February 1, 2012
Exciting news today from Xero ahead of their user conference tomorrow that spans two important announcements. I’ll cover them individually.
$20M Raised from Existing Shareholders
Existing shareholders have reinvested to the aggregate tune of $20M. Sam Morgan, Sam Knowles, Craig Winkler and Peter Thiel’s fund Valar Ventures have all taken part in the round. This is interesting as I was picking a major investment from a US based fund. While admittedly Valar is US based, I am a little surprised at the modest quantum and the Australasian focus of this round. CEO Rod Drury has spent some time recently talking with VC funds in the US and I would have expected a much larger round from an assortment of US funds. I see two possibilities – first that this $20M is an interim step to fund growth in US prior to a major round for a mass US attack. Secondly there is the possibility that Xero has made a strategic decision to keep a modest pace to their US operations (growing, but not seeking meteoric growth), if this is the case the $20M will see them able to deliver this growth.
At the same time Xero is offering a shareholder purchase plan to existing Xero shareholders under the same terms as the new round – namely $2.75 per share (a slight discount on what they are trading at currently). This will appease any existing shareholders concerns around dilution and shareholder equality.
Acquisition of WorkFlowMax Completed
18 months ago Xero made a strategic investment in what was then project management vendor WorkFlowMax. This investment was in my assessment a reaction to the announcement of a tight partnership between Xero competitor Saasu and former Xero partner Acclipse (the deal came less than a month after the Saasu/Acclipse hookup was announced). Xero has long told the story of the modern practice which sees client side and practice side operations occurring over a common ledger. In order to delvier on this vision, Xero needed a strong practice management offering and with Acclipse having gone elsewhere, Xero had to run fast to find this. While WorkFlowMax wasn’t primarily about practice management per se, they have since built out sufficient functionality to deliver upon this single ledge vision.
Xero made the decision that since the single ledger is central to their strategy, full ownership of WorkFlowMax was critical and hence has acquired the company for $2M in cash and $4M in shares.
I’m surprised that Xero has made the full acquisition, my earlier view was that the strategic investment gave them enough control over WorkFlowMax to achieve their aims, obviously having a separate entity didn’t sit comfortably with the Xero board and the benefits of bringing it in house with total control were worth the cost of acquisition.
It’s fair to say that, in Australasia at least, accounting practices are in a state of flux, unwilling to pay for a practice management solution that is growing ever less functional (when compared with modern approaches). Xero aren’t alone in trying to capture this latent demand, Acclipse is also doing well with its iFirm product – it’ll be interesting to see how the two of them grow.
Disclosure – I am involved in an initiative, LiveMigrate, that aids end users and practices moving from varying accoutning solutions. Our initial product being launched at Xerocon is an MYOB to Xero conversion service.