Case Study #2 – Rod Drury, successful serial software entrepreneur

November 26, 2019 | Blog

Track Record of Success

Rod Drury is a serially successful business-to-business (B2B) software entrepreneur with 2 successful exits and a multi-billion dollar global software company. His first business, Glazier Systems was acquired in 1995. Then his second business, AfterMail (email archiving) was acquired for USD65m in 2006. 

Rod’s intimate understanding of the challenges in the software industry and the potential of the ‘cloud computing’, coupled with his proven track record of building successful businesses in the B2B software industry, meant he was perfectly placed to seize on the opportunity he had been waiting for more than a decade. This opportunity was to transform small business accounting globally in 2006.

Xero received investment from the best technology investors and entrepreneurs globally and hit a USD8bn valuation in 2019 (80x return since its Initial Public Offering (IPO) in 2007).

How did Rod avoid the most common mistake of building a product that no one needs?

Rod realised that cash is the lifeblood of every small business, but small business did not know who paid them overnight and how much cash they had in the bank to pay the bills. Rod came to this realisation in the same way that the best innovators do, by asking the people who suffer from the problem on mass and asking “why is that important?”. 

Once Rod had made this discovery, he knew the key to solving this problem was to connect small business owners to the bank, so they had their accounting data pre-loaded on their PC every morning. This would be the ‘beautiful accounting software’ that revolutionised small business.

What did Rod do to ensure that Xero had enough money to execute and avoid failing like most startups?

Rod understood how much capital would be required to build an accounting software company. Like most successful entrepreneurs, he put this opportunity on ice and started an email archiving business called AfterMail in 1999, which addressed a more immediate and simple problem. AfterMail was Acquired by Quest Software in 2006 for USD65m, which meant Rod had the capital he needed to tackle the problem he had been waiting to solve for more than a decade.

On 5 June 2007, Xero raised NZD15m and listed on the NZX at a NZD55m valuation. Even with Rod’s deep pockets, he knew that Xero would need enough capital to bring to market one of the first Software-as-a-Service (SaaS) solutions for small business and then scale it globally. 

How did Rod beat out existing competitors, something most startups fail at?

Rod began wondering why it was so difficult to extract information (data) from financial software in the 90’s. At that time there was innovation in the consumer web, but nothing in the small business space, which frustrated Rod. He asked himself, why wasn’t anyone building engaging web applications (software) for small business that they don’t have to install on their PC. This insight, namely the ability to access software over the internet without having to install it, is what we now call ‘cloud computing’, which Rod saw before Google, who caught only on months after Xero launched in 2006. 

If he could deliver beautiful software over the internet that connected small business owners with their banking data in real time, he could disrupt the existing players whose products required installation via CD and were not connected to the banks. Also, Xero could satisfy the needs of a large number of small businesses who were underserved by existing players.

Craig Winkler, the Founder of MYOB, which at the time, was a legacy small business software solution that had to be installed on a PC via CD and was a major competitor for Xero, clearly saw the opportunity and invested NZD23m in 2009. Rarely do you see the Founder invest in a disruptive competitor, but when you do, it’s a sign of the opportunity and potential that someone who intimately knows the industry sees.

Craig’s investment was followed by Peter Thiel, Co-founder of PayPal and early Facebook investor, who in his personal capacity and through his Venture Capital company, Valar Ventures, invested USD3m and USD16m respectively between 2010 and 2012. 

What else weren’t Xero’s competitors focussing on? And how did Rod plan for its future value?

Also, Rod knew at the time of founding Xero that small business accounting data was inherently valuable, and would give Xero heaps of opportunities but didn’t know exactly what. At the time, competitor solutions resulted in their customer’s data being stored on their PCs (unreachable), while Rod’s internet delivered solution would centralise all customer data allowing them to draw insights and analytics across all small business (e.g. the amount of money flowing through all small businesses in Australia that use Xero etc).

He knew this would allow him to not only initially outpace his competition and but then propel Xero to a monopoly position (which is the case today in Australia and NZ as Xero can steadily increase their prices without losing customers). This was the bet Rod made, and so did Winkler and Thiel in backing Xero.

The company is currently on track to deliver more than USD$400m in annual recurring revenues in 2020, which has the company valued at USD$8bn (at the time of writing in January 2020).

So, what does this mean for you as an investor?

As you can see from the Xero example, successful entrepreneurs make investors more money, more often because they are able to overcome the major reasons why startups fail. This is reflected in the statistics, which found that first-time and failed entrepreneurs had a 20.9% and 22.6% chance of success, respectively, whereas already-successful entrepreneurs had a 30.6%.

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