October 24, 2010
Last week Xero announced that Peter Thiel, co-founder of PayPal and the first external investor in Facebook, was investing NZD4 million to “support Xero’s expansion into the US market”. Not surprisingly the move got significant attention both in New Zealand and elsewhere – I have to admit that while I as absolutely expecting Xero to have to raise some cash in the near future, I didn’t expect it to come from someone like Thiel.
The comments on the Xero blog were, as expected, overwhelmingly positive – Xero has a hardcore bunch of users, fans and shareholders and many of the comments seemed to naively suggest that this is all that it would take to knock Intuit QuickBooks off its perch – people seem to forget that in the US market, Xero will be up against other similar products – inDinero, IAC-EZ, Kashoo, Less Accounting and many, many more. CEO Rod Drury himself is upbeat that the investment is a validation but would never be so bold as to suggest that the hard work is over.
Yes, Xero has had great success at home and, to a lesser extend abroad. Yes, Thiel’s cachet will definitely help with exposure. However it’s arguably still going to leave them coming from behind when compared to the hyper-buzz that inDinero and its 19 year old founder Jessica Mah gained after the funding they received only months after launching and even further behind the sheer momentum that four million customers (Quickbooks) brings to a product. Dennis points out why the Thiel investment, although a validation, won’t do much to accelerate uptake int he US market.
Anyway – I don’t want to dwell on the funding, I do however want to look at some of the more critical comments that were left on a TechCrunch post talking about the Thiel deal (rhyme intentional). A commentator, remarking on the fact that Xero is still cash flow negative and is paying its execs and directors well, commented that:
…the company is a cash black hole, because management’s interests are misaligned with shareholders’. The directors pay themselves fat, six-figure fixed salaries even as (or as a result of which) the company is making mounting losses. Every time they lose money, they ask shareholders to pony up to cover opex. Meanwhile the bigwigs bear no risk. I hope Thiel will introduce some Silicon valley thinking to these guys. The directors should be paid in equity with very low fixed salaries. That will change their incentives and focus. I’d hate to see such a great product in the deadpool due to greedy and wasteful management.
The comments are fairly aggressive especially in light of the fact that Xero has always been open about an approach to business that is the antithesis of bootstrapping. As CEO Rod Drury says:
We’ve done underfunded start ups before and this time we’re building a well resourced sustainable business
It is however interesting to note that a number of the directors and executives who are being paid what the commenter called “fat salaries” are some of the same people who get employee share purchase deals, or loans to buy shares, or are in fact significant shareholders from pre-IPO allotments themselves. As such, one could argue that paying “key management” 35% of revenue, and directors a total of 17% of revenue is a little unfair to shareholders. One could argue that the directors are in effect hedging their bets – making great returns by way of salaries, but also potentially being in line for great capital gains from a possible future sale.
Another Xero watcher reflected on this saying that:
the more I think about it the more I wonder why are the directors are paying themselves such big salaries….
On a simplistic level, they’re doing so because they can. their investor base is (or at least was pre investments by Craig Winkler and Peter Thiel) New Zealand based. Many of their initial investors were newcomers to the stockmarket, having jumped on board primarily because of the credibility of Drury and other founders. However, after a few years post listing, I wonder if those same initial Ma and Pa investors don’t start to ask questions about the appropriateness or otherwise of the executive remuneration.
Drury has said on a number of occasions that breakeven will occur this year. Alongside that Xero has a six monthly report due out in the next couple of weeks. Current numbers indicate 100000 active users (I quizzed Drury on this and he advised that an active user is one who has signed in over the past three months), note however that Xero charges per business so paying customers are significantly lower than active users. Either way, unless the news on both those fronts is positive, I’d expect more murmurings of discontent rom the rank and file Xero shareholders – watch this space.