When Xero was planning to list on New Zealand’s stock exchange through its initial public offering ten years ago, there was a gag in Kiwi financial circles about the company which said it aimed to upend the accounting industry.
“Xero,” they’d say, “the first IPO named after their revenues.”
A decade later, the company has more than a million business customers. The share price has risen from $NZ1 on debut to around $NZ27 now. This week it is hosting 3000 customers at its annual event, XeroCon, in Melbourne.
It is still yet to turn a profit, having stuck with its strategy of pursuing growth over earnings. But the company has become a poster child for New Zealand’s tech sector, having blazed a trail for the country’s now-burgeoning tech startup industry.
The company started in an apartment with a ramshackle solution for accessing wifi from a nearby café. It acquired its domain name by flying a fan of a US metal rap band out to New Zealand. Along the way it secured backing from the co-founder of an arch-rival company, as well as from one of Silicon Valley’s most controversial entrepreneurs.
And the revenue is now no longer a laughing matter: in the last financial year it was $NZ290 million, up 44% on the previous year.
Here’s how it all started.
The first Xero
In 1996, young rapper and songwriter Mike Shinoda started recording music in California with high school buddies Brad Delson and Rob Bourdon. They had a few songs on their set list and had fun being teenage musicians.
After finishing high school, the trio started to ramp up their musical career and sought new band members for their “nu metal” rock band. As they met vocalist Chester Bennington, who would later become the internationally famous face of the band, it was clear the group would need to evolve further.
“We had just told Chester that we wanted him to join the band. He said he was ready to move out from Arizona to LA. We went to a pizza place near UCLA to hang out and talk about what to do next,” Shinoda explained in a post on Instagram.
1997 or 1998…I think this was the first photo we ever took together. We had just told Chester that we wanted him to join the band. He said he was ready to move out from Arizona to L.A. We went to a pizza place near UCLA to hang out and talk about what to do next. The band was called Xero at the time, and we probably had less than a half a dozen songs. No flame tattoos yet, no red hair yet, most of us were still in college.
“The band was called Xero at the time, and we probably had less than a half-a-dozen songs. No flame tattoos yet, no red hair yet, most of us were still in college.”
The group soon changed its name to Hybrid Theory. Before their recording debut, they settled on Lincoln Park, in honour of a park in their home town of Santa Monica.
But there was a hitch. The internet domain name for Lincoln Park was taken. The band tweaked the spelling, and would go on to find global fame as Linkin Park.
Xero had done enough to build some profile, though, that someone owned the domain name.
Back in 2006, to most people in Silicon Valley, New Zealand was the remote island nation that formed the backdrop to the Lord Of The Rings movies: a land of mountain scenery, sheep, and sleepy villages; a quiet place, and not the creative well you would anticipate capable of disrupting a global industry thousands of years old.
Rod Drury had already successfully started two companies and exited them for gains of millions of dollars. He was busy as a director of New Zealand classifieds site TradeMe, but had a vision of having a bigger impact on the world.
Craig Walker was working around Wellington as a technology contractor for a range of small business clients that couldn’t afford to have their own chief technology officer.
In 1999, straight out of university, he had worked at Glazier Systems, a software development and consulting company founded by Drury. At first, Walker didn’t have much to do with the boss, but that all changed in his second year.
“I started to get on [Drury’s] radar when I developed a new way to write software, essentially. Out of that, we spun out a company called VIATX,” Walker told Business Insider.
“It was a software-as-a-service company. Some generally good ideas, but with the dot-com failure that was kind of happening around the world, it kind of didn’t go anywhere. That’s how Rod and I worked together the first time.”
Skip forward to April 2006. Walker had long moved on from Glazier and VIATX, and he had a good portfolio of small business customers that kept him busy.
Some of those clients were introduced to him by Drury. They were in enough contact that Drury invited him along to his lavish 40th birthday party, where he was celebrating not just the life milestone but a recent business success.
Just weeks prior, Drury sold his email archival business AfterMail to US tech firm Quest Software for $US45 million. The party was packed, and the drinks were flowing.
Drury was working the room, flitting between guests. Eventually he got around to Walker, and knew what he wanted to say to him.
“Are you about done with this contracting bullshit?” Drury asked the technology specialist. “I’m doing my next thing, we start on Monday.”
Walker was caught off guard. He had a lot of faith in Drury as a businessman but that wasn’t a lot of information to quit on a portfolio of customers which was earning him a comfortable living.
“On Sunday, I had a think about that [offer],” Walker said. “I had no idea what it was. I had an inkling that it was probably going to be again a system… On that Sunday, I actually ended my contracts.”
On May 1, 2006, Walker came in for his first day of work at Drury’s mysterious new venture.
Drury told him his idea to change the world was to build a new suite of accounting software from scratch, without any preconceived ideas from existing players of how it should look, feel and act.
He called it Accounting 2.0. It was a lame brand, and they would quickly realise it.
The software would be stored and delivered over the internet rather than installed on individual computers. Software-as-a-service, as the industry called it, was still rare for small business use.
Most business owners at the time would have been paralysed with horror at the thought of keeping their financial information on the public internet rather than in the privacy of their own computers. But this was before everyone was happily putting their personal information on Facebook and the iPhone was still a secret project deep in the laboratories at Apple.
The term “cloud computing”, of which Drury’s product would later become a prime example wouldn’t be introduced to the common business language until more than three months later, when Google’s then-chief executive Eric Schmidt talked about it at a conference in the United States.
“It really was a once in a lifetime opportunity, where it wasn’t just about providing good accounting software, but the data that was sitting on individual PCs. Once you’ve got it into a central store, that was actually really interesting,” Drury said.
“We didn’t know exactly the value it would have, but we just knew it was inherently valuable, and it would give us lots of opportunities to do stuff with the data later on.”
This was the bet. Gather data, store it in a central place, and figure out how to unlock the value in it later.
It may seem obvious now in a world where data powers vast businesses like Amazon and Google, but back then it was a gamble.
Walker recalled that, three years earlier, Drury had shown him a basic prototype of a new accounting system. The entrepreneur, having studied information systems at university, had technical skills himself and in 2003 was able to mock up a model of his big idea – but it was never spoken of again and Walker had long forgotten about it.
But there was never a doubt in Drury’s mind who he’d bring in when he was ready to go with his grand plan.
“Craig is one of the best developers I’ve met in my previous lives, and I was just really keen to get him in, he’s incredibly fast — incredibly clever.”
With Walker not having any knowledge of accounting, this was a risky project for him – but he immediately felt at peace about walking away from his safe contracting gigs.
“Rod is usually good at taking bets on stuff,” Walker said.
“I was 28 at the time. It just felt like it was the right time to trust him, and get a good opportunity to work on the ground floor of something.
“And I’d do it again. I’d do it again a hundred times over.”
Numbers are beautiful
Despite making great money out of Glazier Systems and AfterMail, accounting had been on Rod Drury’s mind since he was a teenager.
“I first got into accounting and bookkeeping at Napier Boys High [School],” he said at the Xerocon conference in Brisbane last year.
“We had a fantastic teacher there – Fred. There were three or four of us, the naughty people. I don’t know what was the decision that allowed us to pick bookkeeping as a subject for 5th, 6th and 7th forms. But I really loved it. I loved that we could get a trial balance, we would do journals, and we had to come up with a P&L and a balance sheet.”
Looking back, he said he and the other “smart” kids in that class were likely the types of people that enjoyed doing puzzles.
“We loved solving the problems. There was this mathematical beauty in accounting. We loved the equation that debits equalled credits,” Drury said.
“We’re probably the same sort of people who really like sudoku. There’s a mathematical elegance in accounting and getting accounting right.”
He finds the equilibrium in accounting — balancing debits and credits — profoundly satisfying.
“Accounting is almost like e=mc2, it’s almost like the golden ratio, it’s like pi. There’s this underlying magic if you get the order of things right.”
It was also at high school that Drury formed an interest in computing.
“At Napier Boys High, we had the first Apple IIe computers coming in and we did programming at the same time [as learning accounting].”
Drury went on to complete a computing degree at Victoria University in Wellington, specialising in accounting and information systems. Then in 1987 he joined consulting firm Arthur Young, which later became Ernst & Young.
He remembers his bosses, when he was a fresh graduate, instructing him that he must do a year of auditing – a grinding, detail-driven, and mainly thankless rite of passage for younger consultants.
“I said that’s great, I’m happy to do that. It was a fantastic experience. I got to learn a huge amount of things, which turned out to be quite relevant later on.”
Drury was out of auditing duties after one year and one day.
“I then had three or four years working with some real thought leaders around information engineering… And as we went through the merger of Ernst & Young [in 1989], we implemented lots and lots of financial software and it used to bug the hell out of me that none of them were really clean. You couldn’t just pull out information like you should.
“That stuck with me for many, many years… The magic of getting accounting and software together is really important.”
Drury is not the stereotype of the unicorn startup founder. With his crisp New Zealand accent and radio announcer-like enunciation, he is engaging both on stage and in one-on-one conversations.
It’s clear he likes people, and transmits his passion instantly: a drive to use software to make life easier for people stuck doing the books when they would prefer to be building their business.
Perhaps this knack for evangelism was born out of those early days in 2006 when he had to motivate his first employees – including Craig Walker – to share the same vision as him for Accounting 2.0.
“We got the book Accounting for Dummies — because many of our very first programming team hadn’t really been exposed to [accounting].
“And they started to see the magic of it as well.”
The chaos of apartment 404
In New Zealand’s most populous city, Auckland, there’s an exhibit called The Innovators at the Museum of Transport and Technology (MOTAT). It celebrates the nation’s innovation, entrepreneurship and ingenuity.
It features a recreation of Craig Walker’s dining room from 2006, where Xero started.
The actual table where he wrote the first code to turn Drury’s vision into a working product is the centrepiece. The installation also features video narrative from Drury, Walker and his ex-wife Catherine, who also ended up working for the new software venture.
As the technical framework took shape in that dining room, Walker hired three software engineers and three designers – and the new team needed a place to work.
The answer was an apartment in downtown Wellington, on 60 Willis Street.
“It was a studio apartment. Not even a galley, but a little kitchen, a bathroom and that was it… It was really small. It was grey. It had grey carpet. Grey walls. Very simple, small apartment, about 50 metres square,” Walker recalls.
The tiny flat was soon filled with cheap office furniture, and eventually accommodated 14 staff. The entire team was coming and going all hours to get Accounting 2.0 off the ground — much to the bemusement of the other residents in the complex.
“The guys next door would come home at like five, they’d ask us how we were. Then you would get sort of this waft of marijuana coming in,” says Walker.
“I think we were legally working there. I’m not entirely sure whether you were allowed to start a business out of an apartment.”
Remarkably, the number of the apartment was 404 – the error code for a “page not found” returned on web browsers. A terrible omen for a software-as-a-service company, if you were the superstitious type.
Drury remembers the chaos of 14 people crammed into a studio flat, all while outside guests constantly went in and out.
“There was only one bathroom…. It was all quite an intimate experience, and we had lots of people coming and doing interviews,” he says.
“I remember there were a couple of MPs [members of parliament] that lived in the building… and we’d be having these business meetings, and people coming up into this residential apartment building.”
At this stage, Drury was still busy with his other ventures – he was a director at TradeMe and worked as a sales evangelist for Quest Software, the company that bought out his AfterMail business. He would occasionally poke his head into 404 to check on progress.
“I was still kind of learning how to build it, because I didn’t have any background in accounting. [Drury] would come in and throw accounting questions at me, and so I kind of threw ideas back at him and if I answered them in a way he proved them,” says Craig Walker.
“There were some great implementations and great discussions around some of the early product features that still exist today.”
Catherine Walker, when she first started working at apartment 404, was alarmed by the ferocity of the debates between her husband and Drury.
“I remember in my first week, being quite nervous and scared of what I thought were these terrible arguments,” she says in the MOTAT video.
“That was quite nerve-wracking to start with, thinking, ‘Well, I’ve signed up into this company where all these people do is shout at each other all the time.'”
But it wasn’t personal. Norwas it a reflection of a doomed relationship – it was just the way Drury and Craig Walker worked to make the right decisions as the first version of Accounting 2.0 took shape.
After she joined in December 2006, Catherine, as the fresh and non-technical voice, often acted as the circuit breaker.
“That was an interesting time for me too because I would need to butt in to some of these robust discussions and ask a question,” she said.
“‘Why would I click this button?’ or ‘Why do I now go to this screen?’, which was the kind of naivety that we needed to bring to that whole productisation element. So that would sometimes spark another conversation because everybody would be like, ‘Oh, yeah. Why is that button there?'”
With not much funds, renting a residential flat wasn’t the only penny-pinching measure in the early days.
“The internet was a bit of a challenge there, but there was this thing called Café Net, which was you bought $50 for prepaid internet and you [could] get it if you were in a café,” said Catherine Walker.
Craig Walker recalls that the $50 bought unlimited data for seven days, but it was only available at certain cafes.
“We realised that we could pick up [a wifi signal from] the café across the street. We could pick up the internet kind of very, very loosely,” he said.
Then they found a way to get a full signal: hanging a metal rod attached to a wifi extender off the balcony.
“So every morning… the first thing was to hang the rod out over Willis Street, otherwise, we wouldn’t have any internet for that day.”
It was a time for creative thoughts and trial-and-error. Both Drury and the Walkers speak of apartment 404 with great fondness.
“One of the guys had an idea on the back of an envelope, on the way to work. We completely built our journal engine off the back of that,” Walker says.
“We kind of threw a bunch of stuff at the wall to see what would stick. We weren’t looking at what other products were doing. We were making it up as we were building.”
‘You can’t have a name like that’
The new software venture began life as Accounting 2.0, but the name never felt right.
“It was a stupid name. You couldn’t have a name like that,” said Craig Walker.
The decimal point meant it was impossible to register an internet domain name anyway. It could never have a website with its brand as the URL.
“No one else liked it,” Walker said. “We actually had an intervention and basically said, ‘this is not good’.”
Drury remembers they specifically wanted a four-letter name.
“We felt that, ideally, it would be four letters — we wanted to be as big as SAP, something that was as strong as them.”
As a platform intended to represent the “beauty of accounting”, Zero was a strong candidate. But it was soon apparent many other people liked the brand too: the zero.com domain name cost $US100,000 to “even start the discussion”, according to Drury.
Then his friend, Dot Johnson, came up with an idea: spell Zero with an “X”.
Everyone loved it. There was just one problem.
“Xero.com [was] actually a Linkin Park fan site,” said Walker. “And the footer of the website said ‘This domain is not for sale’.”
The administrator had named the fan site after the original band name of Linkin Park. Initially, the owner wouldn’t budge, but as the conversation went on with the domain owner, Drury and Walker found a glimmer of hope.
“I think he just had a baby, or just got married, so he was actually just running low on cash,” Walker says.
The Linkin Park fan said he’d previously rejected an offer of $10,000 to give up xero.com. Drury realised he’d need to do something out of the ordinary to convince the guy to part with it.
“So I said, ‘Well, why don’t we buy you a couple of business class tickets from New York down to New Zealand and we’ll look after you?’ That got him kind of interested.”
The xero.com administrator was wined and dined, and taken around to see the sights in New Zealand. Having softened him up with Kiwi hospitality, Drury finally convinced him to take $US20,000 for the domain name.
So, thanks to an American rock band changing its name in the previous decade to commemorate a Santa Monica park in their home town, Accounting 2.0 died as a brand, and Xero was born.
“Finally we had a brand that we could do something with,” Drury says.
Old, new, and the IPO
On 24 July 1845, 28-year-old Englishwoman Mary Taylor disembarked from a ship in Wellington harbour. Her brother William Waring Taylor had already settled there and despite a comfortable middle class life in the old world, she travelled out to the fledgling colony – a dangerous months-long sea journey in those days — to start anew at a place where women had opportunities to control their own destiny.
Taylor opened a general store on Cuba Street, itself named after the settler ship the Cuba. Her cousin Ellen Taylor joined her from the United Kingdom in August 1849 and the business flourished, according to FL Irvine-Smith’s Wellington history book Streets Of My City.
Mary Taylor reportedly even wrote articles for English newspapers and worked on a novel while running the shop on Cuba Street. But after Ellen died of tuberculosis in 1851, she started to miss her acquaintances in England, including her close friend Charlotte Bronte.
“It is apparent from her letters that in New Zealand she missed the literary associations of her friends, and felt isolated, mentally and physically, especially when the mails brought from her beloved Charlotte such ‘incredible’ achievements as Jane Eyre and Shirley, with news of their repercussions,” Irvine-Smith wrote.
While Mary Taylor returned to England in 1859 or 1860 to live out her remaining years, she had set a precedent of risk-taking, independence and entrepreneurship on Cuba St that remains to this day.
“Cuba Street is Wellington’s centre of creativity and cool,” said Mark Clare, managing partner at Clare Capital, a corporate finance advisory firm in Wellington.
“At the northern end of Cuba Street you will find the head offices of two ‘unicorns’ — technology companies with values over a billion dollars. Both of the companies were founded in Wellington in the last 20 years. TradeMe in 1999 and Xero in 2006.”
Classifieds site TradeMe was worth $NZ2.1 billion and Xero $NZ3.7 billion by market capitalisation at the time of writing.
Clare said that while New Zealand has produced many technology companies that have been around for decades – such as Datacom, Fisher & Paykel, Gallagher and Jade — the sale of TradeMe 11 years ago is considered a landmark event in the local tech industry.
“From a financial perspective, New Zealand technology’s ‘Big Bang’ was the sale of TradeMe in 2006. A company started in 1999 was sold less than seven years later for $NZ750 million to Fairfax.”
Rod Drury was a board member of TradeMe at the time, but he was also busy doing the sums to try to get Xero off the ground. He figured he would need $NZ17 million to sustain a business with close to 50 staff – for three years to develop the accounting software into a commercially viable product.
Even in today’s terms, that’s a lot of money for a company not generating any revenue. In 2006 it was even more difficult to find that much in a tiny country with not many more than 4 million people and a practically non-existent tech venture capital pool. Drury was adamant that he would not go to Silicon Valley to raise funds, however.
“We probably could’ve raised money on the US west coast, but if we were looking for $NZ15 million, the company would’ve had a valuation of around $NZ20 million, meaning the venture capitalists would’ve got most of the business,” he says.
So there was only one way to get that much cash. An initial public offering.
“Our only option really was to tell a big story, and explode early from day one. And [the IPO] allowed us to raise $NZ15 million at a $NZ55 million evaluation. So we still had plenty of equity in the business, but we had enough capital to be successful.”
Like Craig Walker, “mum and dad” investors would be asked to take a leap of faith based on little more than Drury’s vision and track record.
“In some respects, the IPO was an IPO on Rod,” Walker says.
“And we told people that invested at the time straight up.”
Mark Clare remembers the 2007 IPO well, including the criticisms that it exposed unsophisticated investors to a risky venture that hadn’t yet even had a product to sell.
“The sledge at the time was: ‘Xero, the first IPO named after their revenues’,” he said.
“Xero listed very early, with limited revenues, raising $NZ15 million from 1,100 retail investors — not funds.”
But Clare agrees with Drury’s logic for going to a public float.
Drury “had private market options, but the IPO delivered more capital at a higher valuation than other options,” Clare said. “Xero was a high-profile IPO offered by leading financial institutions to retail investors — there were risks but these were clearly articulated.”
Much like Mary Taylor did 160 years earlier, Rod Drury and Xero took a big chance on Cuba Street to control their own destiny. And as is the case with many companies, internal history shapes some of the present, and legacy features of how things worked in the founding days are still seen at the firm today.
Those winter days of Rod Drury and Craig Walker yelling at each other in apartment 404 has now grown to a corporate culture in Xero now known internally as “diversity of thought”.
While that first era of solving problems with a clash-of-ideas seemed chaotic to witnesses like Catherine Walker, the approach has persisted to encourage current-day Xero teams to be inclusive of different points of view.
Craig Walker remembers that even as a struggling startup building the first prototype, a variety of people with distinct skill sets were deliberately hired to provide this diversity.
“We had a sales person very early, we had quality assurance people pretty early. We had accounting. Experts in their field. We had help writing, and a product manager as well as the designers and engineers — it cost us really a fair bit,” Walker says.
“It was about kind of building lots of ‘diversity in thought’ very early on.”
Australian general manager of product development, Laura Cardinal, joined the company in 2014 but says she still feels the cultural legacy from those early days.
“We understand how we’re going to have an argument, in a way, but also why we’re doing something,” she says. “Rather than the process, it’s the principles.”
Even in expansion offices like in the USA, this holds true, says Xero USA vice president of products and partnerships Herman Man.
“We have diverse opinions. It’s the collective diverse opinions that come together to form a much better solution,” he says.
“And through that process, of course, there’s going to be tension, but for us it’s healthy tension. It’s how we arrive at a better solution.”
For Walker, having an understanding of diversity at Xero is essential to walking in the shoes of their customers – small businesses.
“Small businesses are complex and diverse and they’re global. And there could be one person. There could be 20 people, it could be 200 people. There are just a wide array of different businesses that make up what is the small business market. So having that diverse set of experiences, that diverse set of mindsets, enabled us to have conversations that could take things in completely different directions.”
The president of Xero USA, Keri Gohman, who joined the company last December, says that the software company is the one place in a long career in finance where she felt it was acceptable to “be yourself”.
“Often I’ve joined companies when you walk in the door, and you think ‘What’s the culture, how do I need to adjust my style so that I can be successful?’ … but Xero’s just been a place where everyone is uniquely encouraged to be themselves.”
This freedom to “be yourself” extends out to another word Xero employees use regularly: “family”.
Cardinal says if there is a family-like understanding that employees’ life outside of work would be supported then staff are more motivated to put in extra when the company really needs them.
“I remember in my induction here Rod was on a [Google] Hangout – for every single newbie that starts, he gets on a call – and his words were ‘It’s a sunny day outside. If you want to go for a surf then go for it. Just don’t take the piss.'” she says.
“And we laughed, joked and thought ‘yeah, right’ — but it’s true.”
Xero leaders see a broader benefit in this approach. In organisations with a firm shared vision, Cardinal says, staff can be so passionate about their jobs that they take accountability for managing their own energy levels and avoiding burnout.
“You want to make sure you’re doing 110%, so when you do decide to take a day off, you don’t feel guilty about it. Not that anyone’s making you feel guilty – I think we’re just programmed that way, and there’s ‘unconditioning’ you have to do.”
Cardinal has two daughters and in the last couple of years, the constant flying necessary as a manager looking after teams in Melbourne and Wellington has made time a precious commodity.
“It would be quite common for me to say, ‘I’m home, I need a Monday to catch up on my life’ — because that’s important,” she said.
“If you don’t have time for yourself, you don’t have time for the company. For any job, right? And for me, I think I’ve learnt that the hard way personally because I do love what I do and love working.”
For Cardinal, it’s vital that the time off is used to refresh and concentrate on herself – not for it to be entirely consumed with domestic and family duties.
“I had to stop and create some time for me. That’s not my family, that’s not Xero, that’s actually me in the middle,” she says.
“And when I programme that time in, it’s just amazing how much better the rest of the day is and how much my life is. It sounds simple, but it’s true.”
This individual accountability is present in other ways around the company. Trent Innes, MD of Xero Australia, has a philosophy that he directs all employees to live by. The idea is that everyone in the company, regardless of their seniority or role, must wash their own cup.
“If you go to our kitchen, you’ll find that there’ll be no coffee cups piled up,” he says.
“It’s about ownership. As soon as you become too important to wash your own coffee cup, you’ve reached a different level of hierarchy. But I want what I call the ‘hierarchy of hows’ to be as flat as possible.”
Innes says even though everyone’s roles are different, he wants a unified approach to tackling problems – the “how” should be the same for everyone.
“If you can keep that ‘how’ working really well, then you find you have no hierarchy in the organisation. And it allows you to have a really flat structure, where people are empowered and they own things.”
The flat hierarchy circles back to the “diversity of thought” theme seen in the robust conversations back in apartment 404. If the boss is seen different to or distant from the rest of the team, free exchange of ideas would be hindered.
Drury says the importance of diversity is one of the biggest things he’s learnt over three decades of entrepreneurship.
“Not just sort of physical diversity or gender diversity — but having diversity of thought. If you can have a complementary team that respect each other and work well together, you can do completely amazing things. You’ll always address problems from different perspectives.”
The ex-rival with a $25 million offer
Diversity is also evident in Xero’s share register. Having started life supported by a thousand retail investors, the company would later take money from some surprising backers, including the founder of a competing company.
It was 2009, three years since the apartment 404 period and two years since the IPO. The company now had a small local customer base and the promise of success seemed far more realistic than ever before. But the original three-year plan that Drury had in mind at the IPO was starting to run out.
Xero needed around another $NZ7-8 million to scale up to something bigger than a Wellington startup.
As a business operating in New Zealand and Australia, the biggest rival for Xero was – and still is — the desktop software package named MYOB. Established in 1991, the Australian company was dominant in the small business accounting software market by the time Drury started Xero.
Even though Drury knew MYOB was his competitor, the company’s co-founder Craig Winkler was a rockstar to the Xero boss.
“I’d been watching Craig — he was always a hero of mine,” Drury says.
“I’d been watching him a while closely, and I saw MYOB was moving down the private equity route. When it had all those private equity people come into it [from Archer Capital, in early 2009], Craig got moved to chief innovation officer, then left.”
MYOB likely started with similar objectives to Xero in helping small businesses succeed, according to Drury, but the takeover oversaw a transformation from a “founder-led business” to an investor-first machine.
But it did give Winkler $125 million in cash to play with.
“So I just figured that obviously Craig would be fascinated at what we were doing, and I’d really would like to meet him. So I put out through my networks that I’d like to chat to him, and within a few days, I had an email from Craig Winkler,” Drury says.
“I was jumping out the chair, saying ‘woohoo’!”
Within a few days, Drury flew to Melbourne and bought some takeaway coffee to bring into his meeting at Winkler’s office.
“It was actually a private banker’s office. I took out some coffee, which he thought was strange — but we always do that.”
Drury pitched frantically for more than two hours. Xero needed $8 million and he had one chance to convince Winkler to back him.
Drury paused, took a breath and posed a question. “What would you do if you were me?”
Winkler replied: “Let me give you $25 million.”
Drury was stunned. That was more than triple what he’d spent the last two hours trying to convince Winkler that the company needed. And what’s more, it would have given the Australian a larger slice of Xero than Drury himself.
“You can’t put in that much,” Drury told him.
(Winkler these days is shifting out of the business world and ramping up his philanthropic activities, which he prefers to work on in private. Business Insider was unable to speak with him for this article.)
Drury says Winkler was trying to teach him in Melbourne that day in 2009 that you’ll always need much more money than you think. Winkler would know, having been in Drury’s exact situation a decade earlier with MYOB. He knew precisely what the startup was going through, and what it would face in the future.
“So he ended up putting in $NZ18 million and became the second biggest shareholder. And he’s been a great shareholder ever since. I’m very proud, and remind him often that he’s made more money out of Xero than he made at MYOB,” says Drury.
Winkler had indeed made more than six times his initial investment by the time he sold off $NZ15 million of shares in November 2012. At the same time, Xero co-founders Drury and Hamish Edwards also wanted to cash in $NZ5 million and $NZ2 million respectively.
It was time to get more backers in. One would be a major US tech industry player who, years later, would become a divisive name in the startup and investing communities: Peter Thiel.
“I’m so mystified by your endorsement of Trump for our president, that for me it moves from ‘different judgment’ to ‘bad judgment’.” This is what Facebook board member and Netflix chief executive Reed Hastings reportedly said in an email of August last year to Peter Thiel.
Thiel is also on the Facebook board. Hastings was acting in that correspondence in his role as chair of the committee that evaluates board members.
“Some diversity in views is healthy, but catastrophically bad judgment (in my view) is not what anyone wants in a fellow board member,” Hastings wrote, according to the New York Times.
Thiel was born in Germany but moved to the US as a baby, spending his childhood there and in Africa, as his father moved the family around on work requirements.
Thiel made his name and fortune as a co-founder of payments provider PayPal, which would later lead him to work with Elon Musk. He was also an early investor in other companies that would become titans – including putting in $US500,000 to become Facebook’s first external investor in 2004. He later sold that stake for more than $US1 billion in 2012.
In October 2010, Thiel purchased a $NZ4 million stake in Xero through his company Valar Ventures. His involvement came at a time when Xero was looking at entering the US market, and Drury hailed Thiel at the time as a “hero” and among “the global leaders in internet” that were supportive of his company.
“We’re really proud that they are enthusiastic about our business, understand what we’re doing and that they want to help us,” Drury said at the time.
Thiel is recognised for his business acumen and has some deep and fascinating philosophical views on society and history, but he has lately become a divisive figure in Silicon Valley, mainly for his political views. He has financially supported Republican candidates at various elections, and wrote a book in the 1990s that railed against political correctness.
He gained even more political profile last year after Carly Fiorina, a former tech CEO Thiel was supporting in the race for the Republican presidential nomination, dropped out of the contest. Thiel threw his support behind Donald Trump.
Thiel spoke at the Republican National Convention in 2016, to enthusiastic applause. “Fake culture wars only distract us from our economic decline,” he said. “And nobody in this race is being honest about it except Donald Trump.”
After Trump’s election victory, Thiel was on the president-elect’s transition team, and sat next to him at the January tech leaders’ meeting that featured execs like Amazon’s Jeff Bezos, Microsoft’s Satya Nadella and Apple’s Tim Cook.
The additional scrutiny that came with being a high-profile Trump supporter led to resurfacing of comments in a 1995 book Thiel co-authored with fellow PayPal founder David Sacks — “The Diversity Myth: Multiculturalism and Political Intolerance on Campus”. They theorised a woman with “belated regret” might “realise” days later that she has been “raped”, and that “the rape crisis movement” was as much about “vilifying men” as raising awareness.
“More than two decades ago, I co-wrote a book with several insensitive, crudely argued statements,” Thiel said. “As I’ve said before, I wish I’d never written those things. I’m sorry for it. Rape in all forms is a crime. I regret writing passages that have been taken to suggest otherwise.”
While Thiel’s politics have been in the headlines recently, back in 2010 he was a tech industry megastar. As New Zealand media revealed this year, Drury supported his application for a waiver around the usual Kiwi citizenship requirements in 2011.
Thiel was reportedly granted New Zealand citizenship in an overseas ceremony in August of that year, despite admitting to immigration officials that he didn’t reside in the country and never intended to.
Drury has no regrets over his reciprocation of Thiel’s support by helping him attain citizenship.
“Over more recent years, the whole concept of equality’s become a big deal here. Politically, it’s a different time, it doesn’t play out as well, but my view is these people add a huge amount of value to New Zealand,” he says.
“At the time, we were just so blown away that someone of Peter Thiel’s reputation was interested in being a Kiwi.”
Drury says he usually catches up with Thiel a couple of times a year, although they’ve not met in the last 12 months due to time pressures. And Thiel this year sold down almost $23 million of his Xero shares to slip down from 6.7% equity at one point to 4.8% — putting his stake under the 5% disclosure threshold.
“He’s very constructive, and challenges you, he wants to deeply understand what’s going on. I think he liked that we were really frank,” Drury says.
“Smart people always like to interact with other smart people, and learn things from heading one direction, and Peter was one of those people that always chats to you, and you always come out of the room smarter.”
Finding a purpose
Australia hosted the G20 summit in 2014. Running in parallel was the B20 business leaders’ summit, and as host, Australia invited its close neighbour New Zealand to attend as the “twenty-first country”.
As one of NZ’s leading entrepreneurs, Drury was chosen to speak at the closed-door meeting.
“One of the big issues that came through at the conference was youth employment. Everyone was talking about it,” Drury recalls.
“We hadn’t really thought about it that much, but what we realised was, yes, we have internships and we have graduate programs, and all those good things, but there aren’t enough large companies to move the needle.”
There was a collective acknowledgement that small businesses also needed to create jobs to make a real impact on youth unemployment.
“Small businesses move the needle by each adding half a job to a job. And we realised that, really for the first time using our accountants’ channel, we could… drive urgency through millions of small businesses.
“And that was a real, ‘a-ha’ moment for us. We realised that we had a pathway to do something that was really good… Working with those customers, we could educate them.”
One can hear how much this new-found purpose energises him. Drury believes it’s an authentic way for his business to give back..
Xero brought in experts to create an education pack for its client base. The company was armed with ready information to teach small businesses how to find young workers, how to manage them, what the rules are on wages and probation periods — all to help them take on more young people.
It’s OK to play the long game
Although it’s been 11 years since Drury summoned Walker at his 40th birthday party and 10 years since the company floated on the NZX, Xero remains a growth-first venture. It has focused the entire time building up its customer base and has not posted a dollar of profit along the way.
Blair Galpin, analyst at New Zealand investment firm Forsyth Barr, said earlier this year that Xero’s continued losses should not be a concern – yet.
“Our view for some time is Xero could be profitable if it was willing to forgo a lot of its push for growth — so it’s a choice.” he told Stuff.co.nz.
Xero reached the 1 million customer mark in March, when Drury celebrated with some relief that he was able to fulfil a promise he made years before.
“Five-and-a-half years ago, at 50,000 subscribers, we asked shareholders to imagine our business at a million subscribers,” he said.
“We invested for the long term to build a business and ecosystem to achieve those numbers.”
Galpin said the milestone was remarkable, considering the company started with zero customers just a decade earlier.
“What it has done is help support a strong technology investment story in Wellington, and to a lesser extent Auckland.”
Clare Capital’s Mark Clare says Xero’s success has seen other Kiwi companies emulate their journey, building software-as-a-service products for the business, rather than consumer, market.
“Like New Zealand rugby players, there is a healthy pipeline of talent coming through. Private companies that we see leading this next wave — utilising the ‘Xero-model’ — include ARANZ Geo, Vend, Cin7, Timely and Raygun.”
The company that has gone the furthest along the same path as Xero is fintech Pushpay.
“Pushpay was founded in 2011 and completed an IPO valuing the company at $NZ50M on the NZX in 2014. Today Pushpay has a market capitalisation of $NZ556M – an 11-fold increase in value in three years.”
This post-Xero crop of startups are different from previous generations, Clare says, because they have tangible sales backing up their business.
“All of these companies have real software-as-a-service revenues with more than $US2 million in annualised recurring revenues – some well more than $US10 million in annualised recurring revenues,” he says.
“Companies can show investors material revenues that are growing, and often growing faster than 100% year-on-year.”
Drury says Xero has given new confidence to New Zealand startups and investors that it’s okay to “play the long game”.
“We weren’t used to building long-term business of scale. The kind of play for Australasian companies was: you build out a better technology to a certain size, and then quite often the US company or public company would come and buy you out. I’ve done a few of those, and some other New Zealanders and Australian businesses have done the same.
“That was the technology scene in the 1990s, because it was really hard and personally very difficult with all the travel, to build long-term businesses. So you get into a point and you’d sell them, and everyone was happy.”
Xero’s growth has led to some excited comparisons. Credit Suisse once called it the “Apple of accounting” and Drury was introduced to the crowd at XeroCon in Brisbane last year as a person who was “doing for accounting what Steve Jobs did for the phone”.
Drury isn’t thrilled with Apple comparisons, though.
“I don’t like their secrecy. There’s bits of Apple I don’t like — I do like that they do some cool stuff, but I think they could be more customer-centric and a bit more open about what they’re doing. Because a lot of people are very invested in their journey.”
Drury says two people that inspire him at the moment are Tesla founder Elon Musk and – having recently launched a Singapore office – that city-state’s first prime minister Lee Kuan Yew.
“Some would say [he’s] an authoritarian, but he had a really clear vision and took people along on a journey that really drove an outcome,” he says.
“He’s somebody who had a real clear vision, he had a real sense of purpose, and you look at how that moved Singapore from a swamp to a vibrant city in a single generation… I’ve been fascinated by the strength that he had to drive an outcome, and I’ve taken a lot of inspiration from that.”
LKY’s style of leadership is something that’s missing from modern western political discourse, according to Drury.
“They have been re-opened to immigration, because they knew that the Singapore people would build networks and have skills… If you hear them speaking, it’s like, ‘we’ll start off as the managers, then we become the general managers, then we become the global executives of these companies that are investing here’.”
“[Singapore] also pay their ministers really well, so that people can move in and out of the public and private sector. You feel like Singapore plays as a team, and they have a real purpose, and I think that kind of leadership is something we haven’t really seen in the west for a long time.”
While Drury plots the path to world domination out of Wellington, Craig Walker now plies his trade in the New York City office. In a 28th St office near the Flatiron Building, he loves his life in Manhattan leading a team of developers that work on “strategic projects”.
“My ex-wife and I wanted to move, and we wanted to move to New York at some point. We got the opportunity to move to San Francisco… Then once that got the ball rolling, we came over here, which is where we wanted to be,” he says.
“I’m still programming every day. It’s what I love to do.”
He’d do it all again. He’d do it a hundred times over.
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