Even on a cell phone from nearly 9,000 miles away, you can feel Rod Drury’s energy.
The co-founder and CEO of Xero, the cloud-based accounting software company that this year made it to the top of 2014’s Innovative Growth Companies list, Drury was speaking enthusiastically from his base in New Zealand about what led him and Hamish Edwards to found
“It always upset me that big, financial software was so hard to actually extract information from,” he said. “We began to see what was happening in the consumer web—that you could start to build these really neat, engaging web applications and not have to install software. Yet we weren’t seeing that innovation happen in small business. So to me, there was a very obvious opportunity.”
A self-described software nerd, Drury locked himself in his office at home for a few weeks and wrote an early online relational bit of accounting software.
“It felt really good,” he said. But he also understood that starting up an accounting software company required a huge investment—something he didn’t have. So he put the idea on hold and started an e-mail archiving company called AfterMail. After two years, he sold it to Quest Software, giving Drury and Edwards the war chest to do Xero properly.
That also meant asking an important question: What do small business owners really need when it comes to accounting tools? So they came up with a simple plan to find their answer: they followed them around. About two to three hundred of them.
“We realized they would all kind of do the same thing: go to the office in the morning and click on the Windows XP computer,” he said. “They knew it would take five minutes to boot up, so they go and pour themselves a coffee. Then they'd get back to their desk, start drinking coffee, read the sports scores, and the first business thing they did in the morning was to go to the Internet banking. And we asked, ‘Well, why do you do that?’ Because they wanna see who paid them overnight so they could see what cash they had and what bills they can pay. And cash is the lifeblood of small business.”
That led to a Eureka moment. Like all great innovators, Drury and Edwards asked themselves some provocative questions: 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, already pre-loaded into the accounting software?
It was these questions that led to Xero’s “beautiful accounting software.” And the software changed everything. Drury saw that once these bank transactions automatically loaded into the accounting cloud, it completely transformed how a small business owner works.
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“That was the first business process improvement I've seen for 20 years,” said Drury. “What it means is, you do a small amount of work every day, and you have the satisfaction of clearing your stack. Your cash possession is exactly up-to-date, you know exactly where you're at. Your accountant can log on and see exactly where the business is at. And we suddenly saw that it wasn't about putting accounting software on the cloud, it was working on behalf of our small business customers and doing a whole lot of work for them on their behalf.”
Xero’s innovation extended beyond accounting software—it was also funded in a unique way. In New Zealand at the time, the biggest VC deal was about two million dollars. Perhaps not surprising given the size of the country (which Drury calls “a small set of rocks in the South Pacific”) but Drury needed more than that. So he went public on day one.
“We had 100 customers and no revenue,” he explained. “We were a public company from the word ‘go.’”
Working on the razor’s edge like that, Drury said the Xero team worked with “incredible discipline, incredible urgency and incredible capability.”
They raised an initial $15 million and then used strategic placements to bring innovative leaders into their register, including Craig Winkler, Peter Thiel, and “a bunch of East Coast hedge funds.” So far they’ve raised about $280 million.
Xero is now one of the top 20 companies on the New Zealand Stock Exchange and is listed on the Australian Securities Exchange. There are offices in New Zealand, Australia, the U.S. and the U.K. (Edwards left the company in 2011).
Peter Karpas is CEO of North America and said that one of the things that has made Xero so successful is that employees are encouraged to ask questions. Top management shares with the entire organization exactly what it shares with the board, allowing complete transparency and conversations about every aspect of the company.
“When you look at Xero’s list of values, one of them is that we’re human,” said Karpas. “What I mean by that is that people can just talk to each other. We encourage that. We recently launched a program called ‘Meet Two,” where everyone in the U.S. office is now expected to meet two new people a week—one in the U.S. and one outside the U.S.”
“We run the business incredibly flat,” adds Drury. “I don't even have an office. Peter's just sort of sitting out there in the middle of the San Francisco office, and anybody can just come up and say, ‘Hi.’ There's very little hierarchy. We try to keep the status out of it. We're just real people.”
It’s a philosophy that extends to their customers, too.
“Small businesses are the biggest contributor to GDP in every country,” said Drury. “These are real people. We see their faces every day, we talk to them. If we can improve their business at a material percentage, that dramatically moves the needle. That translates to better schools and hospitals. So yeah, we've built and sold businesses before. We've made money before. This is our life's work that comes together that can really help millions and millions of small business owners. We’re taking all of the stress out of doing the books and actually making it enjoyable.”
As we’ve written before, innovators ask provocative questions that challenge the status quo. Rod Drury asked why small businesses couldn’t access their financial statement right when they wanted them. He asked how he could fund a business with no money. He asked how he could make the lives of small business owners easier. He and Peter Karpas encourage this same line of questioning in their employees. And it’s why Xero is likely to keep growing and keep innovating.
