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Xero raises $60m from US investors, Drury sells down stake

Xero has raised $60 million from US companies Valar Ventures (backed by billionaire Paypal founder Peter Thiel) and Matrix Capital Management, which have both increased their stakes.

Matrix Capital Management is investing $58 million and Valar Ventures $24 million.

Their total investment of $82 million includes a purchase of $22 million of shares from Xero’s three largest shareholders, plus 10 million new shares issued at $6.

Founder and CEO Rod Dury pocketed just over $5 million as he sold down his stake (in February last year, Mr Drury sold shares worth around $3 million).

MYOB founder turned Xero director Craig Winkler sold $15 million worth of shares to the Americans, co-founder Hamish Edwards $2 million.

Mr Drury told NBR ONLINE the tranasaction took Xero's cash in the bank to between $85 million $90 million. It was an endorsement from sophisticated investors who wanted to increase their exposure.

Xero has around 300 staff. The new funds would be used for across-the-board expansion including the hiring of around 200 new employees over the next 18 months.

The company will now hunt for a global president for sales. It will also hire sales, development and support staff in Wellington and Auckland.

According to S&P Capital IQ, the company's largest holders before the transaction announced today were co-founder and Mr Drury with 22.5 million shares;  with 21 million; Mr Edwards with 6.13 million and Xero director Sam Morgan with 6.12 million.

As a result of the new share issue and transactions, Matrix Capital Management's shareholding will increase from 1.8% to 9.8% and Valar Ventures will increase from 3.9% to 7.0%.

Mr Winkler’s shareholding will reduce from 19.5% to 15.7%, Mr  Drury’s shareholding will reduce from 21.0% to 18.5% and Mr Edwards' from 5.7% to 4.9%.

All the transactions are priced at the 20-day volume-weighted average price at the time the deal was negotiated - $6 per share.

Xero recently reported $30.6 million of cash on hand and a first half loss to September 30, 2012 of $7.0 million. The company ancipated an increased loss for the second half to March 31, 2013.

Asked if Xero had reinstated a target date to breakeven, Mr Drury said it had not (the company's earlier goal to break even by the end of calendar 2011 was abandoned in July last year in favour of a push for growth.)

If anything Matrix and Valar wanted it push harder for growth. They saw SaaS (software-as-a-service or software that runs over the internet) as its very early stages of growth. US investors had wanted to put more money into Xero, but $85 million covered the company's immediate needs, Mr Drury said.

In midday trading, Xero [NZX:XRO] was up 0.16% to $6.45.

More by Chris Keall

Comments and questions
34

well done

Yes, Well done Rod Drury and Mr Winkler for talking up the shares then taking some profits.

Not so well done that the EPS will be diluted as a result of the new capital raising.

Like you are a better judge of value than professional investors. Why don;t you trolls move on, perhaps get a job. I have been watching you pan this company since day one, and it really is getting rather boring.

Finally - a global president focusing on sales.

The foots being pushed down on the accelerator. Good to see.

How do these guys stack up against the other New Zealand company BANKLINK?

Yeah BankLink is much much better

Banklink earns money by selling bank data and offering software free. Xero Sells software and offers free bank data. Technically, they shouldn't compete but at low end of market as they both have competing product lines. Banklink doesn't have cloud solution, which is a deal breaker.

Banklink pays your bank 'x' cents per transaction line and charges 'y' cents from you for the privilege of importing your bank transactions to your accountant's software. (Myob/sage or any accounting software). Banklink also offers free basic accounting software if user have data subscripion. This software doesn't have extensive functionality like Xero, it's just basic. Banklink's real competitor is Yodlee and Intuit's data supply division. Banklink supplies 100+ financial institutions in AU and NZ. Yodlee can do 10000+ and much cheaper.

It's been 20 years and Banklink managed to achieve large market share in AU and NZ. It doesn't have any significant footing in other countries. On the other hand, Xero's cloud model is used in 100+ countries in less than six years. Xero is rich enough product for most small businesses around the world, while Banklink offers limited set of functionality in its accounting software as it doesn't want to compete with mainstream accounting softwares like Myob, Sage.

Banklink simply can't go to a country and sell, they have to get in bed with banks and accountants and get the product ready for the market which takes years. Xero got their product ready for whole world. Local country specific needs are catered by apps via api (taxation, payroll). Yodlee takes care of bank feeds arround the world. In the next few years we will witness Banklink defending its turf from Yodlee-powered services like Xero and Saasu. Now that there is a significant client base in NZ and AU Xero will focus more on global client base. In a way, Banklink is yesterday's Xero and Xero is today's Banklink. You can't buy shares in Banklink as it's private company.

whether Banklink operates out of NZ is of no interest to our clients.
Whether they have 100 or 1000 institutions in bed with them is of no significance to our clients.
Our clients work with a core number of institutions numbering less than 20.
If some accounts do not have many transactions we will not load them on,as it is immaterial as to whether they are coded directly or dissected.
So let Xero take on the world.
Our clients could not give a hoot.

The approach to doing a startup seems nicely focused on the original investors being able to get their money back. Whether there will be viable product at the end of it remains to be seen.

Obviously the Americans can see value the NZ market can't. Well done Rod.

However this also provides a useful comparison. To harp onto a well used comparion - Relatively Diligent (given its profitability) must be worth multiples of the current price.

Either Diligent is worth more or Xero is worth less.

Fantastic

Sell.

Do none of you see what is really happening here? Those with the best information set are selling out progressively over time because the valuation is ridiculous.

This will end in tears.

Have you ever considered the possibility that Xero will actually make it and the people who have bought into Xero's potential will be rewarded?

It may well make it but that doesn't mean the valuation is justified. If its such a bargain why is Drury selling, not buying?

Thank you for enlightening us. I now realise Paypal founder and Facebook early investor is dumb enough to invest in Xero. Also 35-year-old Venture capital firm (which handled 100+ investments) has gone nuts to cross Pacific and invest in Xero. Yes, we need more conspiracy theorists in NZ. Keep up the good work.

Take a look at the two investors who just put $60m in Xero:

Based in San Francisco, Peter Thiel is a co-founder of PayPal and an early investor in Facebook and is reportedly worth US$1.5 billion.

Based in Boston, Matrix Partners was an early investor in Apple. It says the following on their website: "Since its inception in 1977, Matrix Partners has had the privilege to partner with hundreds of innovators. We have been fortunate to play an active role in the development of many successful businesses, 50 of which went on to initial public offerings, and 75 of which have gone on to profitable M&A events. The firm consistently ranks in the top five venture firms in terms of returns to its investors."

Neither of these two sophisticated investors strike me as not thoroughly doing their homework before investing.

And they have both invested in Xero.

Disclosure: Tentative Tomahawk invested in Xero at the IPO and continues to own the shares today.

finally someone speaking some sense.

There are a massive number of accounting offices who use Banklink.
We have one client going to Xero due to a being a National franchise.
We like Banklink because the file is emailed back to us.
So who is going to tell me why our clients should use Xero rather than banklink.
We see some businesses using Banklink...eg a builder,where there is much more suitable software out there tailored to the construction industry...and a number of reliable software options to chose from.
So I cannot see what the hype is all about.

"Because the file is emailed back to us."

You obviously don't understand the benefit of the single ledger.

1. You checkout file in Banklink
2. Send email attachment
3. your Client sees his mail on iphone and goes to nearest computer(not mac)
4. downloads the file and does the coding
5 Save the changes and email the file to you.
6 You come to office next morning and downloads the file from email
7 you then check it in to the Banklink system
8 If Any discrepancies- Repeat Step 1 to Step 7 again
9 Do the Accounting.
10.Add up the time you have spent from step 1 to 9 and then charge the billable hours.

with Xero

1. Client will open xero on iphone/android/Mac/pc
2. Does the coding from anywhere on this earth
3. you login in to xero finish accounting work (any doubts both can login and see the same screen at both ends same time).

It's the Single ledger that's big wave sweeping accounting industry, unfortunately you consider it as hype and exposing your clients to inefficient systems.

To bring you into the real world and out of the fantasy world.
Our clients are not walking down Queen Street waiting for their IPhones to ring.
They are in the dairy shed putting cups on cows,driving a tractor,jibstopping a house,serving a customer in the corner dairy,driving a logging machine on the side of a hill etc..
The bookwork is dealt with at the end of the day on their home computer.
We would not have one single client who is interested in data entry away from home or office.

Almost none of our client use Mac computers.
I have one who does.
They use Moneyworks,which is compatible and easy to use.
So the Mac issue is a red herring.
We do not look at files when they come back in every two months.
That is not cost efficient.
We give clients proper training front end and then only review coding issues once a year at annual interview time.
Banklink charges are peanuts and Banklink is much more efficient than clients bringing in a bag of bank statements and invoices.
We use it as our main means of in office coding.
It is much more efficient than one staff member coding and a data entry operator then being used.
If we have clients who want sophisticated software,we recommend the likes of Cash Manager Rural,Moneyworks,MYOB,Quickbooks or infusion.
But the majority of our clients just want something that will do their coding and gst returns.
The direct cost we charge our clients for using banklink is around $100 per annum.
What does it cost to use Xero by comparision.
No one has commented on this point.

You do not live in the real world of Grassroots New Zealand.

Cost for Xero is probably $600pa unless one o the smaller plans is suitable.

With Xero they get upto date P&L and cash flow statements, debtors and creditors.

You, my sir, just made yourself and your business look like an idiot.

Seems like some sounds business ideas. I take it your business is worth millions then? *Cough*

I am hearing this drumbeat since 2011, can you tell us your analysis to support your claim?

Institutional investors have enough resources to do rigorous due diligence on all fronts before they make additional investments. They might throw some cash at the beginning for any weird idea but further large investments are done with careful analysis.

Fantastic news. Well done team Xero!! Fuelling up to do some Intuit hunting! So great to see a tech company from NZ with seriously aggressive global ambitions just totally going for it.

OMG. Will the peanut gallery just shut up? This is brilliant news for Xero. And for NZ. The news coming from both Xero and Diligent is all the more exciting after all the shots fired at them by the rude and the skeptics. Well done Rod! Don't worry about the flak. They're even busy trying to pull down Peter Jackson right now.

Xero is a sand-castle build on hype. Issuing large numbers of shares make it very hard for the company to post adequate earnings per share, which would need to be in the region of 30-60 cents to justify the current share price.

An article in the NBR earlier this week clearly showed that Xero's competitors are ready to attack should Xero become a threat in their home markets. Xero will need a heck of a lot more money if it is to defend itself against those giants.

A heck of a lot of money? Hmmmm - like $60 million?

There are plenty of Analysts in the market ready to uncover if it's sand castle or not.

As far as competition, I doubt if they are preparing for attack. Myob is busy with 120 million bond offer to top up coffers of Mitt Romney pet Bain Capital. Intuit and Reckon are busy fighting each other. I doubt if any of them has spare 90 million to attack on Xero.

All the people saying that Xero is 'hyped' and 'over valued' haven't used the software, missed out on investing and now trying to take a hit at it with their own comments.

Sure it's not worth $700 million now, but once they become the global dominant player you're looking at a billion dollar New Zealand tech giant take the reigns.

I'm an accountant, after you go to Xero you won't go back to the old software. Xero is the future here and now, and the competition know it, heck they have to take jabs at Xero and create their own 'cloud software' which doesn't even work.

Good job Xero!

I notice in the share sale agreement that the purchaser of the shares has a right to appoint an "observer" who will have access to all information given to the board of directors. Does this give an un-fair advantage to this investor over the others. Isn't this insider information ahead of the market?