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Founder profile: How Rod Drury used network effect to turn Xero into a global software giant

Published 25 Jan 2021

Many investors might not know that Rod Drury started cloud accounting software giant Xero in an Auckland apartment. Despite those humble origins, the company has surged to 2.45 million subscribers for its cloud products around the world and a market capitalisation of $20 billion. 

Drury has successfully built a company with a global moat this is a business’ ability to maintain a sustained competitive advantage over their competitors in order to protect their profits — and enable scale from the ground up.

Xero Share Price

So how did he do it? We have identified five key attributes and the lessons, explored below, that help explain Drury and Xero’s success.

Investing is riddled with uncertainties. But we believe that some of that uncertainty can be managed by developing a deep understanding of the skills and characteristics of entrepreneurs and founders, like Rod Drury, who are successfully competing on a global scale in the digital age. 

If investors can understand, not just the business model of a company, but the people behind the ideas, we believe they will significantly increase the odds of being ‘ahead of the curve’ in identifying and profiting from future success stories like Xero.

Lesson 1 – Hone your craft

The first lesson is that Drury had a deep knowledge of his industry. He was fortunate enough to take three years of bookkeeping courses throughout school. He loved it. He also worked for EY building business applications. And if you look throughout his career, all of the different things Rod worked on carry through into the design of Xero. 

Simply, Drury acquired the tacit know-how to build a business from scratch to build out his vision. Having run several ventures, Drury had an inherently strong relationship with his accountant, understood the challenges small business faced, and also how poor the accounting experience was with desktop computers. 

Lesson 2 – Embrace Technology

Ultimately, it was the cloud that allowed Xero to thrive. The cloud fundamentally changed the distribution model of accounting software. Drury was ahead of the curve on this. He saw the cloud was going to allow everyone to access their accounting records from anywhere.

As the cloud was coming to the market, Drury was in a unique position. He had a business idea already in his mind and now a technology solution that could bring that idea to life. In fact, looking back on Drury’s career he has continually been at the forefront of technology and that is, arguably, the reason he has been so successful in his multiple ventures.

Lesson 3 – Unwavering conviction and relentless drive.

Today, you must compete globally. Drury knew this and went about listing Xero in New Zealand very early so that he could access public funding. This was before any profit was close to being generated. Drury understood that to build Xero, it was going to take a significant amount of capital (beyond what he had). 

Obviously, Drury needed conviction and relentless drive because it took him 12 years and a half a billion dollars of capital just to break even! He described himself as a workaholic over this 12 year period, barely taking anytime off. 

Lesson 4 – Strategically incentivise

Drury designed the business model’s sustainable competitive advantage around ‘network effect’. He not only understood the role of accountant relationships, but how to incentivise them. 

Drury spent a lot of time with his customers to design and build the platform around their needs (Human Centred Design approach). 

Drury turned accountants, the users of the software into his distribution team. They became the Xero salesforce selling the value of the proposition to their clients. This has been so effective that most accounting firms are ‘Xero only’ accounting firms. 

Additionally, through the Xero Partner Program, accountants are incentivised to upskill their knowledge of Xero, which has created a culture of experts within the Xero community.

The large penetration levels in New zealand (above 75%) is a testament to the success of creating this incentive structure.

Lesson 5 – Be Open

Finally, Drury realised that to unlock the true value of Xero, the company needed to enable others to leverage their product.

The evolution of accounting software to the cloud has been a seismic shift in the industry. Xero has stayed ahead of the curve and their competitors because of its culture of continuous innovation, building incremental value to the whole ecosystem, and always being centred around the needs of the Xero community. 

Xero has created an open API (Application Programming Interface) system that allows third party developers to easily integrate their products and services straight into the Xero platform. This allows accountants to offer broader and higher valued services for their end clients, which all culminates in the end user receiving better value for the product they pay for. 

The three vital questions

In our qualitative assessment, Rod Drury has built Xero to be a global business with an enormous moat via network effect. The Xero share price has certainly started to reflect this.

This stock story shows the value of studying, understanding and trusting the visionaries behind the innovative companies with big ideas.

At its core, developing that understanding means investors should ask three key questions:

  • How deep is their domain expertise? 
  • How much conviction and drive do they have? 
  • How universal is the value proposition, can global network effect be achieved by some enabling technology step change that significantly improves on the cloud experience of today? 

 

By answering these questions, we can confidently assess Xero as a world class business of tomorrow. 

If investors want to find the next Xero, they should ask similar questions of the next generation of companies.

Stay tuned as we profile other Holon investments in 2021 by subscribing above.

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