Exports took off 150 years ago when steamships, railways and refrigeration took sheep meat, wheat, minerals and butter to the other side of the world. The telegraph, radio, aeroplanes and container shipping were all once innovative new technologies. They opened borders and stimulated international trade. Globalisation is not new.
Then the internet arrived. Optimists thought it would boost trade. The earlier export technologies were all about moving kilograms of things which could rot, break or sink below the waves on their overseas trip. It costs money to move atoms across the world. The internet could move the electrons making up digital goods for next to nothing and bypass tariff barriers.
Internet pioneers didn’t expect that moving business online would lead to consolidation. The commercial world has always leaned towards the winner taking all, overnight this happened on a global scale with less room for national champions. Now just one company can dominate a market around the world. Think Google with search, Uber with car trips or Netflix with entertainment.
Last month Economic Development Minister Steven Joyce issued a report on the state of New Zealand’s technology sector. It says the sector is “strong” and “fast growing”.
In other words, the NZ tech express is leaving the station.
What the report didn’t say is that the engine pulling that train is a single company: Xero.
Xero on track
Yesterday Xero announced it now has 500,000 customers. At the last count the company had about a quarter of a billion in the bank.
These two numbers tell us New Zealand could soon be home to a global technology giant on the scale of Apple, Google or Microsoft.
Xero’s brand is already well-known around the world. Forbes magazine ranks Xero top of the World’s 100 Most Innovative Growth Companies.
New Zealand wins
That success is good for New Zealand. We’ve long had a reputation for developing quality software.
Thanks to Xero, we now have a reputation for developing and selling world-class technology.
We’re on the map as a nation of innovators. The world is taking notice.
Ticket to ride
If we’re smart, we can all hitch a ride on Xero’s success. The company’s emergence on the world stage gives us a once-in-a-lifetime opportunity to transform and diversify our economy. This is our chance to position New Zealand for the 21st century.
Technology engines like Xero don’t pass by often.
Growing the NZ tech sector
While there’s no room for complacency, we’re doing well. Overall New Zealand’s IT service exports grew 14 percent year-on-year in the six years ended 2014.
MBIE reports total IT exports are now $930 million. Software exports increased from $166 million in 2012 to $300 million in 2014.
Research and development spending grew at an annual rate 14 percent during the last decade. Technology related employment was up 6.5 percent.
New Zealand now has more than ten listed technology companies. Those tech companies now make up 10 percent of the NZX by market cap. They all export.
It’s a success story by any standard, yet New Zealand’s outstanding technology performance has a narrow base.
Xero accounts for about half of the New Zealand tech sector by market capitalisation. Last year it was behind one-quarter of the sector’s export earnings. It makes up 20 percent of the research and development spending and created one in ten of new tech sector jobs.
Beyond raw numbers, Xero is showing younger New Zealand tech start-ups how to tackle problems such rapid international growth from a relatively remote base. It has put New Zealand on the map for international technology investors.
Savvy investors come to town to see Xero, that gives the next generation of entrepreneurs an opportunity to showcase their ideas to the people with money. It’s an opportunity that didn’t exist five years ago.
A sub-set of smaller start-ups is directly dependent on Xero. They are part of a vibrant marketplace that has grown up to develop products and services around the company’s accounting software-as-a-service business.
There are some 400 app partners trailing in Xero’s wake. Many are New Zealand-based.
By building tools that work with Xero, they get immediate access to ready-made customer list. That’s half-a-million potential customers from day one.
There’s another effect. Xero acts as a training ground for the next generation of software entrepreneurs and as inspiration for future generations.
High school students and university undergraduates can see for themselves that building a world-class technology business in New Zealand is not unrealistic. Our young entrepreneurs now know they don’t need to fly to Silicon Valley to get started.
That will please Mum and Dad. It will also please the so-called Mum and Dad investors who’ll have access to growth stocks to help fund their retirement.
If we act sensibly now, Xero’s surge today could have an effect for years to come.
It could reboot the entire economy. That’s vital. The recent fall in the dairy price underlines how important it is to move away from depending on commodities.
Xero’s pay off goes well beyond the technology sector. More than one-in-five small businesses in our nation of small businesses use Xero’s software. That already makes us one of the most advanced business cultures anywhere in the world.
Thanks to Xero our panelbeaters and plumbers are online and in the cloud. They will be reaping huge efficiency gains from this long before their counterparts overseas.
Xero spin-off benefits will accelerate. Having a large slice of the nation’s companies online and in the cloud means government can move fast to modernise the way it interacts with business. We’ll be among the first wave of countries integrating our tax system with cloud accounting. We could even be first.
We’ll have experts here who can teach the world how to become more effective business owners and managers.
Likewise New Zealand’s large business-to-business suppliers are finding ways to leverage Xero. Among others, Warehouse Stationery links direct to Xero making things easier for customers.
Paymark is working with Xero to end paper receipts. These are great for productivity. Finally we are in sight of the promised ‘frictionless commerce’.
Xero has already changed New Zealand. It’s galvanised our technology sector, inspired a generation of entrepreneurs and eased the load on small business.
There could be more. More Xeros or Xero-like companies would mean more export earnings, more high quality investment and more great, well-paid jobs. It would mean we would keep our brightest talent and attract the best brains from around the world.
Next a few interesting ideas were left in my notebook after I interviewed Xero CEO Rod Drury for a magazine article. These were too good to waste and provide insight into a fast growing technology company:
On marketing Xero:
“Xero is a product for small businesses. They need all the complexity found in enterprise software. Yet because of its nature we have to sell it like a consumer product. You can’t go one-on-one with every customer. It’s intensive. There are a lot of up front costs.”
Drury went on to say the Xero business model is partly about spending a lot up front to get small annuity revenues.
On being profitable now:
“You can’t fake this stuff. We have more than a quarter of a billion cash in the bank, that’s a big moat to protect us.
“There are plenty of opportunities swim to the side”. 
“We’re executing well and growing faster than our competitors. We can’t keep hiring new people at the rate we currently are. Eventually our numbers will cross over”. 
If you’re an editor or publisher and can use this material or similar please get in touch. I’ve notebooks full of gems. ↩
This is a great metaphor, in essence he’s saying Xero could stop spending on growth tomorrow and those monthly subscription fees would deliver a respectable profit. However, Drury and Xero have big ambitions and a war chest full of cash to help pursue them. ↩
Xero is burning through cash as it builds a organsiation large enough to deal with its long-term ambition. That means putting feet on the ground; developers and sales people. They all have to be hired now before the revenue stream is big enough to pay their wages. He’s saying here that the point where the revenue is greater than the wage bill is in sight. ↩
Rod Drury’s name wasn’t mentioned on the agenda for the AWS Auckland Summit. So it was interesting to see the Xero founder and CEO chatting to the other keynote speakers as media representatives filed into to the hall.
AWS put Drury on stage early. He talked about the advantages of building a business on cloud services.
That’s something Drury often talks about. More about that in a moment.
Then, almost in passing, Drury told the crowd: “Xero is migrating to PaaS and AWS”.
Xero has been a Rackspace customer. Only two years ago the small business accounting software-as-a-service company moved to a new Rackspace PaaS service.
That’s a blow for Rackspace and a big win for AWS. Xero is a flagship in New Zealand and others here will figure ‘if AWS is good enough for Drury, it’s good enough for us’.
Xero is a major cloud customer. Drury says his business runs 625 servers and has 584TB of data. In the last year Xero had revenues of $160 million, but is responsible for managing a whopping $130 billion of transactions.
Drury says Xero’s move to AWS is all about speed and cost. He says: “Our culture is one of speed. We know if we can go faster than the incumbents we can grab significant market share.
”It’s not the strong that eat the weak the big that eat the small but the fast that eat the slow“, he says.
That speed means Xero can move far faster than its competitors. Drury says: ”We release small bites of functionality quickly“. That is a competitive weapon, last year Xero rolled out 729 software updates.
He says migrating to AWS and investing in PaaS is about bringing down the cost of serving each of his customers.
Despite putting Drury on as a keynote AWS was coy about winning Xero’s business. AWS regional sales manager Tim Dacombe-Bird says ”We’re excited about bringing on Xero as a customer“. But other than to explain the process was through the company’s ANZ region with ”engagement out of the US” there was little detail.
Xero broke the mould when it put accounting software in the cloud. Now, thanks to the Xero iPad app released last month, tablet owners can get the most out of the software.
How did Xero break the mould?
First, it showed accounting works well in the cloud.
It turns out accounting software works better in the cloud than on a desktop app.
Every accounting software brand now in the cloud
The only proof you need is that every other accounting software company of note now also has cloud apps. For me the key is that cloud accounting frees me from needing to sit at my desk when dealing with the books. I can invoice a client on-site or check payments before a meeting.
Cloud also makes data sharing easier.
The second way Xero broke the mould was by taking small business along on the cloud computing journey.
Xero took small business to the cloud
That surprised many because when it comes to technology small business owners are often among the most conservative.
Go into any business area in New Zealand and you’ll find ancient computer hardware, Windows XP and even fax machines.
Small businesses are the main market for accounting software. They were quick to embrace Xero’s cloud software, at least they have been in New Zealand and Australia. And for that matter, they didn’t falter when it came to paying monthly for software instead of buying familiar boxed products.
The speed New Zealand small business picked up cloud accounting, using, what was for most of the people concerned, alien technology concepts, demonstrates Xero’s depth of vision. Normally small businesses are reluctant to swim away from the side of the technology pool.
Last month Xero launched version 2.6 of its free iPad app. Free isn’t quite the right word here because while anyone can load the app on to an iPad without paying a penny, you need a Xero subscription to benefit from the software.
Before last month you could use the iOS app on an iPad, but Xero designed that version for the iPhone and was a touch clumsy on the bigger screen.
Until now if I wanted to use Xero from my iPad I would load up the full browser version. which was also clumsy, especially when it came to using the touchscreen. Maybe delicate accountant hands can drive the software that way. My fat fingers struggled.
The browser version of Xero has always been well designed. The company sells it as beautiful accounting software.
Beauty, not vanity
That’s not vanity. Form and function are always closely tied. Elegant software isn’t just a pleasure to use, it’s easier to use. Who would have thought beautiful would sell accounting software? That was Xero’s fourth breakthrough.
Earlier incarnations of Xero iPad weren’t beautiful. That’s been fixed. And that means iPad owners can get things done quickly and easily without needing to fire up a full-blown computer and a browser.
The new iPad app works in landscape and portrait mode. It takes advantage of the larger screen and will work with TouchID if you have a newer iPad. In practice it works well for writing and reviewing invoices while on the move.
After a month with Xero on my iPad, I find I don’t use it that often. For every three or four sessions on a PC I might use Xero once on the iPad. When I do, I go there to do something specific in a hurry, then get out fast. It’s a time saver and a nice-to-have, not a make-or-break option.