$20M Raised from Existing Shareholders

Existing shareholders have reinvested to the aggregate tune of $20M. Sam Morgan, Sam Knowles, Craig Winkler and Peter Thiel’s fund Valar Ventures have all taken part in the round. This is interesting as I was picking a major investment from a US based fund. While admittedly Valar is US based, I am a little surprised at the modest quantum and the Australasian focus of this round. CEO Rod Drury has spent some time recently talking with VC funds in the US and I would have expected a much larger round from an assortment of US funds. I see two possibilities – first that this $20M is an interim step to fund growth in US prior to a major round for a mass US attack. Secondly there is the possibility that Xero has made a strategic decision to keep a modest pace to their US operations (growing, but not seeking meteoric growth), if this is the case the $20M will see them able to deliver this growth.

At the same time Xero is offering a shareholder purchase plan to existing Xero shareholders under the same terms as the new round – namely $2.75 per share (a slight discount on what they are trading at currently). This will appease any existing shareholders concerns around dilution and shareholder equality.

Acquisition of WorkFlowMax Completed

18 months ago Xero made a strategic investment in what was then project management vendor WorkFlowMax. This investment was in my assessment a reaction to the announcement of a tight partnership between Xero competitor Saasu and former Xero partner Acclipse (the deal came less than a month after the Saasu/Acclipse hookup was announced). Xero has long told the story of the modern practice which sees client side and practice side operations occurring over a common ledger. In order to delvier on this vision, Xero needed a strong practice management offering and with Acclipse having gone elsewhere, Xero had to run fast to find this. While WorkFlowMax wasn’t primarily about practice management per se, they have since built out sufficient functionality to deliver upon this single ledge vision.

Xero made the decision that since the single ledger is central to their strategy, full ownership of WorkFlowMax was critical and hence has acquired the company for $2M in cash and $4M in shares.

I’m surprised that Xero has made the full acquisition, my earlier view was that the strategic investment gave them enough control over WorkFlowMax to achieve their aims, obviously having a separate entity didn’t sit comfortably with the Xero board and the benefits of bringing it in house with total control were worth the cost of acquisition.

It’s fair to say that, in Australasia at least, accounting practices are in a state of flux, unwilling to pay for a practice management solution that is growing ever less functional (when compared with modern approaches). Xero aren’t alone in trying to capture this latent demand, Acclipse is also doing well with its iFirm product – it’ll be interesting to see how the two of them grow.

Disclosure – I am involved in an initiative, LiveMigrate, that aids end users and practices moving from varying accoutning solutions. Our initial product being launched at Xerocon is an MYOB to Xero conversion service.

• Have significant interaction with external applications or services
• Are not a point of differentiation between the organization and its competitors

Part of the rationale for this advice was the realization that organizations are still generally anxious about moving core applications to the Cloud; those applications that handle their most sensitive data are still sacrosanct within many head offices.

This made it all the more interesting to read a case study on Box Free IT that seemed to challenge this anxiety at least for one business. Arthrocare is a global medical equipment manufacturer that is headquartered in Texas but has operations all around the world. They are a typical modern business running a distributed operation in multiple geographies and time zones.

Arthrocare runs its operations on SAP, the quintessentially traditional financial and enterprise resource planning (ERP) application. Wanting to move into yet another market, this time Singapore, Arthrocare’s international controller, and by all accounts a very pragmatic and progressive person, Annika Hedstrom took a deeper look at whether the time, cost and hassle of rolling out SAP in a small market was justified.

Hedstrom took a close look at cost but, more importantly in my mind, at time to implement. Previous roll outs of SAP in new markets had taken at least three to six months to get up and running, not exactly agile in anyone’s book.

Hedstrom decided that an agile approach, one that potentially made do with an 80% solution, but one that could be up and running in very little time, was the best option. Instead of SAP and six month deployment times, Hedstrom decided on relative unknown Saasu, a simple, easy to use and most importantly easy to implement application from Australia.

Final time to deploy? Five days. Five days!

Which is interesting when looked at in context of planning a move to the Clouds, and determining what is a good fit for Cloud and what is best to remain on-premise.

Now arguably there are some lightweight on-premise accounting solutions that might have been able to be deployed more rapidly than SAP. But if we look at the multitude of benefits that a SaaS application brings, it becomes a pretty easy decision to make. Moving from on-premise to Cloud, regardless of which vendor is chosen, sees Arthrocare gain the ability to access their application anywhere at any time. This gives them the ability to forget about hardware and software upgrades, and provides the flexibility to integrate with lots of different applications via API.

So when you’re thinking about what is a good candidate for Cloud in your organization, think back to Arthrocare, and imagine the benefits that Cloud could bring to your particular situation.

We’re covering these areas of Cloud Computing on an ongoing basis at CloudU, an educational series aimed at increasing the knowledge and skill that SMBs have about the Cloud.

The report looks at a few different dimensions including;

• Can I get my data in and out freely?
• Does it integrate natively with other systems?
• What third-party integrations are available?
• Can I write code to integrate with it

While it’s awesome to see some empirical data wrapped around cloud applications for real world business, I was a little dismayed at the methodology of the report. Where to start?

• The report has the somewhat bizarre requirement that to be included vendors need to have service and support from an office in Australia. That almost makes sense but then ITnews includes Google in the survey which, while having a presence in Australia, only has one for sales and marketing with support heading off to other locations
• The first issue I have is that using “data in/data out” as a proxy for “playing nicely” is a little flawed. While a vendor may offer a CSV download of data, if that data is tied to business processes that are proprietary to their application, the data download is somewhat redundant. I see no mention in the report of escrow services both for data and for the application logic itself. If one really wants to push the “playing nicely” barrow, escrow is an important part of that discussion
• The report gives a higher rating to applications that have native integration, and by doing so kind of discounts the awesome work that third party integrators are doing to tie together application as somehow inferior. But the report then goes on to give one example of a native integration, that between Xero and Salesforce which is in fact a third party integration created by my buddies at Trineo
• ITnews has split applications across five categories – CRM, Office Comms, Collaboration and project management, Finance and HR. Unfortunately they’ve then lumped three bizarre bedfellows together in HR – Paycycle, SuccessFactors and Taleo. Paycycle is a local payroll provider that, while in no way competing with SuccessFactors or Taleo, does compete with a number of other payroll providers, including some that are natively integrated with other applications in this survey. Unfortunately ITnews chose to ignore these other vendors for reasons only known to them
• Collaboration and project management are only represented by two Atlassian products, Jira and Confluence, and SharePoint Online – clearly there are a wealth of vendors in this space and the commonality between SharePoint and Jira/Confluence is hazy at best, unexistant more likely
• In financial applications, ITnews ignores the integrations that LiveAccounts and Saasu have with their own payroll products and slams them for being lightweight applications when it comes to integrations. ITnews also completely ignores the wealth of integrations that Saasu showcases on its website

I congratulate ITnews on trying to put this report together, but I have to say I’m pretty disappointed in what they have created, it’s not a particularly helpful document and if anything just confuses the situation.

The second assertion is little more than marketing speak. While I do agree that desktop software is entering its sunset phase, it’s simplistic to suggest that all desktop software companies are also in a sunset part of their lifecycle – there are two many smart people trying to work out smart strategies going forwards for that to be the case. Sure it’s a very very hard ask to move from desktop to the cloud, but it would be an exceptionally bold person to suggest that it’s impossible.

So circling back to the Bain acquisition, Xero CEO Rod Drury asserts that the following occurred;

1. The Archer guys are very smart and ruthless about making a return
2. They correctly picked they could be in and out before the sunset business and decline in accountant-side revenue, was noticeable
3. They cut costs to the bone, reduced investment and put up fees.  No quality or innovative software shipped during their time
4. They knew the end customers were loyal to the brand and not sophisticated enough to see the play
5. The flawed Microsoft Azure sync strategy looks good on paper but they never had to deliver it– great for a sale
6. They found a further PE firm with lots of money, needing to do a deal but not experienced in the Australasian market, who had been tracking the category
7. Flick.  $700m profit. Masterful

While this is a fun analysis to make, it’s probably a little belittling of Bain Capital to suggest that they are so shortsighted as to buy a lemon, or that they have no idea of a strategy going forwards. So, if Bain need to add value to the business, by gaining more customers and providing a coherent set of offerings for the new connected paradigm, what do they need to do?

Well as Drury rightly points out, vendors need an answer to the opportunities provided by the “single ledger” – where businesses and accountants use the same set of data but look at it through different lenses. MYOB is currently hampered in that, while it has products for both businesses and practices, they are essentially separate products with some sort of low level integration hobbled together – that simply doesn’t cut it in the cloud world.

So what Bain need to do in order to drive up the value of their acquisition is to really deliver in this new cloudy paradigm. They need to either build or buy a consistent cloud offering that gives both client side and practice side functionality…. what to do?

Well luckily there is another Australasian client side vendor, one that is partly owned by another Australasian vendor, this time someone practice focused. The client side vendor I refer to also has the benefit (from Bain’s perspective) of being seriously under rated – it’s an awesome offering with very broad functionality, significantly broader than that of Xero.

As for the practice side vendor – they’ve got good momentum in both Australia and New Zealand and are managing to wean practices off the incumbent solution, MYOB’s Accountants Office. Funnily enough, the practice side vendor, is someone who Xero themselves talked up saying;

[they] have been investing heavily in that side of accounting. As we got to know them we saw that they shared our vision for reinventing accounting. We quickly identified lots of opportunities where we could make our software work together to dramatically improve the way accountants work with their customers. Exchanging of data between client accounting software and Practice Management is such a painful area where there has been minimal innovation. We’re excited about the things we can do.

Those words were from three years ago when Xero was announcing a partnership to produce the “single ledger” with said vendor.

In it’s announcement, Saasu has chosen the favorite word of my friends at Rackspace and are now articulating their desire to provide “fanatical” value to their customer. So what does this mean? Saasu recently introduced automatic bank feeds, a feature that many see as the first true “added value” offering that a cloud application can bring. I’ve been using automated bank feeds for a few years now and can confirm that they are indeed a game changer. Interestingly given the power of the feature, Saasu has chosen to provide bank feeds to customers as a free upgrade on all paid plans. So an “professional level” plan on Saasu, with full inventory,payroll, bank feeds and all the functionality that a small or medium business needs now costs $25 per month.

The release announcing this move is clearly aimed at local competitor Xero. In his blog post, Saasu founder Marc Lehman stated that;

We are often perplexed by online systems that charge more than much older software products.

That competitor that Marc is alluding to hasn’t stood still however. Arguably in answer to the competitive landscape that exists, Xero rolled out it’s own new feature, giving customers a basic payroll system for the same monthly fee they had previously been paying. This post isn’t the place to discuss the issues that Xero’s move causes – some would argue that the Xero payroll is some uncomfortable compromise between introducing true payroll and in the process annoying the ecosystem on the one hand, and keeping the status quo with no payroll functionality on the other. We need to look at the move however at a distance, and reflect on what it indicates about this new generation of software vendors.

To that point we have MYOB who have long talked of the cloud-enabled version of their accounting product being the development that will see them able to compete in the new world – where software is connected, is developed nimbly, and is charged via a subscription model. Interestingly enough, MYOB Corporate affairs GM Julian Smith said that;

The launch has been delayed because of feedback received from beta testers… This has forced an extension in development times and the company hasn’t finalised the release schedule. The code base for the AccountRight family is more than 10,000 A4 pages, so it’s highly complex

It’s an interesting comment and one which highlights the cultural differences between the new vendors on one hand, and the traditional vendors trying to change their model on the other. One could criticize the announcements of both Xero and Saasu – Payroll lite may be a bad move for Xero, not providing enough real functionality while at the same time dismaying their ecosystem partners. Meanwhile a pricing drop may be an unnecessary move from Saasu – if they can differentiate on the product itself, why bother trying to differentiate on price (especially when they’re already cheap compared to their competitors. Regardless of the criticisms of these two vendors however, the fact is that they’re happy to travel uncharted waters – we’re seeing a level of innovation in terms of business models and functional spec that is very much a case of experimentation – some things stick while other quickly get moved aside.

Meanwhile MYOB seems to be bringing a traditional development approach towards their product. They’ve had extensive beta testing which, one assumes, identified a huge number of product suggestions. Rather than simply get the product to market and iterate in the marketplace – MYOB appears to be looking for some perfect result and is reluctant to release prior to this result is achieved. Of course MYOB has much more to risk – it has a massive customer base that simply will not put up with MYOB “experimenting” on them – the tragedy of incumbency I guess.

This is far from a zero-sum game – all three of these vendors will likely do well in the future, it is however interesting to contrast and compare the relative approaches they all take.

Disclosue – both Xero and MYOB have been clients of Diversity Limited

In any industry where large numbers of sellers exist, economics force prices downwards – it’s an undeniable economic fact that many a high school student has heard in the context of market gardeners and consumers. However the same theories hold true for software, albeit in slightly different ways. This week Saasu is trying to give us a lesson in economics 101. Saasu, the Australian SaaS accounting application, this week announced a new pricing plan that sees them unashamedly declare a price war on their higher-profile competitors, MYOB and Xero. In a press release that from the get go leaves no one in any doubt that this war is going to turn ugly, Saasu announces that they are:

ramping up the battle with Xero and MYOB for dominance in the online accounting software market with the launch of a new version of its most popular product… Weighing in at almost half the cost of its nearest competitor, the $16.50 per month ‘Accountants Edition’ version provides access from anywhere in the world to Saasu’s powerful automation tools, extensive reports, and contact management system.

It’s an interesting approach, both Xero and MYOB have a lightweight version of an online accounting product. The details of those are as follows:

• MYOB LiveAccounts – $25 per month with unlimited application use but a relatively narrowly featured product
• Xero – $29 per month with application limits of 5 Accounts Receivable and 5 Accounts Payable invoices per month and 20 reconciled bank statement lines per month

The Saasu product both beats these two on price, but does so with reasonably high application limits (50 accounts receivable invoices, 50 accounts payable invoices, and 200 reconciled bank statement lines). In commenting on the pricing of competing products, Saasu CEO Marc Lehmann says that:

To limit activity to 5 invoices a month is restricting for some businesses, and to charge as much as Saasu charges for its full-featured product for this limited service is extortion. Saasu is focused on providing affordable time-saving solutions for businesses and their advisors, and now we’re making a stand against these prices.

It’s a pretty gutsy move from Saasu and is indicative of their recently adopted approach to aggressively take the fight to other vendors – this was first evident in the marketing of their partner Acclipse and is accelerated in this announcement. I reached out to both MYOB and Xero for their reaction to the move. At the time of publication Xero hadn’t responded but Julian Smith, MYOB General Manager was upbeat saying that:

We think it’s great that Aussie and Kiwi businesses have a broad range of options available to them in terms of how they manage their books.

It’s interesting to look at this in relation to the launch of Wave Accounting that I covered last week – you’ll recall that Wave is following a free to user model not unlike that taken by Mint.com, offering users services from third parties that are in keeping with their business habits. I reached out to Wave founder Kirk Simpson to get his take on this – after all they’ve taken the “price war” to a whole new level. Simpson’s response was interesting;

At Wave, we don’t think that small business owners are looking to save 20% or 40% off the cost of accounting applications or software. Bringing the cost down to $200 per year from $350 per year doesn’t address the flaw of existing business models. We see a paradigm shift that’s greater than that. As the online app world keeps evolving, free services are the natural end point and, frankly, the only end point.  Small business owners don’t want to be doing accounting in the first place, and they certainly don’t want to be paying for the privilege, which is why the majority of them are using shoeboxes and spreadsheets to “organize” their finances. This is a trend across all applications, and we’ve positioned Wave to capitalize on this. The market evolution is greater than price, too. Rather than looking at the ceiling that some apps put on functionality and moving that ceiling upwards, we decided to remove limits and ceilings altogether. We provide all of our tools for free so that the business owner doesn’t have to compare the limitations of one app to those of another.

I’m not sure that “free” is a natural endpoint for all application – Google apps, long the exemplar for a free-to-the-customer approach is, after all, a paid product (albeit at a very low price point). However, at the very small end of the market, free products that monetize through some third party approach would seem to be an increasingly popular alternative for consumers, what will be interesting in all of this is the pressure that vendors like MYOB, Xero and Saasu come under from the ongoing trend towards zero.

Enter DataGroup, an Australian based startup that aims to reduce the pain for SMBs looking to migrate. DataGroup specializes in moving businesses to Saasu from a host of desktop applications such as MYOB, Quickbooks and Sage. Interestingly they’re also offering clients a migration service from Xero and NetSuite to Saasu – I’ve written before about the lack of standards for accounting data and how that increases the stickiness even for connected SaaS apps – DataGroup aims to provide a roundabout means to reduce that stickiness.

Businesses however are concerned about the compliance issues involved with software changes and for this reason DataGroup has a multi-stage process:

1. Data Cleansing. As the saying goes, rubbish in/rubbish out. It’s for this reason that DataGroup works with clients prior to any data output to ensure data is “clean” and up to date
2. Saasu Setup. To ensure there are no compliance issues with the migration, DataGroup arranges for a certified BAS agent to set-up the accounting system
3. Data Migration. Once the data is ready to migrate to Saasu, DataGroup takes care of the nuts and bolts moving of information
4. Training and  Support. Included in the deal, as an admission that SMBs need help changing processes, DataGroup performs an initial training program to ensure users are familiar with Saasu

So when TradeMe announced the release of their API recently, those of us who know what this really opens up were pretty excited. As SciBlogs said:

[with the API] creative people will make new web and mobile applications that work with Trade Me’s data and services to do useful and clever things. Second, there is an opportunity for people interested in data visualisation. Trade Me has become an important aspect of our collective consumption habits. The API opens a door to this data and I hope we will see inventive mash-ups and visualisations over the coming days and weeks.

As an aside, it’s really interesting to read an old post from TradeMe alumnus Rowan Simpson about their reasons (previously) for not having an API. specially telling is a comment on that post from Nat Torkington who suggests that:

A cynic might say that the real reason you don’t have an API is because you already own the sector. Why spend money to develop something? So people will find it easier to list more items? They have nowhere else credible to go. You have a shitload of business. There’s no pressure to wring more out of the customers you already have. The hell with it, make ‘em use the damn HTML form and they can be happy about it!

Perhaps, despite still very much “owning” the space, TradeMe is starting to realize that heir is competition and the value to be gained from an API is sufficiently compelling to be a drawcard away from TradeMe should other vendors start to offer one.

Anyway, I digress. Saasu, the Australian based SaaS accounting vendors, has just announced a connector that integrates their accounting application with the TradeMe storefront. So… what does this mean for TradeMe users? In one word, efficiency. With this integration,  transactions and buyer information is automatically transferred into Saasu – thus removing a real data entry burden and automating order flow and accounting.

On the side I’ve done a reasonable amount of TradeMe selling, and the lack of integration with the accounting applications I use has, frankly, been a pain. This integration may be a minor development, but what it does is show Ma and Pa businesses, not usually au fait with the power of the cloud, the value in having a connected application set.

Of course the main question for businesses down here in new Zealand is what our own home-town hero is doing in this area. I poke with Tony Rule, head of the API team at Xero who told me that:

We know of some third parties working on an integration between Trade Me and Xero. It’s just too soon to say any more on this just yet but stay tuned… We’re also working with some developers from abroad who have expressed interest in developing integrations between eBay stores, Amazon WebStores  and Xero.

In other words… yes, it’s coming and watch this space.

I’ve been working of late with organizations looking at how to move their traditional desktop applications into a cloud-enabled and cloud-connected world. Often I hear that the marketplace isn’t ready, and that people don’t really understand” “this crazy cloud stuff”. Au contraire – once people start to see the value and efficiency to be gained by integrating apps quickly and easily, the change will happen more rapidly than we can imagine.

Saasu and TradeMe are but one example – but they’re a good lesson in why seismic shift is occurring in our industry.

Why is it happening?

Recently practice management vendor (and one time close Xero partner) Acclipse inked a deal with accounting software firm Saasu to package up client side and practice side software. MYOB already has the Australasian market covered with a somewhat integrated practice-side solution and so Xero was left, at least in the Australasian market, somewhat lacking in the practice management space.

This was especially trouble some as Xero has been at the forefront of the SaaS vendors, articulating the value of cloud based applications to businesses and to the practices that serve them. The accounting practices who invariably have to deal with businesses books at year end, are beginning to see the value that cloud based applications can bring. With this realization, practices are beginning to look at the applicability of connected applications to run their own practices. Xero had to respond quickly and seeing the existing players had already done deals with other vendors, their options where to build their own solution or help give someone else a leg-up to do so for them.

Analysis

The Modern Practice is a logical initiative – Xero have partnered with Microsoft which has been trying to gain some momentum or its own BPOS products in the region as a strategic blocker to Google apps the credibility and deep marketing pockets of Microsoft will help Xero’s own aims.

The WorkFlowMax investment is more interesting, especially since Xero’s stated ambition is to build a global accounting business – this investment is purely to build a New Zealand specific practice management product and leaves questions about Xero’s approach in other countries.

Similarly from WorkFlowMax’s perspective it is an interesting decision. They’re essentially giving up around 16% of equity in return for a $200000 custom development job. They’ll no doubt be hoping that this development will extend beyond the New Zealand market and the credibility of having partial ownership by Xero will help their own marketshare ambitions.

This follows on from MYOB’s moves to move its accounting customers and end business users onto a common data model. It also follows on from moves by Xero to have accountants and clients work on the same data. This will finally move accounting on from the interminable model of having businesses email data files through to accountants and then have to manually enter journal entries once accountants have done their work on the data.

Xero had strong relationships with Acclipse some time ago, but with his deal it seems that Acclipse are really casting heir vote with Saasu, Acclipse CEO even goes so far as to say that:

Price plans cost about half that of one of our major competitors – and you’re getting a fully mature, feature-rich product from a company that has been in the online accounting business for over ten years, a big contrast to the online offerings from MYOB and Xero. I personally consider Saasu to be online accounting’s best-kept secret.

In one move this partnership has managed to cast doubt on MYOB, the big incumbent in the space, and Xero, the plucky upstart. I pinged Xero CEO Rod Drury to ask for his reaction to the move. he was upbeat saying that:

It’s good. Allows people to select best of breed combinations. The beauty of the web 2 model

In another statement that is a direct reference to the lack of inventory functionality within Xero, Chisolm points out that:

…accountants will be able to take advantage of Saasu’s online accounting system complete with a fully integrated inventory system

In terms of product integration Saasu will be integrated into two of Acclipse’s products: Acclipse Web Manager and Acclipse iFirm, the online practice management and tax system designed for New Zealand accounting firms.

Development has started on a single Saasu login within Acclipse Web Manager – which means businesses can login to their accountant’s website to access both their Saasu accounting system and any confidential documents and files their accountant wants to share with them in a safe and secure manner.

The key to achieving the benefits that cloud computing can bring financial software is allowing all parties, accountant and businesses (and for that matter other advisers) to look at the same data. Different people may need a different view of the data for their own purposes but there is immense value to be gained when those views are generated from a common data set. This move sees customers and accountants offered another choice to get these views – choice is a good thing

A common ledger is the holy grail of the accounting and SME world. Both Xero and MYOB are working towards this end goal but out of the blue Acclipse and Saasu have stolen a strategic head start on them – the question remains as to whether they can translate that into adoption by the all-important accounting practices.

[see disclosure statement here]