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Lessons from Xero's First 12 Months

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The Pre-Conditions: What Rod Had Before Starting

1. Cash from AfterMail Exit (January 2006)

Rod sold AfterMail to Quest Software. The deal structure was complex:

  • ~$15-21M cash upfront
  • Up to $20M earn-out (reportedly didn't fully materialise)
  • Various sources cite $15M-$65M total depending on what's counted

This gave him personal capital to fund the initial build and credibility to raise more.

2. Trade Me Network (Sam Morgan + Investors)

Rod was on the Trade Me board when it sold to Fairfax for NZ$700M+ in 2006. This put serious capital into his network:

  • Sam Morgan became an early Xero investor and board member
  • Trade Me investors became potential Xero investors
  • Instant credibility: "the people who backed Trade Me are backing this"

3. The Co-Founder: Hamish Edwards (Accountant)

Rod's own accountant. This wasn't accidental:

  • Hamish understood the pain firsthand
  • He knew what accountants actually needed
  • He had relationships with accounting firms
  • He worked 12-14 hour days for 3-4 years straight

The Critical Insight

Rod and Hamish asked:

"What if we could get banking transactions from the bank? What if we could connect to the bank on behalf of the business owners and get their accounting data sitting and ready for them first thing in the morning?"

This became the automated bank feeds — the killer feature that differentiated Xero from MYOB and desktop software. Nobody else was doing this.

The Funding Decision: IPO Instead of VC

This was the critical strategic move.

The Problem:

  • NZ venture capital market was tiny (largest deals were $2-3M)
  • Rod needed ~$15M to build a 50-person team
  • US VCs would want a quick sale and would take huge equity

Rod's Logic:

"We probably could have raised money on the US west coast. But asking for $15 million, we'd maybe look at a valuation of $25 million, and I knew the business would end up getting sold quite quickly."

The Solution: IPO on NZX (June 5, 2007)

  • Raised NZ$15M at NZ$55M valuation
  • Rod kept 45% stake (vs maybe 20-30% with VCs)
  • Hamish kept 13%
  • Stock gained 15% on first trading day
  • Fewer than 100 customers at IPO. No real revenue.

Why This Worked:

  • Rod's reputation from AfterMail and Trade Me gave credibility
  • Sam Morgan and other Trade Me investors came in early
  • Public listing = no VC pressure to sell early
  • Could later bring in strategic investors at higher valuations

The First 12 Months: Key Milestones

Date Milestone
July 2006 Founded as "Accounting 2.0"
Early 2007 Private beta
April 2007 Limited release
June 2007 IPO: NZ$15M raised
August 2007 Public launch + automated bank feeds from ASB
Sept 2007 200+ customers
2008 Expanded to Australia and UK

The Channel Strategy: "Nobody Has Made Accountants Sell Software"

This was the second critical insight.

The Problem:

  • End customers are small business owners
  • But accountants/bookkeepers manage their finances
  • Direct-to-business marketing is expensive and slow
  • "Accountants don't know how to sell" — Rod Drury

The Solution: Recruit, Educate, Grow

  1. Quarterly events for accountants — education, not sales pitches
  2. Telemarketers called every accounting firm in NZ (~2,000 firms)
  3. Made accountants the hero — Xero made them look modern, efficient
  4. Result: "Within the first year we had engaged nearly 100% of the 2,000 accounting firms in New Zealand"

Why Accountants Adopted:

  • Xero made THEM more profitable
  • Bank feeds = less data entry = higher margins
  • Cloud = access client data from anywhere
  • They could charge for "advisory" not just "compliance"

The Numbers:

  • 90%+ of Xero's paid subscriptions in AU/NZ came through accountant partners
  • Accountants became a decentralized sales force

Strategic Investments After IPO

Rod "did VC backwards" — IPO first, then brought in strategic investors:

Year Investor Amount Significance
2007 Sam Morgan (Trade Me) ~$2M initially Credibility, board seat
2009 Craig Winkler (MYOB founder) NZ$18M Competitor validation
2010-12 Peter Thiel / Valar Ventures $3M + $16M Silicon Valley credibility
2012-14 Multiple rounds ~$280M total Global expansion

The Winkler Investment Was Huge:

The founder of their main competitor invested $18M. Signal: "Even the MYOB guy thinks cloud is the future."

"At MYOB, we attempted US/UK but the model wasn't scalable. With cloud, this is achievable." — Brad Shofer, MYOB co-founder

Growth Trajectory

Date Subscribers
Sept 2007200+
April 20093,000
Oct 200912,000
201020,000
2012100,000
2015500,000
20181.3M
20264.9M

Summary: The 8 Critical Moves

  1. Had cash and credibility from AfterMail exit
  2. Trade Me network gave access to serious capital
  3. Co-founded with an accountant who knew the pain
  4. Bank feeds innovation — genuinely differentiated product
  5. IPO instead of VC — kept equity, avoided sale pressure
  6. Accountant channel strategy — made accountants the sales force
  7. Engaged 100% of NZ accounting firms in Year 1 through events + calls
  8. Strategic investor raises — brought in MYOB founder, Thiel for credibility

What This Means for Litebooks

Xero Did Litebooks Equivalent
Had co-founder who was an accountant Need accountants deeply involved in product + sales
Bank feeds = killer feature What's the "wow" feature that makes accountants' lives easier?
IPO for capital without VC pressure Different capital strategy needed (bootstrap? strategic angels?)
100% of NZ accounting firms engaged Y1 Aggressive accountant outreach — events, calls, education
Made accountants look good to clients Position Litebooks as making accountants more efficient/profitable
MYOB founder invested Get credible accountant/industry validation early

The big insight: Xero didn't sell to small businesses. They recruited accountants as their sales force by making accountants more profitable. The software was just the tool.

Sources