New Zealand-based cloud software specialist Xero gets a sideways glance from some industry commentators because the company burns cash.
They are right to worry; a high cash burn is often a warning sign.
But not in this case.
Unlike the social media companies and dot-com boom and bust merchants, Xero is sometimes unfairly compared with, the company generates a steady and healthy flow of revenue.
Today Xero passed an important milestone hitting monthly revenue figures, which over a year would add up to $100 million.
That should silence some of the criticism.
Sure, the business is not profitable yet. However, that day is now in sight.
Xero is using its capital to expand the business as quickly as possible. It has momentum, but that needs to keep going until the software-as-a-service operation achieves global scale. In particular, it needs to make inroads into the US market where it faces strong incumbent competitors.
This costs money. Lots of it. One day the spending will stop. At that point, hundreds of thousands of customers will continue paying their $50 or so every month — for years to come.
PC software developer has always been a high-risk business. Software as a service reduces some the risk.
In the past developers would build applications, then, if they had the right product, would earn a one-off sale, and, perhaps, extra for an upgrade every year or so. Although not every customer would buy the upgrades and selling to them could be expensive.
The beauty of software-as-a-service is that revenue comes in regular as clockwork. It predictable and manageable. There’s nothing to update, that happens automatically.
Not so long ago the idea of accounting software as a service was revolutionary. Now it is mainstream.
Xero has already changed the face of the market. Now it is building a sustainable business for the long-term.