Rod Drury

Today we travel across the Tasman to meet New Zealand entrepreneur Rod Drury, the founder and chief executive of SME accounting software provider Xero.

Unlike most SME accounting products on the market, Xero’s software-as-service (SaaS) offering utilises cloud computing. Last year, Drury pulled off a big coup when he convinced MYOB founder Craig Winkler to invest $NZ18 million in the company.

Here Drury explains how he has built his company for the long-term, how he’s harnessing the power of social media and why entrepreneurs are always looking for level 11.

You’re a bit of serial entrepreneur?

I’d always sort of followed the technology space and was really interested in it through the 80s and 90s, seeing what was happening in Silicon Valley. It was kind of really exciting when programming tools start arriving on the PC because especially from when you’re from a place like Australia and New Zealand, you had these magic set of tools that you could build things and sell them to anybody all over the world.

So the first business was a services business, one of the first Microsoft development shops. We were actually inside Ernst & Young at the beginning and then looked around for a software company to work for and there weren’t any, so we had to start our own.

We peeled a team out of Ernst & Young and built a little software company called Glazier Systems and built that up to about 60 people working in New Zealand and a bit of work over here in Australia as well. And then the dotcom boom happened and we started to see public companies buy service businesses and the idea was everything was going online. So we sold that business in 1999.

Wonderful timing.

The public company that bought us was looking at doing an eCommerce rolled up and we spent quite a bit of time in the US and saw that some of the really big dotcom players like Commerce One and Purchase Pro had all the same sort of skills that we had in Australasia but they actually had the scale and the market and people introducing capital to their businesses.

So the next business I did was Context Connect and we wrote some patents in the mobile directory space and ended up raising some money in Boston through the VC funding route. We started to understand how you pitch a business and why a VC would invest in you. So we did that for awhile and actually realised we were a bit ahead of the market – we still own that business and we have some patents now that are starting to become valuable sometime later.

Having understudied a CEO I was really keen to step in and build a technology company. So we actually looked at doing online accounting back then, but with online accounting or accounting in general, there’s a lot of responsibility to the end customer, and at that point as an entrepreneur I really wanted to do a technology trade sale.

We’d seen a number of companies that have had a bit of technology and sold it to a US public company. So accounting didn’t really fit that and another product that I was kind of interested in was email archiving. That always frustrated me that Microsoft didn’t have a relation database where they put their email, you know an exchange, you couldn’t see if you were dealing with an external company, give an idea of the person in the cubicle next to you is also talking to them. So we ended up building a company called AfterMail. The model was to do a trade sale, so we engineered the business for that and looked at who would buy us and we managed to exit that business within two years and we got US$15 million in cash and some more on earn out. That as entrepreneurs gave the war chest for the next one.

While we were doing AfterMail we had to use common small business accounting products. We installed MYOB, and I was really excited about getting it all set up and I looked at it and it looked pretty homemade and it was just really frustrating to work with. So right through AfterMail I was thinking running a business is really hard for the entrepreneur, so pretty much as we got our cheque, we put a few guys in an apartment in Wellington and because we had capital for the next business we were able to do some real R&D and build a really exciting platform.

As a young entrepreneur you kind of have to run out and grab revenue straight away, but I think of entrepreneurship as a series of baby steps. Your first few deals help you build your network, you build your personal capital, you build experience and your ideas get better. So each one gets a little bit bigger. And when we sold our email business to Quest Software, I remember sitting in the auditorium hearing the CEO of Quest talking about how his business was a long-term business and who’d be bought and all those sort of things.

So when you sell your business you think you get up to level 10 and suddenly level 11 presents itself. I just sort of saw that the public company dimension the ability to have capital to potentially do acquisitions is really the next step up in the game. So I always wanted to do accounting software, so now we thought let’s do it as a public company. And that gave us the capital to do things right.

Was starting a business with the public company in mind, rather than say the trade sale, a very different process?

Absolutely, because you’re building something for the very long-term and it was also competitive advantage. What we’d seen in our market was that in the second generation of accounting software for small business – there’s DOS, there’s the first generation in Windows and the second – the public companies really took off in the late 1990s. So we had MYOB in Australia and Sage in the UK and when they took off, because of Y2K and the introduction of GST, they get to a certain size and then as public companies they have to buy the number two and the number three. And they’re in a great position because if anybody good looks up, they just buy them.

So if we wanted to get past that acquisition in the first few years and build a long-term business, doing it as a public company would give us the liquidity, capital and the valuation to actually to be around for a longer period of time.

And a public company suits the SAAS market because it’s transparent and people can look behind the company and see who’s there and see that they’re well funded and all of those things. Because otherwise if you start using SAAS products from the private companies, then who’s going to buy them? And we know there’s going to be a lot of consolidation in the market over the next year or two.

So public company was a key part of the strategy and now as an entrepreneur having done a few things, the public company gives you a whole lot more knobs to turn, new bits of strategy. But it’s also pretty scary because you’ve also got a whole lot of people watching you, it’s not happening quietly.

Yes, you’re far more answerable and transparent, aren’t you? So tell us a little bit about where you are now. I know you established the company in 2006 and listed in 2007, so are we still in the early growth stage or further down the track?

Well I think what we’ve seen in Xero exactly what we see with most entrepreneurs. When you can see the opportunity, you think it’s happening really fast, but we’re three years into it now and the market’s only just starting, so we’re still very much in building the foundations, educating the market.

But now we’re starting to see the external drivers that will accelerate the market over the next year or so. Netbooks are a good example, where we’re seeing carriers like Telstra, you can walk into a Telstra shop and come out with a free netbook if you commit to a two-year data plan. As Google Chrome OS arrives and there’s no operating system for small businesses and consumers to get access to these new cool devices, everything has to be on the clouds. So we see this really being acceleration – there is going to be whole lot of new devices that users want not just for doing their normal consumer-land stuff like Facebook and buying tickets, they’ll want to do their bookkeeping and all that sort of stuff as well.

So we think that market’s really just starting and it’s interesting that the incumbents don’t really have products yet. Sage put their online product out 12 months ago and it got pulled three days after launch because of security holes and they haven’t come back into the market. And Intuit hasn’t put out a new platform. They’ve bought Mint and that Mint team is going to take over the accounting product, so they’re not innovating in-house. We’ve had basically a three year run. MYOB will probably enter the market this year which again is fantastic for us because we’re so far ahead when they start telling accountants to look online, that should be a big accelerator for us as well.