[Updated 6/30/14, see below] If you run a small- or medium-sized business and it’s big enough to have bookkeeper, chances are he or she is using QuickBooks, the desktop accounting program sold by Intuit since the mid-1990s. QuickBooks has a market share of around 90 percent in North America, making it one of the most powerful and long-lasting near-monopolies in the world of business software.
When Intuit’s QuickBooks division looks over its shoulder these days, the company it probably sees looming largest is Toronto-based Freshbooks, which started out as a simple invoicing tool for non-accountants but has added many bookkeeping functions. The startup claims to have 5 million users, although it doesn’t say how many of those are paying.
But while the Freshbooks threat is very real, there’s another company trying to sneak up on QuickBooks, from an unexpected direction: New Zealand. Wellington-based Xero offers a cloud-based business software accounting package that earns around $87 million in recurring subscription revenues from 300,000 paying customers around the world. At the moment, only about 18,000 of those subscribers are in North America. But the U.S. market is so central to Xero’s growth plans that it has put nearly a sixth of its 600-strong workforce into its North American headquarters, on Green Street in downtown San Francisco.
Xero is a public company in New Zealand, where it has a market capitalization of more than $3 billion, and over the last two years it has collected $200 million more in private funding from the likes of Peter Thiel and Matrix Partners. That leads Jamie Sutherland, president of Xero’s U.S. operations, to compare the company to a speedboat that’s zooming forward while bigger and smaller players—read: Intuit and Freshbooks—bob about in its wake. “We’re well-funded and well-capitalized, with the right talent,” Sutherland says. “The big players are fumbling around figuring things out, and then there’s a whole slew of smaller companies that aren’t well capitalized but try to play in our space.”
As someone who’s been following Intuit for a while—I wrote a long piece in 2012 about the financial-software giant’s efforts to keep innovating even as it enters its fourth decade—I’ve been intrigued by Xero’s bold move into one of the two U.S. markets that Intuit still convincingly dominates (the other being online tax accounting through TurboTax). The basic value proposition at the Kiwi startup, founded in 2006, is that it understands the Web-based software model and user-friendly design in a way that Intuit and other established competitors, such as UK-based Sage and Australia-based MYOB, never will. But just being new isn’t enough in a market as conservative as business accounting. If any company is going to steal QuickBooks’ market share, it will have to win the hearts of accountants and bookkeepers, since they—not their clients—are usually the ones who choose an accounting package. So I’ve been spending some time talking with Sutherland and his colleague Peter Karpas, Xero’s U.S. CEO, to find out more about the company’s strategy.
Rod Drury, a prominent serial entrepreneur in New Zealand, conceived Xero after difficulties communicating with accountants in his previous businesses. “He was frustrated that he couldn’t get a sense of what was going on with his business in the desktop world,” Sutherland says. “He’d send a question to his accountant and it would take three or four days to get the answer back, and by that time the information was out of sync. That problem doesn’t make sense in our day and age of cloud computing, when you can have all the data in one location.”
With no product, no customers, and barely an idea, Drury and his co-founder Hamish Edwards were able to raise money to start Xero in an IPO on the New Zealand Stock Exchange. (Just try doing that in the U.S.; Sutherland said it was only possible on the back of Drury’s track record as the founder of successful New Zealand software companies Glazier Software and AfterMail.)
Xero took off quickly in its home region, displacing a QuickBooks-like product called MYOB in New Zealand and Australia and then making inroads against Sage in the U.K. and Europe, Sutherland says. Good design and usability were among Xero’s selling points from the beginning. “We wanted to make accounting easy and fun,” he says. “It isn’t this old, legacy desktop application where you cringe when you look at it. It looks and feels like a consumer application.”
A case in point: Xero’s interface for reconciling a business’s internal books with its bank statement, which is one of the first things many small business owners do every morning. It’s usually a
