With Scott Orn

A Startup Podcast by Kruze Consulting

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Scott Orn

Scott Orn, CFA

Rod Drury of Xero

Posted on: 08/17/2016

Rod Drury

Rod Drury

CEO - Xero

Rod Drury of Xero - Podcast Summary

Rod Drury is the Founder & CEO of Xero, a multi-billion publicly traded accounting software company. Xero began in New Zealand and is going head to head with Intuit’s Quickbooks across the globe. The Company has been a publicly traded startup since the early days because that was the easiest way to raise capital in New Zealand. But now Matrix and Accel have invested and Xero has just hit an annual run rate of $250M in Revenue.

Rod Drury of Xero - Podcast Transcript

Scott Orn: Welcome to the Founders and Friends Podcast with Scott Orn at Kruze Consulting. This week’s guest is a special one. It’s Rod Drury, founder and CEO of Xero. Xero is multi-billion dollar publicly traded accounting software firm. I’m actually a shareholder myself so please take everything I say here with a grain of salt. But it’s a really great podcast. Xero started in New Zealand. It’s now totally global. Huge business in the US, the UK, everywhere across the world and Rod’s just done a fantastic job building the company. He’s also a super funny guy. He basically tried to rattle me I think and accused me of using the wrong name as I started the interview and that’s not in the podcast but he had everyone in the room laughing like crazy and it was hard to put a straight face on and give him a real interview after that. We had a great time though and I think it’s very informative. I hope you enjoy. Welcome to Founders and Friends with Rod Drury, the CEO and co-founder of Xero. Welcome. Thanks for taking time.
Rod Drury: Cool. Thanks for having me guys.
Scott Orn: So we are at ExpensiCon. Expensify’s big conference and Rod has been doing a bunch of announcements here. I think it would just be kind of cool if you just told Xero’s story a little bit. Like this is the major huge company in SaaS and accounting and please just give us a little bit of background of you guys.
Rod Drury: Yeah. So we’re in our tenth year which sounds kind of crazy. We used to be four people in a small apartment. We now have 1,500 people all over the world. We got over 700,000 small businesses globally on our platform. We got $200 million of revenues and yeah we’re in the small business and accounting space. So people who might be on QuickBooks Desktop, they should be on Xero.
Scott Orn: And I heard the origin story a little bit from actually one of your team members. Did you start the company with your accountant?
Rod Drury: Yeah.
Scott Orn: So what happened? Were you just fed up and couldn’t deal with QuickBooks?
Rod Drury: Yeah. So I sort of came from Arthur Young which with the merger. So I had been in sort of large high-end IT and in financial consulting. So did ordered it my first year and then taught my way into the information technology consulting group. So did lots of implementation of sort of high-end ERP and it always kind frustrated me that they didn’t really use the power of the database. So I did quite a few startup companies. We actually did some internal entrepreneurship and started a development arm inside Ernst and Young within two offices. Kind of when [inaudible 00:02:26] first came out. And then we sold that business in ’99. Did A bunch of startups was on the Board of Trade Me which was New Zealand’s version of eBay which we sold for half a billion US dollars. So that was a pretty big deal on our part of the world. And then I did a email archiving product. I actually built a version of online accounting when Microsoft ASP.NET version 2.0 came out. That sort of took two weeks and built the general ledge on that. It felt really good. But what I realized was building accounting for small business wasn’t a quick kind of build and flip. It was something that you have real relationships with real customers and there was so much to build. So I packed it and did a email archiving company which we sold to [inaudible 00:03:10] Software within two years of starting it and while we were doing that, we sort of wanted to make sure the books roll up-to-date and because we were building this business. We knew we’d probably sell it quite quickly. We went sort of doing it to build a long-term business especially wanted to make some money and see if we could build some technology and sell it. So we got the version of sort of QuickBooks for Australia and New Zealand. There’s another company called MYB. But the products are kind of the same and it was so frustrating. We’re seeing the innovation that was happening in the consumer internet with this horrible desktop software that looked really homemade. It was just really clear and having built my own engine, so once we sold that business I took the money from doing AfterMail straight into Xero. Started the company and because we had some capital, we did a lot of real RND, we wanted to build a proper global accounting engine and what was interesting back in those days is when we sold AfterMail, we had about 23 people and everyone’s doing two or three jobs to do accounting software properly. It’s just a massive investment. We probably need at least ten developers. So ten testers and we needed like sales and marketing because it wasn’t selling big large enterprise deals. It was selling a fairly low cost product. So we needed 50 people from Day 1 which was like half a million bucks a month and we probably needed about 3 years. So say, call that $15 million. And back at that time, the biggest New Zealand venture capital deal is probably two or three million bucks. We probably could’ve raised the money on the US West Coast after the other things we’d done but we were the head of valuation of sort of 20 and the business would’ve sold by now. So we told a big story and actually floated on the New Zealand Stock Exchange with 100 customers. Had the first sort of $55 million valuation raised $15 million and that was a big journey. So far we’ve raised in US dollars well over $300 million and we‘re just sort of passing the $200 million annualized revenue mark now.
Scott Orn: Looking back, was going public or doing the float a smart move? Do you feel like it was the right move?
Rod Drury: Yeah. I mean it’s pretty hard.
Scott Orn: Lots of scrutiny right?
Rod Drury: Yeah. There’s a lot of scrutiny. We’ve done the startup basically in the public eye. So you really can’t stuff up. We’ve had every dollar we spent, every bit of revenue, every deal, you have to expose that and New Zealand’s [inaudible 00:05:34] every six months. Not every quarter thank goodness. But that does put a real edge on the business. So while it was incredibly hard and it’s probably being quite stressful, at least it builds a very very strong business. So we’ve had this right from Day 1. Had great corporate governance. Great boards. We have Chris Liddell who used to be the CFO of Microsoft. Graham Smith who was the CFO of Salesforce. Bill Veghte, number two at HP. Just fantastic people helping us all the way through.
Scott Orn: Do you look at the kind of the unicorns in Silicon Valley and shook your head a little bit? And say like, why don’t you guys go ahead and get public and that scrutiny will help you a little bit?
Rod Drury: It’s really different things. I mean if you can raise capital and be private allows you to just be in a lot more stealth and moving staff and making sure you’re always having the right team is harder. When you’re public, things like making moves with senior staff, that’s probably anything that we get pinged from whereas [inaudible 00:06:34] is really low and because we’ve been growing so quickly for so many years, you’re really operating in dog years. So the people that were right from two years ago may not be the right people for the next one. So we’ve been very active in making sure that we’re managing. The board, always had the right board for the company as we’ve been growing globally and also making sure that we’re always bringing in the best talent because as you get bigger and better, then you have the right to get better and better people through and also making sure we’re developing our own team.
Scott Orn: It’s such an incredible story. Because you did start in New Zealand, do you feel like starting in kind of a smaller market helps you perfect the product? Or did you go right into … you talked today at the ExpensiCon about how you gotten to the UK really quickly, gotten to Australia really quickly. Was that … did it help you or was it something you wanted to experience as fast as possible?
Rod Drury: So when we started, we probably thought that it was harder because we’re from a small set of rocks in the South Pacific. We only had four million people so it’s a pretty small market but in hindsight, it’s actually been really good for us. So we’re able to have the first two or three years really off the radar of the global scene. So by the time we hit the US, we were pretty well-dressed and pretty [inaudible 00:07:42]. And what’s also interesting is under the last generation of technology, the enterprise software space, everything sort of consolidated up in the US. So it was mainly US-listed companies and once they get to a scale, they have this arbitrage where they can buy private companies that say a multiple of three or four and immediately they’re worth five to eight. So they’re going to buy companies all day. Plus they also have a [inaudible 00:08:09] cost of their global teams. So they’re always looking for new products to put on the shelf. So in the enterprise thing, everything globally consolidated up in the US and what used to be the playbook for technology companies from smaller countries was basically getting to a point where a US public company would buy you. And so you didn’t really see the talent that surround in the world kind of rising to the very top because they get taken out quite early. Whereas what’s happened now with these internet models is you can now build businesses that are truly global and I think in hindsight that’s good. If you look at us compared to Intuit say, I think around … their global revenue is only sort of 5%. Board is completely US-centric. So while they appear like a global company, they’re actually much more of a US domestic company and we’ve been able to beat them on our first main markets. New Zealand, Australia and the UK which is quite weird. You would think these big companies, big brands true global operators but I think when you’re on a big market like the US, you get pretty focused on those big market whereas we see the US as a market just like we see a whole lot of other big ones as well.
Scott Orn: I think you made a great point about the consolidation. You guys have chosen to basically … because you have a public market cap. You could actually buy companies if you wanted to.
Rod Drury: We bought four so far.
Scott Orn: But today you had a really big announcement at Expensify where you’re a global partner now. It seems like you’re integrating everyone into Xero to make the whole ecosystem successful. Instead of just going out and buying a bunch of companies. Is that part of the strategy or is that just …
Rod Drury: The signing thing that we’re seeing in the small business software spaces is most of us aren’t first time entrepreneurs. So if you look at someone like Matt from TSheets, he’s an experienced businessperson that’s built a few businesses. Same with David from Expensify. So we all had very similar backgrounds in that we understand large business and I think all of us, we all had prior careers in the enterprise space and what’s neat about the small business space is that’s very real. You’re dealing with real people and if you can write software that saves them two or three hours a week, that’s an awesome awesome thing and you get that feedback now back through social. So I think what you’re seeing is these new purpose and value-driven companies that most of us are parents as well because we’re all a bit older so we all want …
Scott Orn: You look great though.
Rod Drury: Yeah thank you. You’re very kind. My forehead seems to be stretching all the way to the back of my feet these days. So I think we’re seeing these kind of value-driven companies that are all about better schools and hospitals by making the small business economy so much more productive and the big changes before the small business market must be the world’s biggest markets. So there’s consumer. We buy volume of people it’s huge but people don’t really like paying for stuff. So you kind of see marketplaces and lots of advertising-based models. Small businesses would be the next biggest market by volume but they spend in total trillions of dollars. So the small business internet is really one of the biggest markets that’s been hiding in plain sight but under the desktop world, we had to distribute software. It was very expensive to attack this fragmented market. So the Cloud pulls it all together. So what you’re now seeing is, experienced enterprise entrepreneurs being able to raise capital and deploy solutions, amazing solutions to small businesses and I think because we have a shared background and for all of us, it’s about keeping our marketing cost down. It just makes sense to work together using the great API’s and we’re seeing this global family of businesses who were doing really neat things and completely coordinated even though we’re all managed out of completely different countries.
Scott Orn: It’s amazing. The teamwork is just really helping the whole ecosystem including us, including all of our customers. You have a lot going on here so last question. You had a really cool vision for how AI and Amazon’s Analytics would really work on behalf of Xero’s clients, on behalf of their endcustomers. Can you talk about that a little bit just now?
Rod Drury: Yeah. So for these platform businesses, they’re just massive investments. And when we started the business, I thought, three years, we’ll build it. It will be done. And we’re on our tenth year now and we kind of just finished what we have called a boring bit. So back reconciliation, credit notes, reporting, purchase orders, all the things that you need to build the horizontal and accounting engine. And it’s millions of millions of lines of code and it takes a long time. And what I think we’ve done is we’ve reinvented those experiences on the web and get all the benefit of anywhere multi-user access anytime, iPads, all that good stuff. But we’re still putting data. What’s been amazing, last year we processed $400 billion of transactions. So what’s exciting about the small business space, when the data is sitting on individual PC’s, is not that interesting. When you bring that in, this year we’ll be approaching a trillion dollars of transactions. So for the first time we have this massive growth of data. So what’s happened? Well, we’ve been building our platforms and starting ten years ago. We kind of hosted our own service and those things. Now that we’ve got this transactional data cleaned up, we’re watching closely the big platform walls that are happening with Amazon, Google and Microsoft and these guys are going at it hammer and tong investing billions and driving the cost of our compute down but more importantly, what they’re doing is inside their data centers, they’re putting in these big data tools. So what we’ve been doing for the last two years as well as all of the product features, we’ve had a massive over two year project now of moving from our own hosted environment into Amazon Web Services and what that gives us is access to our commodity innovation like machine learning, artificial intelligence, all the big data services. So we’re now moving from a kind of relational transactional system to a whole lot of new computing models and the platforms that haven’t made that investment to AWS, you can imagine [inaudible 00:14:15]. What machine learning engine do they use? Do I get 50 servers? Do I get 200 servers? You just don’t know but we can now just turn these things on. So what I think will happen, now we’re kind of gone through the kind of mandatory features we all have to build. Those that are on these new modern platforms should be able to show so much innovation over the next two or three years.
Scott Orn: It’s super exciting. So let us let you get back to the party. Thank you so much. Thanks for being on the Founders and Friends. Rod, really appreciate it.
Rod Drury: Cool. Thanks S.
Scott Orn: Yeah. Alright. Eileen Adao from Xero, thank you for coming on Founders and Friends with Scott Orn and Vanessa Kruze at Kruze Consulting. Really appreciate you taking time.
Eileen Adao: Thank you for having me.
Scott Orn: Yeah. So we’re at ExpensiCon which is Expensify’s big conference. Don’t be jealous. We are in Maui right now. It’s unbelievable. And Eileen, what’s your title again? What do you run?
Eileen Adao: Practice and Platform Manager. So I run a team of consultants that help on board and implement our partners onto our platform.
Scott Orn: Fantastic. So maybe give a little bit of background about Xero. Like we’re accounting nerds. We know Xero. I’m also a shareholder so full disclosure there. Small shareholder. But tell us about Xero.
Eileen Adao: Well, we really have a lot in common because I am also an accounting nerd and a shareholder. But little bit about Xero, we’re founded in 2006 back in New Zealand and we actually decided to go pretty public right away in 2009. Then went over to the UK, to Australia then finally landed in the US in very early January 2012. I’m actually employee number nine in the US.
Scott Orn: Wow. That’s amazing. Congratulations.
Eileen Adao: Thank you. So been around a little while and we’re founded by a serial entrepreneur, Rod Drury as well as his accountant, Hamish. So they were kind of tired of the back and forth and unsynchronized files and said, why can’t we just have it instantaneously? And so they decided to build a Cloud accounting software.
Scott Orn: That’s amazing. So Cloud accounting meaning like a hosted, just like every other internet application you use like Google or Google apps or something like that.
Vanessa Kruze: I wouldn’t say it’s hosted. I mean it’s directly in your web browser so you can access it from anywhere. I mean keep in mind that before Xero came along, all of these other accounting platforms basically lived on your desktop, they lived on your accountant’s desktop. The actual owners of the businesses couldn’t access their own financials. So the accountant became the bottleneck and the programs themselves were just really old, rickety, difficult to use, hard to interpret. So I think Xero has done just an absolutely amazing job of revolutionizing the user interface for accounting software.</p>
Eileen Adao: Yes. Thank you. And yes. We are not hosted. We were built for the Cloud from the very beginning and we all say we lead by design so not just within our UI but also the experience for our partners and for the SMB’s. We really consider that when we’re designing our product and before we decide to do a new release or features that we’re going to come out with. We really keep all those things in mind.
Scott Orn: So how did you guys … so Rod and his accountant have this idea, how did you guys spread? Like you were the first person in the United States. Talk about maybe the spreading throughout the world and also like the US launch. How did you guys make this happen? Because that’s a global launch over three or four years is super impressive. Like how did you do that?
Eileen Adao: Really fast. So not the first but close. I say the first year in the US, we were an incubator for the most part and we grew up to probably about 20 employees or so and we did everything and anything. So for the ones that started early, we really know Xero backwards and forwards and then grew rapidly. And I think it was just the transfer of knowledge and being focused and everyone is just agile. People we hire aren’t scared of change and we know that they can be flexible to change because we are always having to change on whatever’s going on with the market and our partners and really adapting to what people needed. Of course there was pain points along the way but who doesn’t have pain points along the way? Let’s be realistic. So but I think we’ve done a pretty good job of really keeping in touch and expanding really well. So we went from San Francisco, having an office there. We’re on our third office now. I think we’re staying there for a while.
Scott Orn: In San Francisco?
Eileen Adao: In San Francisco.
Scott Orn: Oh wow.
Eileen Adao: Actually …
Scott Orn: It’s kind of like in North Beach, isn’t it?
Eileen Adao: Yes. If you count the apartment above our incubator then it’s our fourth office. So we have our fourth office there then we also have remote employees in LA. So we work out there. We have an office out there as well. And then we work in Seattle, New York and then a bigger office in Denver as well. And then now we’re also having employees around the US regionalizing.
Scott Orn: That’s amazing. When you were growing the business and you use the accounting channel quite a bit like that’s one of the ways we know you is actually Kruze Consulting is an accountant for a lot of clients. Was there a certain kind of accountant you look for or was that the channel strategy? Like talk about your channel strategy. It’s okay if it wasn’t all about accountants on the early days.
Eileen Adao: Actually it was at least when I joined in the US, I think maybe strategically globally it could’ve been different but I’ve always been in the partner channel, our accounting channel since I started. Mind you, I came from Ernst and Young so I have a soft spot for accountants. So we really did focus on that. I don’t think there was necessarily a certain accountant we targeted because Xero fits for SMB’s and medium businesses. So it’s more so who are the accountants that want to help SMB’s and small businesses and helping them achieve those goals and making their lives easier.
Scott Orn: Yup. So Xero’s getting penetration now. Now you have a bigger competitor in Intuit. You go head to head with them which was super impressive.
Eileen Adao: Now a bigger competitor? They’ve always been there.
Scott Orn: No. That’s not what I mean. Now you’re in the US, you’re head to head all the time. How do you guys differentiate? What’s your marketing message?
Eileen Adao: Honestly, I mean for me, I don’t know if we … I guess we do market it a little bit but I think my team is a differentiator because we really want to make sure that that process from going to whatever software or platform or different platforms you’re on because we do see that as well, be much of a seamless process to come to Xero and have that hands-on support. I just don’t think not everyone knows about that support and they don’t get it. And so now we go back and make sure that some of our partners that didn’t get to have that are aware of that support and make sure that we’re giving that support to them now. We’re always trying to be innovative in this space and try to come up with new things. It’s been a while now but we came up with business performance dashboards which has a key KPI’s. We do have addons that do that too. But if you don’t need it to that deep extent of complexity, Xero has the basic needs that you’ll have so you can be more of an advisor to your clients and not just give them the financials [inaudible 00:21:41] hear your numbers but hey these are what your numbers mean and here are some KPI’s that tell you how your business is doing.
Scott Orn: That’s a great point. The [inaudible 00:21:49] actually counselling the entrepreneur not just throwing the statements over the wall and saying here you go. You guys have also done a really good job of integrating kind of other software services and today it was announced that you guys are doing integration with Expensify globally which is huge. Can you talk about that just a little bit?
Eileen Adao: Yeah. So we’re partnering with Expensify to kind of have a more seamless solution around accounting software and expense management and so we are offering kind of white-glove service around that from both sides to help them move from to going onto the Xero plus Expensify platform a little easier with a few other benefits.
Scott Orn: That’s really cool. What’s next for Xero? It’s not really a fair question because this was announced today but like what’s the future hold for Xero?
Eileen Adao: That may be a better Rod question.
Scott Orn: Rod’s the CEO who you probably hear before this.
Vanessa Kruze: Yeah I mean I forgot who was saying this at the conference but they were saying that the best way to kind of integrate all of these apps onto one platform is to just allow for each business to do the best of what they do. So Expensify is truly the best of the expense reports. TSheets, arguably the best at keeping track of time. So if a small business comes to Xero, they can choose yes I need Expensify. Yes I need TSheets. So they’re getting kind of the full attention of that company, of that team behind this one product line. But it all integrates onto Xero which makes it an incredibly powerful platform.</p>
Eileen Adao: And I would agree with that and that’s why we say we can be a lightweight ERP system, right? Xero gives you the great GL experience in lightweight applications. We do have an expense claim module but that’s really when you’re just starting out. But as your business grows, our ecosystem allows you to grow with Xero in them. So as that small business grows and they need a more complex expense management system, we bring in Expensify. So it does work still as a light ERP system. We are trying to be the best we can be in the beautiful accounting experience but this is why we have chosen strategic partners to help that business have the full go-to-market solution.
Scott Orn: Yeah. That’s amazing. So we work with a ton of entrepreneurs, ton of entrepreneurs listening to this podcast. What would you leave them with? Like what advice or how to make their decision on what kind of accounting platform to use?
Eileen Adao: For accounting platform? Well, obviously we tell them to come join Xero. It’s going to make their life easier. It’s a very intuitive product but honestly for the entrepreneur, they’re an entrepreneur because they’re passionate about something. They probably started their business on whatever they’re passionate about. Sometimes it actually starts with our add-on partner and that solution may be with an add-on partner but if you want to make your back office more seamless and be able to get that financial data so that your business can grow and let your accountant focus on that and give you advice, then you’ll want to pick one that integrates with Xero so we can make that an easy process working with Xero or add-on and your certified advisor.
Scott Orn: That’s really good advice. Now, you are the eighth employee at Xero.
Eileen Adao: Ninth. You’ll get it right eventually.
Scott Orn: You are the ninth employee at Xero. What advice do you have for just a startup person in general? Because you basically started the United States operations like looking back on that time, is there one piece of advice you can give? Stay sane. Keep exercising.
Eileen Adao: Change is constant. I mean and I know I already touched upon that but it’s what keeps it exciting. I don’t like to be bored at my job. I don’t know many people that do but I enjoy coming to work because there’s always something new and it challenges me and I like that. I like that I come and face new challenges. When public accounting why I loved it and thrived off of it, it’s because you never got comfortable. Once you were knowing your level, you get to step up your game and go to the next and learn something new and it was a very different move for me to go to a startup coming from a very conservative accounting firm but it had its similarities in the sense that you learn the process but now you have to change a little bit more. And what’s the new way of doing things as you scale? Like how do we scale? How do we do it better? How do we automate to reach out to more people? So I think it’s, change is constant and be ready for the ride.
Scott Orn: Yeah. And as she says that, she has a huge smile on her face. So your passion is totally coming through here. Well Eileen, thank you so much for your time. Thank you for explaining Xero to the audience and it’s been great talking to you. Thank you so much.
Eileen Adao: Thank you.

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