Last week Xero announced that Peter Thiel, co-founder of PayPal and the first external investor in Facebook, was investing NZD4 million to “support Xero’s expansion into the US market”. Not surprisingly the move got significant attention both in New Zealand and elsewhere – I have to admit that while I as absolutely expecting Xero to have to raise some cash in the near future, I didn’t expect it to come from someone like Thiel.

The comments on the Xero blog were, as expected, overwhelmingly positive – Xero has a hardcore bunch of users, fans and shareholders and many of the comments seemed to naively suggest that this is all that it would take to knock Intuit QuickBooks off its perch – people seem to forget that in the US market, Xero will be up against other similar products – inDinero, IAC-EZ, Kashoo, Less Accounting and many, many more. CEO Rod Drury himself is upbeat that the investment is a validation but would never be so bold as to suggest that the hard work is over.

Yes, Xero has had great success at home and, to a lesser extend abroad. Yes, Thiel’s cachet will definitely help with exposure. However it’s arguably still going to leave them coming from behind when compared to the hyper-buzz that inDinero and its 19 year old founder Jessica Mah gained after the funding they received only months after launching and even further behind the sheer momentum that four million customers (Quickbooks) brings to a product. Dennis points out why the Thiel investment, although a validation, won’t do much to accelerate uptake int he US market.

Anyway – I don’t want to dwell on the funding, I do however want to look at some of the more critical comments that were left on a TechCrunch post talking about the Thiel deal (rhyme intentional). A commentator, remarking on the fact that Xero is still cash flow negative and is paying its execs and directors well, commented that:

…the company is a cash black hole, because management’s interests are misaligned with shareholders’. The directors pay themselves fat, six-figure fixed salaries even as (or as a result of which) the company is making mounting losses. Every time they lose money, they ask shareholders to pony up to cover opex. Meanwhile the bigwigs bear no risk. I hope Thiel will introduce some Silicon valley thinking to these guys. The directors should be paid in equity with very low fixed salaries. That will change their incentives and focus. I’d hate to see such a great product in the deadpool due to greedy and wasteful management.

The comments are fairly aggressive especially in light of the fact that Xero has always been open about an approach to business that is the antithesis of bootstrapping. As CEO Rod Drury says:

We’ve done underfunded start ups before and this time we’re building a well resourced sustainable business

It is however interesting to note that a number of the directors and executives who are being paid what the commenter called “fat salaries” are some of the same people who get employee share purchase deals, or loans to buy shares, or are in fact significant shareholders from pre-IPO allotments themselves. As such, one could argue that paying “key management” 35% of revenue, and directors a total of 17% of revenue is a little unfair to shareholders. One could argue that the directors are in effect hedging their bets – making great returns by way of salaries, but also potentially being in line for great capital gains from a possible future sale.

Another Xero watcher reflected on this saying that:

the more I think about it the more I wonder why are the directors are paying themselves such big salaries….

On a simplistic level, they’re doing so because they can. their investor base is (or at least was pre investments by Craig Winkler and Peter Thiel) New Zealand based. Many of their initial investors were newcomers to the stockmarket, having jumped on board primarily because of the credibility of Drury and other founders. However, after a few years post listing, I wonder if those same initial Ma and Pa investors don’t start to ask questions about the appropriateness or otherwise of the executive remuneration.

Drury has said on a number of occasions that breakeven will occur this year. Alongside that Xero has a six monthly report due out in the next couple of weeks. Current numbers indicate 100000 active users (I quizzed Drury on this and he advised that an active user is one who has signed in over the past three months), note however that Xero charges per business so paying customers are significantly lower than active users. Either way, unless the news on both those fronts is positive, I’d expect more murmurings of discontent rom the rank and file Xero shareholders – watch this space.

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Ben Kepes

Ben Kepes is a technology evangelist, an investor, a commentator and a business adviser. Ben covers the convergence of technology, mobile, ubiquity and agility, all enabled by the Cloud. His areas of interest extend to enterprise software, software integration, financial/accounting software, platforms and infrastructure as well as articulating technology simply for everyday users.

  • Ahhhh Ben,

    I remember the good old days when we were speculating about the first 1000 users. 3 years later, $8,000,000 plus in Annual revenues and people still find something to whine about.

    Break even will happen within the next 12 months. For those investors who can’t wait that long for an ROI can I suggest listed property funds or something equally predictable and sleep inducing.

    • People have right to pass comment on publicly traded businesses, whether profitable or not…

      My 2 cents

      • Paul, 8 mil in revenues sure, but Xero have burnt 30 mil or more in costs, alot of which is in fat salaries. Have Xero really made an impact in NZ, I think not. Sure the Xero blog is it’s own ecochamber of incentivised bloggers including Hamish Edwards own practice. The fact is, take away the paid for churps everywhere, ask the average man on the street if they have heard of Xero, and sure they have, but do they use it? I don’t think so. Xero will only be for the minority of business owners that are tech savy and reasonably engaged in accounting on their business.

  • Andrew,

    I’d love to meet a business owner that is not reasonably engaged in the accounting side of their business. You are right though in that most Kiwis with a need to run books will have heard of Xero.

    As a shareholder I have no problems with Xero paying good money to quality individuals, as long as the results are coming through. And when the likes of Craig Winkler and Peter Thiel are happy to invest based on what Xero have achieved in only three years, it astounds me that people are still on the sidelines talking about how Xero still hasn’t proven itself.

    To date, in my mind anyway, they’ve done a good job in building their client base as well as credibility in the market. For investors I suppose it’s a simple case of if you believe in where it’s heading then buy a few shares, and if you don’t, don’t.

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