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Xero Raises Additional Capital: What Does This Mean?

October 15, 2013 | By | 35 Replies More

Xero Raises Additional Capital

Xero recently announced that they raised $150 million (with $123 million of it coming from US investors) in funding as part of their effort to win the US market from Intuit.

In his blog article, Xero CEO Rod Drury stated:

For our accounting and bookkeeping partners, Xero has become the safe bet for your practice needs and will continue to deliver a wall of innovation to improve your productivity and profitability.

To me, the statement above is significant. Do they need that $150 million right now? Probably not. Talking with the Xero President of US Operations, Jamie Sutherland, the money will be used to accelerate growth. There is no major shift in Xero’s current strategy, but instead they will be able to do more of the same of what they’ve been doing (which, by looking at their growth rates, seems to be a decent strategy). I think the $150 million simply signals to potential users (accounting professionals and small businesses) as well as developers that Xero means business.

One of the hesitations that businesses have when considering using new software is they don’t know how long it’ll be around and how well it will be supported. I think that this new round of funding clearly indicates that Xero (who isn’t necessarily new, having been in business for 7 years) will be around to seriously battle in the US and global markets in the years to come. I’m impressed with what Xero has done so far and I think the funds will allows accounting professionals, small businesses, and developers to feel all the more confident in working with Xero.

Tracking US Growth

One of Xero’s undeniable strategies is to compete directly with Intuit and QuickBooks on US soil. Here’s a bit of a US timeline for Xero:

  • 2011 (Late) – Opened up San Francisco office
  • 2012 December – Launched 1099 reporting
  • 2013 August – Opened up New York office
  • 2013 February – New permanent San Francisco location
  • 2013 April – Opened up Los Angeles office
  • 2013 September – First US Xerocon (conference where 400 partners attended)
  • 2013 October – Opened up Denver office (for local customer support)
  • 2013 October – A move to a bigger San Francisco office (25,000 square feet)
  • 2013 October – US conversion tool (we’ll be reporting on this in an upcoming article)
  • 2013 October / November – First US Xero Roadshow
  • 2013 December – Launching US payroll

When questioned, Sutherland stated that they have good traction with US accountants and hope to leverage that partnership for growth in the US. Xero believes that many accountants have become disenfranchised with QuickBooks and they want to re-enfranchise them with Xero.

If you don’t know what Xero offers to accountants, here’s a run-down of what all certified partners can get (go here for the complete listing):

  • Free membership
  • Free Xero Partner Edition (similar concept as QuickBooks Online Accountant)
  • Free Xero Business Edition – large plan (your account for your own business, like the QuickBooks Online account Intuit gives to ProAdvisors)
  • A “dedicated account manager”, your Xero contact for any kind of issues you need help with
  • An “enablement specialist” to help you with conversions and technical accounting queries
  • Free email support
  • Free training (basic training, “introduction” and “essentials”)
  • Free marketing resource guide
  • Free quarterly forums

In other words, a lot of free. Intuit must have taken notice, since they are now offering their free Cloud ProAdvisor program.

After looking at user forums, blogs, and attending Xerocon, I can say that there’s definitely a lot of buzz around Xero in accounting circles.

So there’s a lot of momentum with Xero, but what do the numbers say?

How Does Xero Match up to QuickBooks Online?

I’ve built some tables for you.

QBO vs Xero QuickBooks Online – Jul 31 2013 Xero – Sep 30 2013
US* 455,000 16,600
Global (including US) 487,000 211,000
Global Year over Year growth Subscribers 107000 99500
Global Year over Year growth % 28% 89%

* Xero has a category called United States/Rest of World, so I couldn’t get US only numbers

As you can see, QuickBooks Online is clearly trouncing Xero in terms of US based subscribers (455,000 vs. 16,600). However, on a global level, both software’s growth over the past year has been fairly even with both Xero and QuickBooks Online gaining roughly 100,000 subscribers.

Keep in mind this is cloud vs. cloud numbers. QuickBooks has many more users as seen below:

Some QuickBooks Numbers
QuickBooks Online 487,000 subscribers
QuickBooks Enterprise 92,000 subscribers
QuickBooks Desktop 185,000 subscribers
QuickBooks Desktop 1,246,000 unit sales
ProAdvisors 90,000+

What Accounting Tools is Xero Developing With Those $$?

Xero has many accounting tools available in non-US countries, all wrapped into their Practice Studio. Xero plans on bringing the Work Papers, Practice Manager, and Reporting components of Practice Studio to the US in 2013. Practice Studio (in select non-US countries) includes:

  • Practice Manager: “Allows you and your staff to track time, manage jobs, manage expenses and manage invoicing”.
  • Work Papers: Allows you to manage client data and communication, which “makes processing compliance faster and smarter than ever before”. See this Xero blog post on what exactly work papers are.
  • Reporting: “Highly customized financial and management reports. Easily create reports for multiple clients in no time using report templates.”
  • Tax (Income Tax): “Tax forms are pre-populated using data from Xero so you can
    prep returns in no time. Once they’re done you can file directly with the tax department.” This is listed as “coming soon” in Australia, so I have no inkling of when something like this may come to the US.

A Few Other Comparison Points

Ecosystem / API

Xero’s strategy with accountants is similar to their strategy they have with developers – free education, support, and tools. There is no cost to develop or to be included in Xero’s add-on directory.

Currently, Xero has about 300 add-ons while QuickBooks Online has about 40. This isn’t really comparing apples to apples, since not all of Xero’s add-ons are available in the US. We’ll be covering this in a future article, but Xero’s developer friendly strategy is helped it to get ahead of Intuit in this area. Building out the ecosystem of business apps will be a key part of becoming a dominant player in the online accounting space.

Sales Taxes

Sales tax in the US is still a huge issue for Xero, so it would be nice to see if they build out the functionality to calculate, collect, accrue, report, remit, and prepare sales tax returns. This is an issue that a very large percentage of US businesses need a solution to.

Purchase Orders, Quotes, Inventory

As demo’ed at Xerocon USA, these features are actively being worked on and are well into development. These things are currently lacking in Xero, things that QuickBooks Online has.

Xero’s Non-QuickBooks Competitors

It’s interesting talking to Xero, as they want to be acknowledged as the alternative to QuickBooks, as if they’re the only ones in the room. Jamie said that the market for small business accounting software is “white hot” and there’s not a lot of competition that’s born in the cloud (Update: Jamie clarified that in terms of the amount of capital raised, there’s not a lot of competition, which I would have to agree with). I wouldn’t say I entirely agree with the statement, given the number of online accounting software companies out there.

I should also note that there has been two other investment stories happening in the microbusiness / solopreneur side of small business online accounting software (wow, that’s a mouthful!).

  • Clearbooks (UK) is crowdfunding their next stage of development (right now they are at £200,00, which is roughly $320,000 US dollars)
  • Kashoo has received investment from Paychex (a 14 billion dollar company with 570,000 payroll clients)

But yeah, I will say that in the online world, Xero is the biggest threat to QuickBooks.

I’m loving the new-found competition that Intuit is finding both in Xero and in the other online accounting software providers. While Intuit may have been caught flat footed online, I think the new QuickBooks “Harmony” update is a great step in the right direction. Development is happening at a rapid pace and I think that in the end it’s the small businesses that are winning.

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Category: Cloud Accounting, Expert's Corner, For Consultants/Accountants, For Small Business Owners, Greg's Cloud Acounting, Technology/Trends, Xero

About the Author ()

Greg Lam is a passionate small business guy who loves technology and automation. He holds a BBA from Simon Fraser University, Canada. He's a Certified QuickBooks ProAdvisor, Certified Xero Partner, and Kashoo MVP. His business interests are focused on online accounting and how it can be used to streamline and automate a company’s accounting processes. He currently lives in Tokyo, Japan. Greg operates the Small Business Doer website, an "Entrepreneur's Guide to Small Biz Bookkeeping". Connect with Greg on Twitter, Google Plus, youtube, LinkedIn or Facebook.

Comments (35)

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  1. Carol says:

    Good to hear. I can tell you that I search every week for an alternative to QuickBooks that has decent project management and costing tools and reporting.

    • Greg Lam says:

      Well, Xero doesn’t have the project management or costing tools natively built in at the moment. You can get those via add-ons though (which is part of their API strategy).

  2. Xero is really building momentum and gaining respect of the accounting profession.

    We salute the work they’re doing, and we continue to urge them to do the things we think will make Xero even better.

    We eagerly anticipate better solutions to sales tax, matching batch credit card deposits to bank feed deposits, and of course all the other things they’re already working on.

    Indeed we believe Xero will be a force in the future.

  3. G’day Greg – What an exciting industry to be involved in – Right NOW !!! – and hats off to Rod Drury and the Xero board and team to just Go For IT. A wonderful example to all of us in business (big or small) to have a dream, define (and probably refine) your strategy and back your self – one person (or a few together) can truly make a difference in this world. What you are beginning to see in the USA is exactly what we have seen in Australia over the last 2 – 3 years and we were watching New Zealand 2-3 years before that. We are in for one exciting ride and amazing opportunity for all who are in the Business Improvement Business. I totally believe it to be true when you say the winners will be small business (and so they should) – competition can certainly focus innovation – Cheers Clayton

  4. Sunil Pande says:

    Great summary and analysis Greg. Any data on cost of customer acquisition for Xero? Per accountant? Or per end-user company? Or even how many end-user companies are supported on average by an accountant?
    Thanks

    • Greg Lam says:

      Hi Sunil,

      I don’t know those answers, but you may be able to get some from Xero’s investor section of their site (which has their annual reports) http://www.xero.com/us/about/investors/.

      • Sunil Pande says:

        Unfortunately they have been shy about breaking out sales and marketing numbers and letting us in on that secret. But I will take swag at them and post here.

        We love how they are rocking the boat in the entry-level-accounting space and they brand that they have built – not features and pricing or even cloud but – around the kind of company and people they are.

        That is much more defensible than the other stuff in the long term.

        Now it is the turn on the mid-market to see similar innovation.

        • Sunil Pande says:

          I stand corrected. Their Annual Report for 2013 has great detail. Thanks for the link.

          Thanks

        • Sunil Pande says:

          I took Xero’s 2013 operating expenses of $51.4 M. Assuming that they are spending at least 50% on S&M = $25.5M. If you divide that by 81K new end-customers you get CAC of approx $308/end customer. If instead you divide $25.5M by 2400 new accountants you get a CAC of approx $10.4K/accountant. I will not be surprised however to find that they may be spending much more than 50% on S&M at this stage.

          In the case of traditional mid-market players S&M is about 40% of Revenue CAC is approx $6-7K per customer.

  5. Jason Hollis says:

    Xero – best product or best marketing?… or perhaps both? Time will tell once takeup levels out and isn’t driven by the fascination with cloud and gets back to functionality and reliability.

    • Greg Lam says:

      When I first found out about Xero, I really can’t say it was because of marketing, especially where I’m located in Canada. I simply found it online for my search for online accounting software and liked the product. Besides accountant’s, I don’t know how many small businesses know about Xero, but I’m not in the U.S., so I can’t say.

      My takeup of online accounting software (not just Xero) was due to the desire / need to work remotely and more efficiently. Since I deal mainly with micro businesses (5 employees or less), the functionality is generally there. I can’t make the same claims for larger small businesses though.

  6. Graeme Leo says:

    As software developers and one of the participants in the Xero Ecosystem with our live link for Act!, a popular CRM in NA, we are finding enquiry in our CRM link for Xero has picked up significantly. Not yet at the inquiry level for our link for Act! and QB but showing growth where the same for QB (desktop)is just steady. Definitely Xero benefits from a vibrant add-on community. QB need to catch-up on this aspect.

  7. While there are 90,000 members of the ProAdvisor Program, fewer than 20,000 are certified in the QuickBooks Program and out of that number, fewer are Advanced, Online, Point of Sale or Enterprise certified. The last time I did a search, less than 5% were certified in all versions.

    Plain numbers don’t tell all the story.

    • Absolutely right, Keith. And those numbers can be confusing when you dig in. How many are Online certified? How many are members of the new Cloud ProAdvisor program? How many Online Certified will get re-certified in QB Online now that they have changed the certification to require annual renewal?

      And, of course, in the case of BOTH Xero and QuickBooks, how many of those are actually knowledgeable about the product? I passed my QuickBooks Online certification even though I had (at the time) only used QBO on occasion. I became Xero Certified on the same day as I took the Xero Partner certification seminar. I wouldn’t say that this level of “certification” is truly meaningful for either product.

      However, the numbers DO tell one story – how many “accounting professionals” are working with the company and have been brought into the fold. The numbers aren’t meant to talk about the quality of the service that the person provides, the number is meant to show the level of engagement by the company with the accounting professional community.

  8. Rod Drury says:

    Hi guys,

    Looking forward to seeing you at SleeterCon in a couple of weeks.

    It’s such early days in the online accounting industry. All of us have had to build massive foundations to support a fully online service model (billing, ticketing, partner channel, subscriber management) as well as online accounting platform.

    All of us are still a year or so away from having all the accounting features that have been developed in the desktop world in the last generation. Horizontal accounting features for small business is a massive technical build. But we are all getting there. Intuit included.

    More interesting to us is – what happens next? What happens when all small businesses are connected to each other. When large businesses can seamlessly exchange transactions with the thousands of small businesses in their supply chain, when there is true two way integration between banks and small business, when there is no compliance burden with Government as accounting software automatically files returns via web services.

    These things are happening now.

    It’s not about the software. It’s about everyone being connected. That is the industry game changer.

    Great to see the industry numbers. It’s important that there is an independent count so the industry can see what’s happening. Greg can you find out where the Quickbooks Desktop users that are hosted over Citrix are counted. Are they included in the 487k online number? I hope Intuit disclose their actual QBO revenue at some point so the industry can accurately monitor the transition from Desktop to Cloud.

    See you in Vegas,

    Rod

    • Rod, I provided Greg with the Intuit numbers – they came from http://investors.intuit.com/financial-information/quarterly-reports/default.aspx – clicking on the “Fact Sheet” link, the third page of the document.

      The 487K online figure is just QuickBooks Online companies, it doesn’t include any Hosted Desktop users. They don’t break out the numbers for Hosted Desktop anywhere that I can see (but most likely those would be in the “QuickBooks Desktop Subscribers” figure of 185K, although I’m not sure at this point). And, I confirmed with them, that 487K figure is companies, not users (so if there is one company file but three users accessing it, that would be counted as “1″ in that figure).

      In that same document you can see revenue figures as well, but they split it between sales of the desktop product and revenue from “subscriptions”, so the subscription includes revenue from QBO, Enterprise and other desktop subscriptions. They don’t (in this document) split out QuickBooks Online by itself.

      I think that the online accounting industry, as a whole, may be more than a year away from having ALL of the features that are found in the desktop environment, but that is purely a guess. But, that isn’t necessarily the right way to think about it when comparing desktop to online. It is one factor – but it doesn’t take into account the idea that the Online products (looking at them in aggregate) have surpassed the desktop products in some ways as well. It isn’t just a matter of catching up to the desktop.

      One way of looking at the desktop vs online concept that I’ve been kicking around is to draw parallels between Microsoft Office on the desktop vs Google Docs. Microsoft Word (for example) is a complex product with thousands of features. Few people use all of these features. If you use Word you will most certainly use a different subset of those features than I will. Google Docs doesn’t have all of the features that Microsoft Word does, but it has the core features. For MANY people, Google Docs does all that they need. In my particular case, Google Docs isn’t a good fit because it doesn’t have the specific feature that I need to use, so I still use Word on the desktop. Google has the essentials, Microsoft has the full feature list. HOWEVER, Google Docs has great features that Word doesn’t have on my desktop, and Google Docs is advancing rapidly. I see parallels here with online accounting vs the desktop.

    • Greg Lam says:

      Yep, what Charlie said. It was interesting for me to get a sense of the numbers. Globally, Xero’s a lot closer to QuickBooks subscription wise than I had thought (again, comparing Online to Online, not the rest of the numbers).

      I would love if all small businesses were connected together. Although, I still have the feeling that is quite a few years off. While technically it may be achievable, I still have a hard time doing some basic things, like paying someone electronically in Canada (there are ways, but it’s not necessarily easy or inexpensive all the time). Start talking about sending money around globally, and I’ve found no inexpensive way to do so yet.

      Xero has Xero to Xero to send and receive invoices and bills to one another, but each party has to be using Xero. When this is an exchange that isn’t dependent on someone having to a certain piece of software, then I think that’s more in line with your vision (and I’d love to see that). Then we’d be getting all so much closer to zero entry.

  9. Sunil Pande says:

    Rod, since you are on here, are you able to share your CAC #’s? Thanks

  10. Thomas Winthrop says:

    When will Intuit play strategic hardball (in the marketplace) designed to truncate Xero’s growth in the USA? This week Intuit Canada announced QBOL will be free for a year to Canadian start-ups. http://blog.intuit.ca/quickbooks-online-free-for-a-year/
    A tactic to combat Wave (free) and perhaps Freshbooks & Xero from being the accounting choice at a businesses infancy – that they later standardize on going forward.

    All I’ve read suggest it’s critical for Xero to sustain a certain level of hypergrowth (revenues) to support their market valuation and keep from dot bomb exploding. Can’t Intuit USA afford to implement a market tactic designed to suffocate Xero from the much needed air (US customers) it needs? In American business there are always corporate fights over the ‘desktop”, “retail shelf space”, etc. Betamax was a superior quality format than VHS but lost that war due to things away from the product itself. Intuit can implement some hardball tactics to stymie Xero.

    Brad Smith (Intuit CEO) was recently asked, “What keeps you up at night?” He answered The competition I can’t see (competitors are coming out of garages and college dorm rooms, and the bedrooms in their home). That’s not Xero and perhaps he should wake up.

    If I were Brad Smith I’d find all the Xero hype annoying and devise a strategy to de-rail their ability to grow. Examples? 1) Intuit Certified Advisors must be exclusive (no “certified Xero” branding or marketing next to Intuit branding), 2) Concede Xero got the 3rd party development ecosystem right and steal their model and network through incentives 3) drive Xero off the small business accounting landscape in the US through price (along the lines of what Intuit Canada is doing but more far reaching and dramatic.

    There are a lot of things Intuit could do to erode Xero’s growth, valuation, and presence in the U.S. – they just need a Larry Ellison, Bill Gates, Steve Jobs type of leader – who would certainly do it.

  11. Rod Drury says:

    @charlie agree. The rapid acquisition of customers already shows that the market is not waiting for full desktop replacement but we still think that is a useful goal for vendors to chase and run a blended portfolio of feature completion and innovation.

    We’d still like to see the real QBO revenue number. That’s the number that matters. They are hiding it.

    @Sunil as you’ve seen all our numbers are public. Early in the market we see customer CAC at 12-14 months return, and in later stage markets it can be as low as 3 months. Very good for any SaaS business. We invest upfront for account managers to work with accountants. Once accountants have more than 100 customers they are on their own and CAC drops rapidly.

    A bigger point here is that there are few examples of other business apps than have a channel as natural as accountants which make it cost effective to sell to small businesses. For example Salesforce struggles to sell under 100 user sites. Working with accountants allows a more enterprise like sales model as each accountant make have 300-500 small business customers. Already we have 300 add-on partners using us as a channel so accounting feels like killer app to get business apps through to small business owners.

    @Thomas I can understand why Intuit would want to crush us but surprised at your comment. Don’t you want to see healthy competition to drive innovation. How much has Intuit changed since we arrived? Surely that’s a good thing for the industry? We think we’ll both be successful, grow the market and provide more opportunities for accounting industry professionals.

    Great discussion.

    • Thomas Winthrop says:

      Mr. Drury, I’m not speaking to what’s good for the market, I am speaking to what’s good for Intuit and from an Intuit self-interest narrative and posture. To your comment, Intuit’s certified advisors are their ‘front line troops’ and in the trenches. How is Intuit successful if their troops suddenly have Xero share equal “shelf space” & on-par branding identity in the trenches (to the market)?

      This (dual certification of direct competitors) also runs contrary and counter to the real world practices of the most successful tech companies. The titans of success in the tech industry would demand you take a side – and you could not ‘sit on the fence’ or be Switzerland. Bill Gates & Microsoft are famous for predatory pricing intending to drive competitors out of the market, or create barriers to entry for potential new competitors. That’s exactly what Intuit should do to Xero. Larry Ellison/Oracle is a divisive figure with a confrontational style that many say is key to both his own and his company’s success. Steve Jobs (RIP), ditto.

      This week when Intuit Canada announced QBOL will be free for a year to Canadian start-ups, that’s a predatory tactic intended to drive competitors out (including Xero). This could be a North American trial balloon, and opening act ‘salvo’ Intuit is launching, there may be plans to employ this tactic in the U.S, who knows.

      Let’s not be pollyannish here, in this article above Greg Lam says, “I will say that in the online world, Xero is the biggest threat to QuickBooks. Why should not Intuit answer and manage a “threat” to QB by all possible means “all hands on deck” including through their network of certified advisors and predatory pricing? Business 101 dictates that when you have leverage, use it.

      • Rod Drury says:

        @Thomas. Excellent. Love ‘pollyannish’. Ha.

        You can call me Rod. (Sounds like you’re writing to my father otherwise)

        One of the reasons we raised enough capital is a price war in the USA now makes no sense. Of course they may try that in fringe markets.

        This reinforces how important it is to see Intuits actual revenue for QBO so investors can judge the transition. When you have massive market share it’s a battle just to hold revenue as it transitions from desktop to cloud. Will they earn super returns as the industry disrupts or is investor money best being aligned with the disruptors? There is massive new pressure on Intuit to execute globally so they can gain the super returns they should as the leader as the industry accelerates. Yet they have struggled offshore and well behind in UK, AU, NZ.

        This is a fascinating tech business case study playing out. Fun discussion.

        • Thomas Winthrop says:

          Intuit has varied & established revenue streams, This week Wall St. has INTU targeted as a BUY with a $72 (stock price).

          Today Forsyth Barr (the only major brokerage covering Xero stock) Analyst Andrew Harvey-Green said “evidence points to Xero being successful in the US, but the jury is still out on whether it will successful enough to justify its heady valuation. Forsyth Barr describes the stock as speculative”.

          Today Xero hit a new high market cap high of $3.47 billion, and based on what?…certainly not profits…..and you say Intuit has massive pressure? Your stock is characterized as speculative, your market cap against your financials is reminiscent of a dot com bubble….. I can’t think of a CEO that has more pressure on their shoulders than you.

          Rod,ever heard of the saying, “People Who Live in Glass Houses Should Not Throw Stones”? It’s hilarious that you’re appealing for investors to examine Intuit QBO revenue…so they can judge……when XERO’s market cap & metrics make no sense whatsoever.

          • I would say that Rod is asking for a greater degree of transparency from Intuit financial statements, while his company is providing that level of detail.

          • Rod Drury says:

            Hi Thomas,

            Absolutely fair point. And last week it would have been harder to defend that.

            Our recent capital raising from the worlds leading tech investors, who have done a mountain of work researching the market, shows that savvy investors are betting on a shift. Absolutely there is a lot of pressure or I’d be sitting on the beach rather than working on a Saturday. We don’t set our market cap, we just do our work and let others decide to invest or not. We absolutely have to work hard to deliver on that. It’s our passion and we enjoy it so it’s not to stressful.

            We are the only public numbers available and has Charlie has noted, we are calling out Intuit to be clear on their QBO revenue. Anyone in the industry should be demanding to know as they choose their cloud investment. The industry has big decisions to make as they move to the cloud and they are being asked to make decisions incomplete data.

            Adding free products in Canada will only amplify the gap between the reported customer count (which may or may not be true QBO, it’s hard to tell) and online revenue. If you have to go free to grab market share then how good is your value proposition? How do US customers feel about that? Doesn’t feel like a good business strategy to me.

            Great debate,

            Rod

  12. Sunil Pande says:

    @Rod thanks much. I did not see your sales and marketing broken out, just the spend on programs. I assume you are counting all sales and marketing including headcount etc. for CAC? I love that you are creating a company that is not just about product but more about attitude. That is a much more enduring and defensible place to be.

    • Rod Drury says:

      @Sunil, yes. CAC is a more relevant measure when you’re in steady state. Right now we’re in investment mode and putting in the base channel resources, which in SaaS should be more fixed than variable costs. (more webinars less sales calls as an example).

  13. @Thomas, why would Intuit want to alienate their ProAdvisors by forcing them to pick a side in some “war” as though this is a zero-sum game? That type of thinking is based on the old-world model when retail channels had a finite amount of shelf space and add space to offer the vendors.

    But in the online world, there is absolutely no way for any player to dominate the “channel.” This is one reason Microsoft is having so much trouble today. The great flattening has happened, and that has given rise to true entrepreneurship in the cloud. Xero has taken maximum advantage of this new reality, and you’re seeing the results. Not only are customers adopting at astounding rates, but investors all over the world are eager to help Xero because of what they represent. Real vision, real agility, and a commitment to working with accountants as well as the SMB customers to enhance their experience.

    So we reject any type of “picking sides” in this new world. We now have a multi-vendor world where customers can pick the best solution for their specific needs. By chunkifying business processes and leveraging robust APIs, we can now create much better solutions for customers without compromising on the feature set of the all-in-one products that have dominated over the past 30 years. This is VERY good for customers and it provides incredible opportunities for consultants and accountants.

    @Sunil – CAC is fine to calculate, but it’s misleading at this early stage. When a company enters a market, they have to spend like crazy and plant seeds. Those seeds often germinate way down the road. So it’s misleading to just divide the S&M spending by the current customer counts. Just watch as the CAC for Xero and other online vendors tails off as momentum builds. That’s the whole nature of the SaaS business.

    @Graeme – Thanks for the additional data point. Add-ons who are there early have the most to gain as Xero gains momentum in the US. They’re already doing so well in other markets, which give you a huge boost on globalizing your offerings too.

    @Rod, thanks for being so transparent in your posts here. You’re right, we’re in the very early stages of this new world of solutions and the market is hungry for solutions like Xero.

    See you at #solutions13 in a couple weeks.

    • @doug – you are absolutely right, and our experience at FreshBooks confirms it: the accountant channel cannot be bought. Why? Accountants are the trusted adviser to small business owners. They are high minded and rational, and as such they will not be beholden to a single vendor.

      Intuit built its monopoly by owning the shelf in Staples and accountants only had one product available to recommend. Those dark days are over. Long live the Internet.

      Our experience at FreshBooks has been they recommend the right product for the right customer at the right stage of their business, for the right reasons. This is the role of a trusted advisor.

      Another fallacy? That one platform will rule them all. This market is too big and too fragmented, and the small business owners in it don’t want – nor do they deserve – to suffer under another monopoly. An analogy: America is a huge market…no one expects everyone to drive the same kind of car. Small business owners will not all use the same accounting platform.

      I come by this perspective honestly. FreshBooks is #2 in America – no one has more paying customers for it’s online cloud accounting solutions than FreshBooks, except Intuit. And as Rod points out, Intuit’s numbers are murky.

      I’ll add, as it relates to platform transition and accounting software franchises, we expect one million Intuit customers to come to FreshBooks in the next 3-5 years.

      See you all at Sleeter.

      - mike

      Mike McDerment
      Co-Founder and CEO of FreshBooks
      #1 Cloud Accounting Solution Designed Exclusively for Small Business Owners

      • Very well said Mike,

        We have watched companies like yours grab millions of customers via direct Internet marketing. That is clearly the new world, and it proves that the idea of “owning a channel” is now out of the question for any vendor.

        We now live in a multi-vendor world. Microsoft found that out with Google, Yahoo, Netscape, Apple and others. Now the SMB application vendors are finding it out.

        When this happens, everyone wins. Especially customers. So why would anyone try to stop it?

      • Thomas Winthrop says:

        Mr. McDerment, when you say, “the accountant channel cannot be bought”..well, to be accurate, now, the facts show a significant portion of the accountant channel is “sold”, by Intuit (fees for certified status). For some reason thousands of accountants pay Intuit a lot of money ($549 for example) for the badge and to be aligned between the market and Intuit. Why do you suppose that is?

        Meanwhile Freshbooks “certified expert” status is given away free to anyone willing to put in the 2 hours of online training – yet I see 339 “Certified Experts in Canada & the U.S.” on your site. Wikipedia states, “Intuit says that more than 50,000 accountants, CPAs and independent business consultants are members of the QuickBooks ProAdvisor program”. Those 1,000,000 Intuit customers that you claim are going to migrate to Freshbooks over the next 3-5 years, my question to you is how? Let me guess…..the internet? These Intuit customers are going to suddenly de-value their local QB Certified Pro Advisor that sits with them, holds their hand, supports them in person, for a cloud/voice/chat solution?

        Lastly and I have to say it, isn’t your spouting idealized platitudes of accountants (trusted adviser, high minded, rational, yaddah yaddah yaddah)kind of silly post Arthur Andersen? Hyperbole as the foundation of an argument? Really?

      • Rod Drury says:

        So what is your paying customer count and revenue there Mike :)

        • @doug – “why would anyone try to stop it?” <- fact is no one can. And while you may attribute our success to direct marketing activities, I can tell you that the vast majority of our customers come from word of mouth referrals from existing customers, and increasingly the accounting channel.

          @Rod – After leaving my comment it occurred to me that that would be a logical question. So touché! :) That said, while I completely respect Xero's strategy of starting as a public entity and building from there, and Intuit already is public, FreshBooks is a private company and since our founding we have chosen not to disclose our financials…though I will say, have also chosen to be audited by a Big Four firm…so they are as credible as anyone's.

          @Thomas – I hear what you are saying, accountants do choose to pay to be part of programs, but most programs didn't start that way. FreshBooks is new to our program, it is free to join, and those that do choose to recommend FreshBooks of their own volition, truth is many of those are already certified and paying QuickBooks Pro Advisors. Accountants want choice. So I stand by my commentary that the accountant channel cannot be bought.

          With respect to one million switching, I believe both FreshBooks and Xero will benefit from the platform transition that is underway now. Moving from one platform to the next – from offline to online – is a switching moment when customers reevaluate their choices. That has been proven out again and again, market after market – this one will be no different.

  14. Thomas Winthrop says:

    Mr. Sleeter, your commentary advocates Intuit accept “Market Cannibalization” within their Advisor network. Market Cannibalization by definition: The negative impact of a company’s new product (xero) on the sales performance of its existing related products (QB). Market cannibalization refers to a situation where a new product “eats” up the sales and demand of an existing product.[END] It would be foolhardy & ill advised for Intuit to not truncate Xero presence & dynamic within their advisor network.

    When you say, “But in the online world, there is absolutely no way for any player to dominate the “channel.” 1) Selling accounting solutions to small business is not predominantly an online world. 2) No one said “dominate”, only “exclusive”.

    What you’re not acknowledging & appreciating is the 1) face time & 2) hand holding required to get a prospect or established client to buy into a solution or “change” (go from QB to Xero for example). Here in the U.S. for the foreign, unfamiliar and different (FreeAgent or Xero) the task is enormous. Xero is “bridging” that chasm to a high degree using Intuit Advisors & Resellers (off the top of my head – guessing 50% of U.S. Certified Xero foot soldiers are also Intuit Advisors and or Resellers?).

    Intuit is the giant, and as the giant can wield authority and revamp the whole Intuit advisor network making it worthwhile for the advisor to be exclusive with a “eat what you kill” approach going forward, a re-occurring royalty / profit sharing model giving incentive for the VAR to be QB exclusive and keep the end-user/client QB loyal, etc. I’m saying Intuit can easily put some meat on that Advisor bone, and incentivize that relationship to be QB exclusive (in that space).

    When you say, “So we reject any type of “picking sides” in this new world. We now have a multi-vendor world where customers can pick the best solution for their specific needs.” Not really – in context of the discussion. How many VARs out there are both Bill.com certified and also BillQuick advisors? Sides are picked all the time, that’s one example, and the evidence is everywhere. Do keep in mind we’re talking about “Certified” / “Advisors” to companies and their apps, not just vendors able to sell an app – the designation does matter to small business.

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