I saw a post over on Jim Donovan’s blog, and thought I’d make a few comments in response to some of the stuff he’s said. First though a disclaimer – I spoke to Rod Drury the other night and told him that all I am writing is not anti-Xero per se. I’d just rather (as I got the impression would he) people assessed the IPO rationally and didn’t get either caught up in a new web bubble or got swayed by the big names involved
Once the Xero IPO was announced, I wrote that I’d probably take up the offer, once I’d had a chance to study it. Well, I’ve done so, and I have to say it’s very fully priced for what is essentially an early stage venture investment. Mark Clare at Valuecruncher has a similar view. On the other hand, look at the potential.
Translation – an expensive float but with good potential
At $600 a year, and 10,000 customers, you’re onto a $6 million revenue stream. But that’s a very, very modest milestone. Firstly, the chartered accountants love the features designed for them, and will no doubt be pushing it to their small business clients. While the primary target is micro-businesses and small businesses (less than 20 people), if Xero adds true multi-account capability and some smart planning tools, then you’re looking at a very serious SME offering. I also know lots of people who are planning to use Xero for their private book-keeping, if the functionality grows to enable investments to be managed (as per MS Money or Quicken), with good links to debt, equity and FX pricing. Pricing is key – I get all that included with my current PC app at no extra charge – but Xero knows that.
This is important – SaaS is great and all but if it has less than or equal to the number of features of free competing products it is a hard sell. Ad to this the number of open source ERP and CRM packages that exist and there’s a whole lot of competitions for Xero here
Now don’t confuse Xero’s market offer with running your own copy of MYOB on your PC. Xero takes care of all the backend system management, your accountant can work online with you, and you can access the system anywhere (at home, in the office, at the bank, overseas, etc). It’s not for everyone (especially rabid DIY IT guys), but for your typical non-IT small business person, it’s very appealing.
True you can access it anywhere but MYOB also handles back end stuff, exports to your accountant and to be honest – if a business owner is a “non-IT guy” how likely are they to use Xero as opposed to an old fashioned cash book?
How many customers can they get? Well the sky’s the limit. Think 100,000 in NZ at least – that’s $60m+ in annual revenues. But Rod Drury and his team are thinking global – English-speaking first, to keep things simple). The margins in this business should be stunning (even better than TradeMe), and there are other revenue opportunities from advertising and add-on services.
100,000 customers – thats pretty goddam optimistic. Global expansion is key and is the thing that will make Xero viable. However there will be competitors with head starts in other markets and other revenue models so the revenue per user will go down pretty quick in order to get traction within a market
So I’m buying in. I’m not betting the house – it’s very pricey for an early stage deal. If the share price drops after the initial euphoria wanes (and it probably will), I’ll probably pick up some more. If it works, and I expect it will, I’ll do very nicely, thank you.
(I just wish I could have bought in at the start-up stage!)
Yeah and I wish I’d lent SM a 100k or so back in the early days of TM. As they say, hindsight has 20/20 vision!