20VC: Xero's Rod Drury on IPO on Day 1 To Hedge Fund to VC & Doing Startups Backward

Rod Drury is the Founder & CEO @ Xero, essentially beautiful accounting software for small business. Xero has received funding from some of the best investors in the world including the likes of Peter Thiel, Accel and Matrix Partners. Prior to Xero, Rod has founded and exited several successful startups including being acquired by QuestSoftware (later acquired by Dell). This success has led to a mass of awards including the likes of NZ Entrepreneur of The Year and NZ High Tech Hall Of Fame. In Today’s Episode You Will Learn: 1.) How Rod came to found one of New Zealand's breakout tech startup in Xero? 2.) What were the very first days of Xero like? How and why did Rod decide to IPO from the start? How did Rod convey the narrative so well from day 1? 3.) What does it take to transition a firm like Xero from a 50 man startup to a 500 an company? What are the challenges? How do you assure a consistent hiring quality and mechanism? 4.) How are Xero doing in the US in terms of fighting Intuit? Is it a winner take all market? 5.) How was the fundraising process for Rod? How did Rod choose and meet his investors? What was important for Rod when making the selection? Items Mentioned In Today’s Episode: Rod’s Fave Book: How the Billionaire CEO of SpaceX and Tesla is Shaping our Future Rod’s Fave Blog: Feedly, Techmeme As always you can follow The Twenty Minute VC, Harry and Rod on Twitter here! If you would like to see a more colourful side to Harry with many a mojito session, you can follow him on Instagram here! The Twenty Minute VC is brought to you by Leesa, the Warby Parker or TOMS shoes of the mattress industry. Lees have done away with the terrible mattress showroom buying experience by creating a luxury premium foam mattress that is order completely online and ships for free to your doorstep. The 10 inch mattress comes in all sizes and is engineered with 3 unique foam layers for a universal, adaptive feel, including 2 inches of memory foam and 2 inches of a really cool latex foam called Avena, design to keep you cool. All Leesa mattresses are 100% US or UK made and for every 10 mattresses they sell, they donate one to a shelter. Go to Leesa.com/VC and enter the promo code VC75 to get $75 off!

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harry Stebbings?

  Welcome to the 20 Minute VC for this very special Founder's Friday episode. I'm your host, Harry Stebbings, who you can add on the old Snapchat @H Stebbings, that's with two Bs. Now, we constantly hear the talk of unicorns and the need for them in our tech ecosystem, but our founder today is the founder of a billion-dollar startup himself. I'm delighted to welcome Rod Drury, founder at Xero, essentially really beautiful cloud-based accounting software. And they have an incredible story, having IPO'd from day one and have then gone on to raise funding from some of the world's greats, including the likes of Peter Thiel, Excel Partners, and Matrix Partners, just to name a few. And as for Rod, he really is a serial entrepreneur with a wealth of successful startups behind him. This success has led to a vast number of entrepreneur...

• 0:44Harry Stebbings?

  New Zealand Entrepreneur of the Year Award, New Zealand High Tech Hall of Fame. The list goes on and on, but it's a 20-minute show, so out of respect for the time, we can't go through them all. And if you enjoy the show with Rod today, then check out my episode with Andy Lark, CMO at Saster, on the official Saster podcast by Jason Lampkin and I. But before we meet the main man himself, did you know that in the late 17th century, getting up in the middle of the night used to be normal for people? People would sleep in two segments, separated by an hour, and then Lisa came into the world, producing their incredible mattress made of three unique layers: one of memory foam and one of latex-like foam, designed to keep you cool at night. With this mattress perfection, there was no need to get up in the middle of the night,

• 1:28Harry Stebbings?

  and the Lisa experience was made even better through the all-online experience, meaning you can order the mattress from home and have it delivered to your door in a matter of days, for free if you live in the UK, US, and Canada, and avoiding that terrible showroom experience. Also, for every 10 they sell, they give one to a shelter, so sleep well and do good by heading over to leesa.com/vc and enter the promo code VC75 at checkout for a whopping $75 off your purchase. However, it's now time to jump into the interview itself, and I'm delighted to welcome Rod Drury, founder and CEO at Xero.

• 2:06Harry Stebbings?

  Rod, thanks so much for joining me today. I've heard a lot about you from Excel, so really great to have you on the show.

• 2:11Speaker 01

  Thanks, very great to chat, really appreciate it.

• 2:13Harry Stebbings?

  Now, I'd love to kick off today by hearing a little about your background and the origins of Xero. I mean, what was the origin story for you?

• 2:21Speaker 01

  Yeah, sure. So I was at Arthur Young before the merger that became EY. At school, I got to see the magic of computing with Apple II computers. And when I was a young sort of IT consultant, you know, so there were some really neat technologies coming out. That was back when sort of Microsoft Windows first started. And really, the game changing tool for me was Microsoft Access, which meant that we could take the results of business analysis and actually build applications that multiple people could use. So I started playing with that at Arthur Young. And then we ended up building our own little software development team. We were doing lots of financial implementations. And I'd always sort of been

• 3:04Speaker 01

  reading the Silicon Valley books about how IBM and HP, Apple, Microsoft, how all of those sort of companies started. And I was just fascinated, I think, coming from a small country, a small set of rocks in the South Pacific, that you could actually build things with your brain that would sell overnight. So we started a little software development team and then built file server, client server apps. And then we peeled out, started our own company. And I've probably done four or five startups now. And I guess the magic moment with Xero was realising all of the innovation that was happening on the consumer internet. You can pull these apps and anyone can just sort of sign on. But having built

• 3:45Speaker 01

  sort of hundreds of business apps, being able to use that technology to just get technology out to really millions and millions of small businesses, we just thought that would be a huge opportunity.

• 3:56Harry Stebbings?

  And what were the very first days of Xero like? I mean, you IPO'd from the start. So how was that? And why did you choose that as the funding route?

• 4:05Speaker 01

  So in New Zealand, back sort of 10 years ago and before, there really wasn't a sophisticated venture capital market. So probably the largest deal done had been maybe two to three million. And there wasn't a lot following up or not. So when I sold my last, I mean, after my hour, we had about 23 staff. And when I started planning Xero, we realised we need about 50 staff from day one. So that's like half a million bucks a month. So we needed years to build a product, you know, start to sell it, all those things. It was sort of fifteen million dollars. So it was way out of of the sort of funding which had happened in our part of the world. But what we had seen was a few other companies, there was a vodka brand called Forty Two Below,

• 4:47Speaker 01

  which had told a great story on the stock exchange and managed to to float. They'd actually sold to Bacardi after about two years. They gave shareholders a pretty good return. So what we saw was, because we had a bit of success, we had really good business reputations. We were able to build up a business plan, basically bank our reputations and go public from day one. So we raised fifteen million dollars at a fifty five million dollar valuation, which some people thought was crazy, but you know, now even in this depressed, crazy market time, you know, in a short time, our company's worth over two billion dollars.

• 5:25Harry Stebbings?

  And what do you think it was about the narrative that you conveyed that was so successful from day one? As you said, it was from literally day one. So it must have been a phenomenal narrative to to IPO and go straight there. So how was that?

• 5:38Speaker 01

  Well, the key thing was the track record of the team. I was involved with Trade Me, which was New Zealand's version of eBay. And it sold that recently for, sorry, half a billion US dollars. So, you know, we'd seen some some really big money starting to starting to flow through. And people were starting to be hungry for tech because I I I'd done a number of successful startups and had a pretty good profile and a good business reputation. We were able to have the credibility to sort of tell the story. And the story was that, you know, if you look at market sizes, consumer is the biggest market. No one really likes to pay for anything. We've seen a lot of computing focus on the enterprise space. But the biggest the biggest market after consumer must be small business who spend trillions of dollars.

• 6:22Speaker 01

  And there was really no cloud company in that space. So we we knew the prize was huge. We told the story of it's a once in a lifetime opportunity to take data that's sitting on individual sort of small business computers. It's not worth much, you know, which isn't really of value and it's just uh broken up sitting on on PCs. But if you bring that into a centrally managed store, firstly, um accounting is the killer app for small businesses. They all their bank accounts are smart once they have business advisors and they all have have to have a relationship with the tax ban. So it's the functionality they all kind of need to have. But also, if you've got all of that data in your cloud environment, you can do some really amazing things uh with it to make business better

• 7:05Speaker 01

  for those small businesses and improve productivity at scale. So in the last twelve months, we processed over three hundred billion dollars of transactions. And already we have over six hundred thousand paying customers who are just passing two hundred million annualized run rate. So um you know, so we told a big story and thank goodness it's all worked out, otherwise we'd probably have to move to Mexico.

• 7:29Harry Stebbings?

  And having had such a big start in the early days, the time of very few employees didn't really happen for Zero. But what do you think it took then to scale Xero from a fifty man to a five hundred man startup?

• 7:40Speaker 01

  Um I think because we did an IPO early on, I was never working in the operating part of the business. I mean, I was selling the business right from day one, selling the story, working with the bankers. So right from day one, I had to put put uh that leadership team in place. And what I've found over the various businesses that I've done is that you really want diversity in that leadership team. You know, you don't want people that are just like yourself, you want people that do the things that you aren't good at. And I think founders and entrepreneurs, you know, can can be great on the vision. Sometimes they're not great on the operating detail and all of those things. So it's great if you can put people like that into a leadership team. And I think that's been the real secret of Zero is that I've always, and right from the start, had been working on the business, not so much in the business.

• 8:25Speaker 01

  So I'm always hiring, finding great talent. And we, you know, we run a really active sort of people strategy. If you're growing it, you know, in the early days, over a hundred percent. And then, you know, e- even now, over having two hundred million annualized revenue. Our last numbers were around seventy percent growth. The business is operating in dog years. So you really are always upgrading talent or what people get to their level. So you might be bringing people over the top. And, you know, so I spent a lot of time building the team, making sure that all the things I see in the business are consistent with the vision that we have. And making sure you've got great people and power to do great work.

• 9:07Harry Stebbings?

  It's an interesting topic, though, that the founder and their role in a company. And do you think, do you take Reid Hoffman's view that a founder doesn't necessarily have to be there for the life cycle of the company? And that sometimes they might exit before, before the end of the company. What do you think of that? Do you think VCs, not VCs, founders are destined to lead the company forever?

• 9:28Speaker 01

  It really depends. So there's a real shortage of founders with lots of experience. I think one of the benefits of coming from a, a small place is you don't normally smack it out of the park on your first deal. So you actually end up doing two or three businesses, usually before you do things large. Even though you always hear the story of the young person that, that does smack it out of the park and does a huge exit in their twenties. So I'm coming up at fifty, my next birthday. And so I've done three or four big things. And, you know, you just have, I think, ha- having, sort of training entrepreneurship as a series of baby steps. You are building more and more skills and you're getting some great lessons, you build good networks. You have some of your own capital from exits, so you can drive the business harder and faster.

• 10:12Speaker 01

  But what I know is that most people are fundamentally flawed in a few ways. So the magic is trying to get a complimentary team that really works together. And, and some founders I see, you know, we've got five hundred small companies in our ecosystem. So I'm dealing with founders all the time. They're brilliant at getting things going. And I think the really mature ones understand what they're great at. And when the business gets to a certain size, they may need to step aside and have. Somebody's come in who is better at that next stage of growth. But it's interesting in our market, so we compete with, you know, three or two, two mainly really large companies, but three companies around the world. Sage in the UK, MYB in this part of the world, and Insure it in the US. And none of those are founder-led companies.

• 10:56Speaker 01

  And there's very few founder-led companies that have, that are of our size, have the capital. We have, you know, over 10 million in the bank and have the history of operational excellence that we've developed. So what I'm seeing, and I think what's really exciting about Xero is we still have that very much founder-led culture. And somehow I managed to scale, I've got no idea how, but I think the key thing is just hiring great people that really drive the business.

• 11:24Harry Stebbings?

  And discussing that international competition, how are you doing in the US in terms of fighting Intuit? And, and, you know, who, who's winning the war?

• 11:33Speaker 01

  Yeah, so, you know, we think the war is global, you know, all businesses are global, everything's globalising. Uber's globalising taxis, Netflix is globalising TV, WhatsApp is globalising, telco. And what we see through our customers is many, many small businesses operating cross-border. You know, when we started the business, you know, it seemed, you know, kind of daunting going against these large companies. But we actually added more small businesses, small businesses globally to our brand than Insure it added to their brand last year. And they spent 1.2 billion to do it, you know, sponsor football teams in the UK and sponsoring the Super Bowl, crazy things like that. Had Oprah speaking at their conference.

• 12:12Speaker 01

  So, so in these, in this new kind of age, you can't just spin your way to it, you really need brand authenticity. So, you know, we've, you know, we're the, we've got 25% of all New Zealand businesses, 10% of all Australian businesses. And we're a leader there, we're the leader in the UK and we've beaten Sage to the cloud. And that's game on inside the US. The US is a very conservative market. And as we tell everybody, it'll take some time, but very pleased with progress. And compared to a lot of other B2B SaaS companies, we're doing very, very well with customer acquisition. But you just see there's a big prize there which will play out over the next three years.

• 12:50Harry Stebbings?

  And we said about spending our way to success there. I'd love to discuss the sales and marketing side of the business. So for a complex SaaS solution like, like Xero, what works when selling and marketing the product have you found in the past?

• 13:04Speaker 01

  Yeah, so what's interesting about accounting software in the small business space is it's the only application with an actual channel. So Salesforce hasn't sold a lot at a very, very small end of town because you can't afford to go and sell to it. Whereas um for an accounting software, there's a network of accountants and bookkeepers. So each accounting partner has three hundred customers that can afford to actually go and spend time with them. And then once you have that electronic relationship with them, we've proven with their very healthy, you know, five hundred company ecosystem. Once you have, um, you know, once they're connected to Xero, it's very easy for them to to buy a whole lot of other business applications that connect into the platform. So I think the first one is having that channel.

• 13:47Speaker 01

  And that's why we think accounting is the big chat application. We we we also do a lot of, you know, direct to small business using all of the Google things. But what you find is is in the big categories, the cost of customer acquisition, what you have to buy to get leads and all of that conversion gets very, very expensive. So I think the the real underlying success and what made has made Xero different is that in our massive category of small business, where we have the application that has the natural channel. And if you look at the sort of the pyramid of large businesses down to, you know, millions and millions of small businesses, the market's very, it's very strata.

• 14:27Speaker 01

  So you have, you know, a a small number of large companies that spend a million bucks a year on their financials. And you come down into the mid-market and, you know, the mid-market companies like NetSuite count their customers in like the ten thousands. And, you know, we're at now over six hundred thousand customers at a very, very small end of town. It's interesting looking at the mid-market where you've got all of the expensive, you know, high enterprise, high cost, high touch enterprise selling, but relatively low revenue.

• 14:55Speaker 01

  So you see companies that don't get their sales model targeted for scale, always drifting up market. And the excitement of small businesses, it's this hybrid of a massive amount of complex business software you need to write, like an SAP, but you have to do it with great design so it's easy. And then you've got to map that with an enterprise sales motion, which we do to accountants. And then a consumer style of sales motion that you do to end businesses using all of the online tools and support. Does that make sense?

• 15:27Harry Stebbings?

  Absolutely, yeah, yeah. And, and we always like to touch on the funding process a little bit. As a VC, sure, it's kind of a must. So before the quickfire round, I'd love to hear how the fundraising process was for you. I believe you had investment from our friends at Axel. Fred Destin was kind enough to provide questions for today. So how did you choose your investors and what was important for you when making that decision?

• 15:50Speaker 01

  I'm not sure if you're at Seinfeld, but I always thought of the, that the, I always believed in the George Costanza theory of management. Every instinct you have is wrong, doing the exact opposite must be right. So we did everything backwards. So, you know, because of the situation we described earlier, we did our IPO first, then we brought in the hedge funds, who, who because of the compression in the US market with VCs doing most of the big deals, the project, the hedge fund guy, sorry, had to go out and find global deals. And then it's only really recently that we've actually brought proper VCs in. And it's been great to have the support of Axel and endorsement from them.

• 16:29Speaker 01

  So I think outside of the US, in the enterprise days, you know, what would normally happen is you build a company up to a certain size and then you sell it to a US public company because, you know, it was the US public companies that were listed, so they had currency. And also, they also had, had the global sales channels already in place, which is very difficult to replicate. So I think naturally in the enterprise world, everything consolidated and got acquired by the big global software companies. In the internet world, we're seeing companies.

• 17:04Speaker 01

  Build for scale from their own country and become truly global companies with truly global financing. So in our situation, we had to do an IPO, it was the only way to really get funded in our own local market. And but that didn't take any options off the table. We got money in from hedge funds from some of the really big investors like Fidelity and Wellington and others like that. And then even lately putting in VC money.

• 17:29Harry Stebbings?

  And then I'd love to dive into a quick fire round with you now. So I say a short statement and you hit me with your immediate thoughts. So your favourite book and why?

• 17:37Speaker 01

  Elon Musk book because I was just kind of warning with Ashley Barnes, who wrote it. He came down to see us in Wellington this week.

• 17:45Harry Stebbings?

  And then biggest productivity tips and tools?

• 17:48Speaker 01

  I've just moved to an iPad Pro. I've got the new MacBook twelve, I got that when that came out. I haven't pulled it out of of of my briefcase since I've had the iPad Pro. Complete game changer. iPad Pro plus keyboard.

• 18:03Harry Stebbings?

  And then the best piece of advice ever given to you or piece that most is most pertinent to you?

• 18:08Speaker 01

  Um, I I think, you know, that that a journey starts with the first step. So lots of people have ideas, you've got to make the ideas happen, you know, ideas are easy, they're free, they just arrive all the time. It's actually taking that step and driving it forward and making things happen, picking up the phone, getting that deal, selling that first, you know, that that first deal and actually getting money for it. You know, you have to start the journey.

• 18:33Harry Stebbings?

  And then your most rad blog or newsletter, what's your kind of must read?

• 18:37Speaker 01

  Um, always been into RSS. So really was sad, I'm a Google reader, broke, so I use Feedly, so I subscribe to lots and lots and lots. I I still read the Apple stuff quite a bit because it's kind of interesting. I'm fascinated in the battle between Apple and Google. I think Google's far more interesting at the moment because of the data and machine learning. But the blog I like, which sort of summarizes everything, is Tech Meme. I find that's the one that you go to and you'll find all of the important tech stories. And one that's important is I think as an entrepreneur, you build this mental model of what's going on. And if you're reading all that news every day, you see little bits that either

• 19:18Speaker 01

  prove or disprove part of your model. And then you start building this really good intuition of where where the market's going and what's happening and that company's not going to work. So like interesting watching Twitter and Square and those types of companies. Because you know what's sort of happening, if you've been following it for years and years is really quite predictable.

• 19:38Harry Stebbings?

  And what do you know now that you wish you'd known when you started?

• 19:42Speaker 01

  That when I, what I've always done when I sold a business and I've done, I'm four now. Is I just get so excited, I go and start the next one. And hindsight, what I should have done was actually take through a four months off between them. I think that would be, if I look back, there's very few times in your career where you have no email. And you don't actually have to do anything and I've just raced to the next one. Rather than actually sort of taking the time. The advice I would give is you don't need to do all in your first few years. I think twenties are for building your base experience. Thirties, you start building your network and maybe you'll start making some money. I'm late forties now and it's still hugely fun and a really exciting industry and have no plans to stop.

• 20:25Harry Stebbings?

  And then finally, the next five years for you and for Zero on that train of thought.

• 20:30Speaker 01

  Yeah, so what's exciting about Zero now is, you know, we've got a whole bunch of thirty and forty year olds in the business. And you're really smart twenty year olds that are really driving the business now, so trying to have those people. Like I had this moment, I was at the Rise Conference in Hong Kong. And I'm doing some business development, I'm talking to a whole bunch of people that are in their twenties and thirties. And I'm like, I actually just want to go back and have a cup of tea. And you actually need to sort of let that next generation come through and do that work. So really focused on, you know, on the next layer of talent coming through Zero. And we have a really great C team and giving them the same message, don't want you guys doing work. Work on strategy and let all the, let the young people do the operational part and gain that experience.

• 21:13Speaker 01

  And then I, I think the big thing which I really like is, you know, we, we sort of jump out of bed in the morning because we want better schools and hospitals. And small businesses is the biggest contributor to GDP. And we have the opportunity and we are seeing it now, we are materially improving productivity at national scale. So being able to tackle some of these big social issues like youth employment. Using the network of our, you know, six hundred thousand, run to a million very soon customers. And letting them at scale deal with some of these big issues is really exciting.

• 21:45Harry Stebbings?

  Well, thank you so much for joining us on today's show, Rod. It's been an absolute pleasure hearing yours and Zero's journey. Thanks for sharing it with us.

• 21:53Speaker 01

  Brilliant. Thank you so much. Really appreciate the support.

• 21:58Harry Stebbings?

  What a fantastic show with Rod and a huge hand to him for giving up his time today to appear on the show. So brilliant to hear the Zero journey. And if you're loving the show and would like to see behind the scenes, then you can follow me on Snapchat @HStubbings or you can sign up for the newsletter on the 20minutevc.com so you never have to miss an episode or an update from us. But before we embrace the weekend, what is a weekend without a lion in a Lisa mattress? And there are many reasons why I love Lisa, but there are probably four main ones. First, it's simply the most comfortable and nice bed I've ever slept in. Second, buying a mattress is a really big deal. It's like an eight to 10 year commitment, so you want to make sure it's right. And with Lisa, there's no concerns on this as they give you a 100 night trial so you can make sure the mattress is perfect for you.

• 22:43Harry Stebbings?

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