Xero is an up-and-coming company in the cloud software market. Focusing on beautiful accounting software for small businesses and a partner-based go-to-market strategy, they are growing quickly and making the competition pay attention.
It's a New Zealand summer here in the San Francisco Bay Area, with Emirates Team New Zealand leading the America's Cup competition out on the bay, following the first Xerocon San Francisco 2013 on September 4 and 5, 2013. For those who don't know, Xero is an up-and-coming company in the cloud software market. Focusing on beautiful accounting software for small businesses and a partner-based go-to-market strategy, they are growing quickly and making the competition pay attention.
Xero was founded in New Zealand in 2006 when CEO Rod Drury became frustrated with the lack of financial insight into how his business was running. There was a lot of data entry going on, data files and spreadsheets being passed around, and it was difficult to reconcile the numbers. Mr. Drury wanted to work with his accountant as a true trusted advisor who could help him better manage his business, rather than as a data entry clerk and tax filer who presented him with a rather annoying bill each month. Believing that small business is inherently social and mobile, the cloud seemed to be the answer to transforming how accounting is done for small business.
Xero's accounting solution is a full accrual accounting system with invoicing, payables, payroll, and more. One particularly nice feature is the direct daily bank feeds that reduce clutter and improve customer awareness of cashflow, making bank reconciliation a breeze. Xero is still building out the full core accounting and connected business services, but with over 200 developers on the team they are expected to deliver the promised U.S. payroll, purchase orders, inventory (or "stock" as it's known in Australasia), a re-architected reporting platform and more in short order. Xero is currently delivering new product to its customers about every three weeks, a rate that may change as the product matures.
The tagline for Xero's product is "beautiful accounting software". Meaning, not only does it look beautiful but it works beautifully. Xero believes that bank reconciliation is the key to cashflow and cashflow is the key to staying in business. Hence the focus on connected business services with banks, so that the accounting transactions just appear rather than having someone key them in. These daily bank feeds change the customer's attitude and understanding about where their cash is and where it is going. Xero also reports that its customers reconcile their cash at least once a week and 44% do it more than once a week. They say that most small businesses reconcile a few times a year. This constant reconciliation is an important component in the changing relationship between the small business and its accountant. On September 4, 2013, Xero and City National Bank announced a partnership to integrate the bank's online site for small businesses with Xero, IDC expects that other banks will soon follow City's lead.
The majority of Xero partners are accounting professionals (there are also software vendors building on the Xero platform, but more about that later). The most trusted advisor to a small business is generally their accountant or bookkeeper. Xero offers its accountant partners a no-cost program with free software to run their business (e.g., Practice Studio is available to all partners and those with at least 25 customers get Xero Practice Manager and Xero Workpapers). Both accountants and their customers view and share the same information at the same time. Xero is also offering training to help accountants rethink their business by bundling services to proactively help small businesses create more profit, manage cashflow, and plan for the future, instead of just dealing with tax filings and other compliance issues periodically. Several accounting professionals in attendance at Xerocon expressed delight with the change in their business from an essential, but unsexy, paper-based practice focused on year-end tax compliance to one that allows them to collaborate across teams and with their customers. Partners reported that their businesses are growing and are more profitable as working with Xero enables them to drive down compliance costs.
Xero is also building out an ecosystem of add-on partners and also a platform where cloud applications can connect to one another seamlessly. Most small businesses need more than just accounting software and thus far Xero's partners have delivered over 275 certified applications with verticalized products specific to hair salons, dentist offices, wineries, and more, as well as broader areas such as payroll and CRM. Some of the add-on partners include:
- Bill.com - the business payments network used by more than 250,000 users in the cloud and managing $10B+ in transactions annually that connects accounts receivable with accounts payable.
- Expensify - providing expense reports for the 99% (i.e., companies with fewer than 500 employees) and used by 1.7M users in over 250,000 companies.
- Fathom - performance reporting and financial insight for small business
Generally Xero is providing, through its own offerings and its partners, enterprise grade software for small businesses that doesn't cost an enterprise price. The Add-on directory can be seen here.
Xerocon 2013 in San Francisco was really two one-day events. Held in the Terra Gallery on Rincon Hill in San Francisco, Xerocon was hip, urban, and fresh. The food trucks rolled into the courtyard at lunch and delivered a perfect San Francisco treat. All of which underscored the fresh approach Xero is taking to accounting. The audience was mostly accounting professionals, both current and prospective Xero partners, along with ISVs from the Xero ecosystem. The event was "sold-out" with over 300 attendees each day, which is excellent for a debut event in a new region. The San Francisco event was preceded by Xerocons in New Zealand and Australia (the Sydney event reported over 900 attendees) and followed by Xerocon London.
Xero is ambitious and setting themselves up to grow rapidly in the U.S. market. They've already outgrown the first office they set up in San Francisco and are soon moving to the larger offices in the Financial District. Offices are also established in Denver, New York City, and Los Angeles, as well as in the United Kingdom, Australia, and New Zealand. The stock ticker is XRO, although you'll have to buy it on the Australian or New Zealand market, so check with your broker. Xero has over 200,000 real paying customers, 7400 accounting partners, some serious cloud infrastructure to manage all the transactions, $69M in cash to invest in the business, and an impressive team. Are they the next Netsuite, Workday, or salesforce.com? It will sure be fun to watch them.