entrepreneurs can actually operate globally and build long-term businesses for the world stage. And we’re quite good at it in this part of the world because we’re used to picking the chocolate out of every box, we travel a lot, we’re pretty connected. So this whole cloud thing is a fantastic opportunity for entrepreneurs all over the world.

What about the marketing? Is that more difficult? As you say, the cloud gives you a great distribution opportunity, but selling to those varied markets, does that challenge still exist?

I think we’re all learning how to market in this new world. We know that it’s really difficult for traditional advertising. It’s very expensive to build a global brand. So some of the things that we’ve been doing is what we call “piggy back marketing”. So working with global partners or national partners who already spend millions of dollars in advertising. So we won the Telstra relationship, we also won British Telecom in the UK and if we can give them the opportunity to talk to small businesses about things that they are really interested in – cashflow and those things – and get us part of their value proposition, that’s a great way to build the brand. And we’re all learning about social media and things are changing so quickly. I did an interview with an American website from home on Saturday morning and it was all recorded on Skype, a day later it’s on the website and people are commenting. We’re kind of all working out how this marketing stuff works.

A year ago very few people were marketing through Twitter, but now everyone is.

Even Twitter’s evolved quite a bit. When we first started marketing on Twitter it was like “you guys are cool because you’ve got a Twitter account”. The next thing that we noticed is that we could do keyword searches for our competitors.

And then it’s actually it’s turned. It’s morphed even again in the last few months to showing how responsive you are to your existing customers. So Twitter has meant that customer support has gone from being inside the belly of the beast to being very, very open, which means you’ve really got to be customer-centric.

We now have a dedicated social media person who monitors our Twitter account and conversations that are happening on Xero. And a lot of the customer care stuff is really public and of course that favours new companies that are inside out. They openly communicate and that drives word-of-mouth, referrals and all that sort of stuff.

Now recently you brought Craig Winkler onboard after he sold out of MYOB. That’s a terrific coup, someone of his experience in the industry. Was that something that you’d worked on for awhile? I’m sure you were watching MYOB closely ever since you started, but did you have an existing relationship?

Craig’s always been a bit of a hero I think for all of us. He’s been an absolute leader in this space for the Windows generation. And you could just tell Craig was passionate about small business. So we watched the sort of exit and MYOB get sold to private equity and just sort of had the hunch that Craig would be very interested in what we were doing, so we made it known that we’d love to chat.

We ended up on the phone and then quickly over in Melbourne and we just clicked straight away and I think Craig’s really passionate about small business and the internet is clearly the next generation. It’s been fantastic having someone with his experience that’s done it before onboard.

Now obviously I guess he’s come in on board meetings and all that sort of stuff. But is it an arrangement where if you get to the point where you need a bit of advice, you can ring him?

All the time. Craig’s really good and he’s an absolute hero and it’s just fantastic having him onboard.

Almost like an entrepreneur consultant.

I think he’s enjoying watching us on the journey we’re on as well, because he’s done it before, 10 years ago. But with all the change with the internet, the scale and the speed is really interesting and I think because we’re unencumbered, we have the freedom to go really fast, he’s enjoying that part of it as well. MYOB has been a great company for years but there’s a huge amount of mass there and drag, so the ability to be the nimble speed boat again I think is pretty exciting.

Having gone down the public company route, you will get bigger and bigger and bigger, is there a concern that you’ll lose that nimble speed boat feel?

Yes, well that’s one of the roles of the CEO is to make sure people don’t engineer nimbleness out of the business and it’s about getting balance right. So we really fight that all the time and a big way we do that is open communication. So the outside face of Xero is very much like the inside face.

One of the great things of doing one of these small mini-multinationals is that there are so many great tools. Like one of the tools we use is Yammer which gives us that virtual water cooler talk. So as we’re doing meetings and stuff anyone around the world can power the stream of consciousness of the business. So that means everybody feels involved, you’re passing knowledge around. So there are lots of tools around to keep that culture and as you get bigger.

So I think the last reported revenue was about NZD$1.4 million and your cost base is still pretty high. Are you heading towards profitability?

Absolutely, I mean we’re kind of rare because we’ve got so much cash. So we can actually take two or three years to do it right, but we are aiming towards profitability in 2011. We’re definitely in the growth phase. But the big difference is we’ve got the time to do it right. There’s a lot of under-the-iceberg-stuff that we’ve been working on and we’ve really worked on the foundations because we know long-term that provides sustainable competitive advantage. So it’s easy to control costs, predicting revenue in SAAS industries is really tough. What you know is that you just need a lot of capital to have the time to do it properly. It’s a big market, the biggest market in the world must be all consumers, the second biggest markets must be all small businesses and the differences between the consumer and small business market is that small businesses will pay for value. If you’re improving productivity or saving them time and money, they’re happier to pay.

Look at the big software companies, Oracle, SAP, all those sort of really big global software companies sell nothing to the small business space. So this is a market where multi-billion dollar companies will be created.

How is the New Zealand economy tracking? The reports I get are a bit rough. Is it starting to improve at all?

No it’s not. I think with the change with government, it’s a lot better, but we see in New Zealand that it is a lot different to Australia is that Australia has compulsory savings which promotes investment in businesses and that’s a fundamentally healthy thing. In New Zealand we haven’t had that so we have far too much investment in non-productive assets like property. So we’re starting to see the downside of that after years of investing in property but not investing in businesses so there’s been a whole lot of structural changes that I’m hoping are going through. And the goal of New Zealand is to close the gap with Australia but the gap is just getting further apart.

Would a joint listing ever be an idea?

Absolutely, one of the benefits of listing in New Zealand is we’ve been able to sort of have our training wheels on and become a really good public company and it’s relatively straight forward for us to do that. So that’s the strategy that you’d always consider. And we find that the branding impact and just the buzz of being a public company really suits this space so that’s something that we could absolutely look at. And at the moment we’ve just got our heads down and getting the market started.

And on that note are we going to see a lot more of that brand around in the next six to 12 month?

Yes, I mean it’s a long-term thing but yes. We’re working very closely on marketing partnerships. The first big one we’ve announced is the Telstra one and we’re working on other opportunities like that as well.