Lessons one year in as a public company
Big milestone today as we put out first annual result as public company and checked off where we got to against our offer document issued a year ago.
We only have a few slots a year where we can talk about how we’re doing so for what it’s worth here are some comments and a few things I’ve learnt over the last year that will hopefully be useful to others in the software industry.
Firstly, it’s obviously great to get an IPO away as we did last June. But once the hangover clears you realize that you are on a treadmill and you have to deliver on your promise. There is no hiding. If you screw up you screw up big. And in a small country like New Zealand that means moving to Mexico. To borrow Rowan’s poker betting analogy (you can imagine the hand actions) - it’s an ‘all in’ strategy.
That can be pretty scary but for where I was at in my career I liked the step up in responsibility to do a public company. I believe it is the best/only way to build a significant software company from NZ. All in.
You soon learn it’s a merry-go-round you can’t get off. There are no days off when you are in a public company. You can’t say ‘I don’t like it anymore’. You took the money, you have to deliver. It’s pressure that never goes away.
Because from the start Xero was going to be a public company we engaged great advisors to help us early one. The IPO process and subsequent activities around being a public company are not that onerous. Being public was baked into our DNA from the start. Good governance makes the business better and forces rigor and disciplines that are good practice. This is especially good for the entrepreneur as creates the platform for operation excellence needed for success. I hope other NZ software companies go down this route as well. It just creates better companies.
Having a great board is vital. Our board has a mix of experience and are very challenging but supportive. After a board meeting our management team all feel like we’ve done 10 rounds in the ring but you also know the business is better.
When you plan a business the main things are costs and revenue. You can manage costs, but you can’t directly manage revenue. You can manage the things you do to create revenue but it is not completely in your control.
So made made very sure that we kept our costs within budget. That was completely in our control so we just had to do it. But you take money to invest - not for it to sit in the bank - so you want to make sure you spend up to, but just under, your plan. You can see that in our results.
The revenue curve we experienced was where we learned the most lessons that will be useful for other new SaaS providers.
In most start up business plans you see the infamous hockey stick revenue curve. You see it so much that you discount them. I think we had this in the back of our minds when we did our forecasts 16 months ago we did a more linear curve. But we did experience the hockey stick. With the benefit of hindsight I think we understand why the hockey stick occurred, especially in our market.
A key reason is that accounting systems are sticky. They are not a whim purchase so you tend to validate a change decision with other people. So word of mouth endorsement is a key aspect of the buying process.
You also need to just be around for a while. You don’t change your core information system to a company you have only just heard of.
We also believed that, in our market, accountants are an important validator. We weren’t expecting such a favorable response initially but when they did give us the feedback that Xero was going in the right direction in July/August last year we took the longer term view that we should focus on them first. This delayed adoption as they are less likely to change a customer mid financial period.
That decision also delayed ARPU features we had planned as the accountants message was get the core accounting engine complete first. This was a plan departure which we had to announce. Our philosophy, as an early stage listed company, was to be upfront about what we were doing so we explained that to the market at our half year.
For SaaS vendors the first customers are the hardest. You need to build the base for the word of mouth effect to take place. We took a hand-to-hand combat approach. It was just hard one-at-a-time stuff. Lots of events, presentations and lots of phone dogging. Not glamorous but effective.
It starts off with a sale every few days, then you up to one every day, then 2-3 a day and it goes up and up. 1300 seemed a long way away but we knew that we were building the word of mouth effect and that eventually it would kick in and get easier. It was so satisfying when we got customers that we hadn’t spoken to. With each new software release we’d remove another objection, then another and another.
As we were building out our functional breadth over the year we had to sell what we had, not what we were going to have. That means finding verticals that matched our feature set at that time.
Coming into our first key change over period, March/April in NZ, the hard work we did earlier in the year paid off and customers accelerated quickly.
We noted an unintended benefit of the ’small releases frequently’ model. Normal the feedback cycle for software is so long and often annual or worse. Releasing customer driven features every few weeks accelerated our trust relationship with customers and partners.
We learned, and continue to learn, a lot about marketing to small businesses. This year we tried lots of things deliberately to test what worked and didn’t in the small business market.
The biggest lesson was that small business owners are really busy and that they are not listening for you. Even now I’ll speak at a business event and many people have not heard of Xero. (Did you not notice we listed on the stock exchange last year!). Surprisingly, many accountants we meet still have not heard of Xero. That is a big reality check as to who really cares what you’re doing.
We experimented with newspaper ads and radio. We heard anecdotally that people had seen the ads and they may be good for brand building (which is very hard to measure) but we noticed almost no measurable action from horizontal offline advertising. A PR based approach was much more cost effective and generated many more comments. When we took the message vertical and more tailored to specific industry pain we saw a better response.
We noted it is very hard get people to do an online action in response to an offline message. Online advertising to an online response gets a much better hit rate.
In the end, at this stage in our life, its word of mouth. And that means delivering a great experience, great support and listening.
So how did we do? We achieved our primary objective, hitting the customer number and building that solid base of customers to grow from. We have more cash than planned so that makes our runway longer. I think we have removed the key risk elements and Xero is now all about sales execution. Getting customers in the UK was major milestone.
What was the best part? Having the resources to build a team of talented people and get them all working together to create something special. I just love seeing what our team comes up with and the results of smart people working together.
What would we do differently? There were a few key functions we should have done before launch that took a while to retrofit in later, but I can’t believe how much we’ve got out in the last year. Even more R&D would have been better.
Would you do Xero again as a public company knowing what you know now? Absolutely. In this space you can’t separate your funding strategy from your business strategy.
What’s next? Well last year was about putting the platform in place and doing the things we had to do. This year the fun starts as we exploit that platform. We’re all really excited about the next year!
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Congrats Rod - and thanks for the helpful post. Lots of good pointers in there.
Rod, When are you bringing Xero to us here in the US?
Congrats Rod, Mexico is over rated
Well done rod..
The Kiwi knocking machine has been very kind to you…
Well done Rod, excellent to see such a candid review of progress outside of the required reporting framework. Of course I like the ‘good governance’ endorsement too.
Thanks for sharing - packed with relevant tips.
Even back in the MS/Timex Watch days it was clear you would set the world on fire, and you are.
Well done - may you always live in interesting times
Good to see the result, and you’d be the only Public company CEO giving an open analysis of the results outside of the mainstream, this will be even cooler in years to come when you get the sales really humming.
All the best for the year ahead Xero. Someone had to lead the software industry in this direction, where there’s a comfort with having public ownership and exposure.
If everyone got scared of it, it would never happen, the pioneering is an inspiration, big respect to something the rest of us can only but learn from.
Thanks for the suggestions Rod! We launched a Selling to Small Business Blog to give companies strategies to sell to the hard to reach small business community and I was pleased to see your post! If you are interested in being a guest blogger on our blog to discuss selling to small businesses, just email me!
Keep up the great work!
Evan.