The Xero Story: Building a Global Platform Out of New Zealand

We believe innovation and great entrepreneurs are everywhere. We’ve been fortunate to back some important technology franchises that were built outside of Silicon Valley. In particular, there’s a strong emerging software ecosystem coming out of Australia and New Zealand. We count two category leaders — SiteMinder in hotel management and Xero, a global leader in accounting software — in the TCV portfolio.

I recently had a chance to chat with Rod Drury, Founder of Xero, about his take on building a business from the region. Rod and his team have created and scaled a massive SaaS platform for small businesses around the world that’s made Xero the largest tech company coming out of New Zealand.

Rod really packs in the lessons for growing companies, including:

• The advantages of a small home market
• How to build a global team and business from day one
• Why Xero IPO’ed first and then scaled the business worldwide
• How to make the journey its own reward

For this and a lot more, settle back and access the podcast here.

The full transcript is below.

David Yuan: Hi there. This is Dave Yuan, General Partner at TCV. We're super fortunate to have Rod Drury, founder of Xero. For those of you who haven't heard of Xero, Xero is a massive SaaS platform and the largest tech company coming out of New Zealand. Hey, Rod. Thanks for coming on.

Rod Drury: Thanks for having me, David.

David Yuan: Well, hey, Rod. Maybe we can start with the basics of the Xero story. Tell us how you got started?

Rod Drury: Sure. We started Xero about 12 years ago. We just saw that there was a transition from desktop software to the cloud. Small business was an incredibly fragmented market that didn't have great software. There weren't any really huge, global companies in the small-business accounting space. There were a few brands, but all of the technology was kind of the same, so what we saw was that the transition to the cloud, maybe, could fundamentally shift or exploit the economics of getting technology out to small business. We told a big story, and I think what's different about Xero is, we actually IPO'ed in our first year, which gave us the capital to be successful. We raised $15 million on the New Zealand public markets, which allowed us to have the capital to really start doing things right, and, so far, we've raised about $800 million, and 11, 12 years later, we have an Australian, almost $7-billion market cap.

David Yuan: Wow. Rod, there's a whole lot in there that I'd love to unpack a bit, so let's start with the cloud. You had this insight on the migration from desktop to cloud. How were you able to see this before, let's see, Intuit in the U.S., MYOB in Australia, Sage in the U.K. and Europe? How did you get to the realization that the cloud was the future, faster than anybody else?

Rod Drury: Well, I think, coming from a small set of rocks in the South Pacific, we were always very aware of being in a small market, and, if you want to build a big business from a small market, you have to export. And the problem with exporting is things like going out there and trying to sell to customers, if you are doing a product, going to install it and supporting it. What the cloud meant was, rather than sort of burning copies of CDs and putting them on boats, we could actually install software applications that we'd built, put them into a server environment, and then anybody in the world could just log on. I had a background in building web-based applications, also. I started out at Arthur Young and Ernst & Young, doing lots of implementation of financial software, and you always think that you can do it better. So one thing I wanted to always do was build a really good double-entry accounting system that exploited the power of a relational database, but also combining that with being able to build an application on the web where you didn't have to ship software out to each individual customer just sounded really exciting. I think what was super cool was there was two main markets, and we found this third one. There was a lot of action happening in the consumer space, with YouTube and then Facebook and those types of applications. There was quite a bit of energy happening in the enterprise space, but there hadn't been anyone, really, chasing the small-business space, and small businesses, unlike consumers, actually spend money on things. We thought it was probably the third really, really big market, and coming from a small country, we weren't intimidated that there were lots of other companies in this space, so it would be very hard to build a consumer business on the web outside of the U.S., and it's very hard to build an enterprise-cloud business when you're not based there as well. But small businesses exist all over the world, and we did have good skills and we knew we could build great applications and we understood how accounting worked. It was a space that we thought we could actually build a significant global business.

David Yuan: Yeah. I'd probably add the incredible amount of just personal insight. To see that trend early and to act on it faster than the incumbents, that's obviously a big part of the success, so congratulations. And I think this is a story that's fairly well known about Xero, but it is interesting that your first round was a public round, so maybe you can tell me a little bit more about that? How did that come to be? How were you able to raise funding public money that early in the company's formation? Why IPO at the very beginning?

Rod Drury: Absolutely. We weren't financial market experts or anything like that. We just liked building software, and back in those days, the New Zealand venture capital market was very small, probably, the biggest funding round was 2 to 3 million bucks, and when we looked at a business plan for doing Xero, we thought we needed sort of 10 to 15, really, to get started. By the time you have 10 or 20 developers, you need 10 or 20 testers, you need salespeople. At that time, you need an HR team and all of those sort of things. That added up to about 50 people as the founding team. 50 people might be sort of half a million dollars a month, so raising 2 or 3 million just wasn't going to cut it. Back in those days, we knew that the venture capital market really wasn't developed enough here, so we had to look around and see how else we could raise money, and there was just a couple of examples of businesses that had listed early on the New Zealand Stock Exchange and told a big story and that actually managed to get themselves up to a point and sold quite quickly, which really opened the door, for a short window of time, where we could use that same playbook. It hadn't been used in technology before, in these markets, but I'd just sold a business and had a pretty good profile, so we were able to tell a big story and make it happen. I think, with entrepreneurs, you just don't know what you don't know, and most advisors would say that you just couldn't do it, but we just had to raise that sort of money, and that was, really, the only way we could raise as much money for an early-stage business. And I think that doing an IPO in our first year, that really set us up for success.

David Yuan: That's great. Incredible beginning. Incredible business. That's a fun creation story. Rod, you mentioned some of the advantages of starting a business in a small country, and the topic of this interview is, really, recognition that innovation is everywhere, that Silicon Valley doesn't have a monopoly on great talent or great ideas, and that there's some large platforms emerging in New Zealand and Australia. So let's talk about your experience building a global business out of New Zealand. You talked a little bit about some of the advantages, but what's the full set of kind of advantages and pros and cons of starting a business out of New Zealand?

Rod Drury: I think the big thing is that it's incredibly hard work. Our closest other country, our closest other market of scale, is Australia, and that's a 4-hour flight, and when you're flying up to the U.S., that's 12 hours, to London a 17-hour flight, and that means that you're away from your family for weeks at a time. It can be incredibly hard work physically, it's tough on our relationships, doing all of those things. Once you get going, then you also, at a very early stage, have to work out how to manage a distributed team because you can't be anywhere, and what we find is a good playbook is going from New Zealand, getting up to the U.K. pretty quickly - that's because there's a good sort of Kiwi mafia of people over there and good talent, and it's a very similar but high-value market - and we hit the U.K. and once we had sort of got going in the U.K, we came back and did Australia, and one of the reasons for that is New Zealand is to Australia how Canada is to the U.S.

We really wanted to be globally credible before we hit the Australian market, rather than come from New Zealand to Australia, and Australians don't normally like buying off early-stage New Zealand businesses, so that meant it was about finding great talent that could operate independently, and that's a real dilemma, finding country leaders that are senior enough to be able to operate largely on their own and being able to attract those high-quality people into an early-stage company. So those are the really hard things. It's easier when you're a large fish in a very small pond, you can get network effects and you can really use your connections to get your business established and you can have good access to talent until you exhaust that pool. I think, probably, the biggest thing, though, coming from a small market, is we just had to be global from day one and that really just folds nicely into this idea of global platforms and in the small-business space, it's really hard to build an application just for one country like the desktop software work. You actually have to raise a huge amount of money and, really, build a global platform, and that's played in our favor although it was super hard work.

David Yuan: Yeah. Absolutely. And Xero was always a global ambition? There was never a notion that this could be either a New Zealand only business or a New Zealand and Australia business? It was world domination from the first day?

Rod Drury: Yeah. And because that's where you get the economics of scale, so, ideally, the marginal cost of each new country gets less and less and less. And I think, now, you look at some of the desktop-software vendors that have tried to transition to the cloud. A lot of those are mature businesses where investors have put money in for a while and are used to getting a dividend stream out of those companies. It's very difficult for them to reset their message that they're going to go for growth now, stop paying dividends, go and hire another 1,000 people, and make it happen, and the competitive dynamic between us and MYOB has been a classic example of that. They're our biggest competitor in that market. They've been sold to private equity three times and haven't had the capital structure and the investors to say, "Look. Let's actually stop paying out dividends. Let's go and hire a whole lot of new people and build globally," so that was a dynamic we didn't really appreciate at the beginning, and, again, it's something that played in our favor. So, within not that large an amount of time, we're now much larger than the incumbent in Australia and even bigger, now, than Sage in the U.K., in the small-business space.

David Yuan: Right. Absolutely. And the flight path was New Zealand, the U.K., Australia, the U.S., I understand the linkages. Would you do it differently a second time? The one market that at least, maybe-- perhaps we're a little U.S.-centric. It's just the U.S. is such a large market. How do you think about the sequence of specific markets to chase?

Rod Drury: Yeah. I think, if you have serious global ambitions, you have to go to the U.S, and what was good is we've stayed off the radar for a long time. Intuit, certainly, were tracking us, but didn't see us as a major threat until we really hit the U.S. and started making some noise, but it is hard in the large market. It's kind of like shouting into a vacuum, whereas, in smaller markets, you can get the network effects, and we really like the path that we had started. As soon as you enter the U.S., though, it really pushes your cost base up, and, culturally, the U.S. is different to some of the Commonwealth countries, and it's really difficult to hire staff. It's a far more competitive market, so one of the things that we've learned is, when you enter the U.S. as a small-challenger company, that you probably don't have the right to hire your ultimate team right on day one. What you'll get is the best people in the industry that are looking for change, are looking for challenges, and they'll be the right people to get you up to those first milestones, and as you start to kick some goals, then you'll find really good talent starts to find you. So a good example of that was Keri, who's our U.S. leader. She was running a good chunk of Capital One's business, and we wouldn't have had the right to hire somebody like her when we entered the market, but after a couple of years and we started to score some goals, then, she found us.

David Yuan: That's great. And when did you know and how early were you prepared to go overseas? Can you give me a sense of how big the business was and whether there was a maturity level that said, "Hey, we're ready to go find that key exec in the U.K. and build out a second country?

Rod Drury: We started our IPO when we had 10 or 20 customers, and we have, well over a million customers today, so this was very, very early days, and at our IPO date, what we promised to investors is we'd prove the software kind of worked with 100 customers, and, when you look back, it's amazing that we only listed the business with 100 customers. In fact, I'm pretty sure that, in our first year, we would be the public company in history with the smallest amount of revenue. I think we had like 112 grand. It was our first annual revenue as a public company, and then it quickly grew to a million and then it was 3 million the year after that, we were very, very early stage. What we did at the beginning, because we wanted to prove that we weren't just a New Zealand business, that we could actually provide software to some other large markets, was -- my co-founder Hamish Edwards, who was the accountant, he was really keen to go and live in the U.K. for a while, so he took his family over, and so we had one of our key founders who was there to start that important U.K. market for us, and then we completely lucked out getting Gary Turner, who runs our U.K. business today, and we call Gary a founder in the business because he really took just our embryonic state in the U.K. and has really grown that, well, to the market leader in the U.K. in a very short amount of time.

And then, similar story in the Australian market. We had a great person, Wayne, who was our sort of startup, sort of founder in the Australian market, and I think once we got to 5,000 customers, we were able to attract a guy called Chris Ridd, who was a senior Microsoft exec. He really got the business started and got a trajectory set in the Australian market.

David Yuan: That's great. The pattern of early execs or founders being the first to plant a flag in a different country, I think, is a well-understood path and lots of success there. Can you describe if there are kind of patterns around the profile of the person that takes over from that founder? The Gary and the Chris profile, is there a commonality that other entrepreneurs should think about as they look for a profile to build out that scaling phase within a new country?

Rod Drury: Yeah. The way that we found our first staff was getting out in the industry, doing events, and asking people, asking accountants and vendors, "Who are the thought leaders in the industry? Who are the urgent executives that were building a profile?" because those would be the sort of people you would want to have driving your business. So these really are startups. Even if their business might've been up to a few hundred people, any new sub operates exactly as a startup, so that first person is doing everything. They're out selling. They're doing PR. They're building relationships. They're connecting to banks. All of those things.

David Yuan: And once you've built out a relatively distributed organization, what are some of the keys that really drove a high level of collaboration, that maintained the culture? I know Xero has a great reputation of having a very flat culture and really embracing a diversity of views, and how do you maintain that trust and how do you maintain that culture across multiple time zones?

Rod Drury: Yeah. One of our big advantages, being the challenger, was being a founder-led business, and I never took stuff too seriously. Obviously, we're deadly serious about what we're doing with Xero, but we really enjoy what we're doing and we love the mission. I think that I set the tone of having fun, operating with high values, but there's always humor. I never had a PA or anything like that. I was always on social talking to customers. We used Yammer as our internal network - I was probably the largest poster, and it was just the way that we work, of trying to keep the business as flat as possible, sharing information as much as possible, and we really built a culture of a challenger team. And what's been really amazing is, even though people, in the north of England are quite different from Southern California and they look different, they talk different, they have quite different lifestyles, we were all unified as “Xeros” with this key purpose.

David Yuan: That's great. Maybe shifting gears somewhat. We talked about the Xero story within the New Zealand ecosystem. Can you tell me a little bit more about in general, the Kiwi entrepreneurial culture, how you've seen the ecosystem develop over the last decade?

Rod Drury: Yeah. Well, we have a saying in New Zealand about the Number-8-wire mentality, "When you're a long way from everywhere else, you just have to make things work," and, I think we're not as hierarchical as some other countries. You'll often bump into the Prime Minister in the airport lounge, and you can just go and say, "Hi," - they're not covered by a whole lot of security - and, once you've got a bit of a profile, everybody kind of knows everybody, so that kind of informality and just being able to get stuff done and not worried about coloring outside the lines, or just picking up the phone and making things happen, is a key part of our culture. What's interesting about New Zealand is most people around the world have a bit of a fantasy relationship with New Zealand, so they're always very happy to hear from you, and we've found that's good. If we're travelling, we do normally get meetings, and we tend to build very deep relationships with people that get involved with our business because they do want to come down and spend time with us.

The downside of Kiwi culture is ambition. When we have U.S. execs in the business, they are thinking about scale and speed all the time. There are other entrepreneurs, like myself, who are urgent and think big, but that's not a national characteristic, and one of our characteristics in New Zealand is sort of not to put your head up too much. And what was really interesting in our small markets, is we were just dominating the press. We were in the paper every day, and as news media became about sort of clicks and clickbait, it got really interesting being a large fish in a very small pond, but, about two years ago, we were becoming one of the most traded stocks on the New Zealand Stock Exchange. We had dual-listed on the Australian Stock Exchange, but our liquidity was split across markets, so, for us, it made sense to actually drop our New Zealand listing and became a full ASX company and get all of our trading volume onto that market, which put us quite quickly into the ASX 100, and then what we found were there were more peer companies in that market and a lot of that kind of big-fish-small-pond thing has gone now. We now, truly, are a global company with our executive teams spread all over the world, and I think it's much more mature now. We have proven that we can execute all over the world.

David Yuan: So is this a trend that will continue, Rod? Do you think there'll be other global B2B SaaS companies coming out of New Zealand following in Xero's footsteps?

Rod Drury: Well, there are lots of smaller ones. I think we were really lucky and that we arrived at a time where it was possible to build a platform and, because we were just ahead and we had more capital than anyone else, and we took an open API approach, we were able to create a platform that thousands of other companies could build on top of and leverage the work that we did. You don't see those platform opportunities that often, and in consumer, obviously, there's Facebook and there's YouTube, in the enterprise, there's Salesforce, and in the small business space, there's us and Intuit. Platforms come around every 10 years or so, so I think we lucked out on and just had really good timing to be able to be that small-business platform. I think there'll be lots of smaller SaaS companies and there's so much opportunity in the enterprise SaaS space, but I think it's quite rare that you have the opportunity to build a platform and build a multi-billion-dollar business as quick as we have. Not that we're better than anyone else. I think we ticked a whole lot of boxes, but our timing and really getting in early on this trend positioned us very strongly.

David Yuan: Absolutely. You mentioned New Zealand as a country where it's easy to get things done, and, in general, I think it's well regarded for its government in terms of a whole, wide range of things, whether it's being progressive, whether it's being non-corrupt, so and so forth. What could the New Zealand government do to further foster entrepreneurship?

Rod Drury: We're doing stuff with the visa program, but, unfortunately, we've just closed our borders a little bit to entrepreneurs that are traveling around the world. Because we're a bit of a fantasy destination, we've had a lot of people from the U.S. moving down here and they like buying a home. That's been closed off, and it was incredibly frustrating over summer where I had friends from Silicon Valley, who bought property in New Zealand, that had their friends down, and they can't actually buy, so that just seems like we're cutting our nose off to spite our face, which is just silly. But the world's truly global now, I think. What's great about New Zealand-- we have amazing infrastructure - I have gigabit fiber - and the lifestyles here and you can have this combination of doing absolutely world-class work and interacting with world-class people and traveling around to the big events you need to do all over the world, but then come back and go surfing on an uncrowded break on a Friday night, so it's pretty cool.

David Yuan: Yeah. I've seen a little bit of that. That is an incredible lifestyle and an incredible place to build a business and a life. Maybe, to switch gears again, I'm sure there are plenty of entrepreneurs that are inspired by the Xero story. Any advice you'd give them as a founder and someone who's built a truly global platform?

Rod Drury: Yeah. I talk to entrepreneurs a lot, and I think people are really urgent. You see the examples of people that smack it out of the park, and if you do do that, that's great, and probably a big part of that success is really good timing, so I think, "Don't be in a big hurry. The journey is our reward." I think your twenties are for building your sort of base expertise, it's learning your trade, it's building your network, it's getting technical, and really understanding how things work. In your thirties, you really start to build your network and get really thinking about business. You've got some management experience. I started Xero when I was 40, and it was a huge amount of fun, and while it was hard work and mentally stimulating, I never felt that we didn't have the skills to do it because when you're sort of in your forties, you have a lot of experience and you don't usually meet people that just blow you away and you feel intimidated by because, if you have sort of got through and you're doing big things in your forties, you actually have seen a whole lot of things. And, now I'm in my early fifties, I have the opportunity to not work and I could just be surfing all day, but that actually isn't enough. Doing something big with purpose and working with great people is actually what you want to do. We can all have really long careers, do the foundations, and if you get lucky, that's great, but your twenties are different from your thirties are different from your forties. I'm now finding that your fifties can be a huge amount of fun as well and it's all about doing great things with great people.

David Yuan: That's awesome. And speaking of fun things, let's, maybe, close with what's next, do you think, in the tech-software landscape? What gets you excited these days?

Rod Drury: I really like the enterprise SaaS market. There's not a lot of people that are building complex business software for large companies, and if you're going for small business and consumer, you've got to get out there - it's so hard and fast; it's big marketing; all of those things - whereas there's so many opportunities in business where the heroics or the founder can go and get your first few deals. I love what the Lexium guys are doing, and there's so much opportunity. Everything's still broken. Email is broken. Inter-company messaging, the virtual water cooler, is broken. It’s still so hard being inside an enterprise, and, we know this. I think, Xero, now, we're like 2,600 people, and it's not like we're the first people trying to glue all this stuff together. No one's kind of built the operating platform for enterprises yet, but there's so many cool solutions, Smartsheet, heaps of planning tools, and you can just see there's massive opportunity in there, so I think that stuff's pretty cool. Just for fun, I've been doing a little bit around virtual reality and mixed reality, and I'm quite enjoying that because it's something totally different from what I've done on a business-software side, and the thought that you can have an emotional connection and feel like you're somewhere else when you put a headset on is just really interesting. 

David Yuan: Fantastic. Well, Rod, thank you so much for being generous with your time and your thoughts.

Rod Drury: Thanks, Dave.

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