The biggest debate in the office came about because of my $100 billion number as an end-game market cap. In some sense that is the big-hairy-audacious-goal (BHAG) for any putative tech giant.
But in this case thinking about how you get there explains it pretty well and also explains to some degree what the company needs to do.
Xero currently has about a million customers paying on average about $400 per year each. We pay a bit more mostly because we transact some of our business in foreign currencies and as we add optional features we would expect to pay more still. We would expect revenue per customer to grow over time and think $600 is not unrealistic. At least some of the customers become bigger over time. We know one 200 person business who runs the entire thing on Xero. Their next transition would typically be to Oracle accounts - but they do not feel this is necessary.
To get to $100 billion in market cap you probably need $15 billion in revenue at some point. Even that is fairly expensive at 7x revenue - but most of the tech giants trade at about 7x revenue.
At $600 per customer that means you need 25 million customers. To get to my BHAG Xero needs 25 million customers. It needs to be 25 times bigger.
My first cut was simple. Xero has the bulk of the market in New Zealand - its home market - and about a third of the market in Australia. It has a small market share in the UK and a tiny market share in the US. Australia is about 2 percent of the world - and so Xero could - if it got to this market share globally - be 50x bigger.
It is a superior product, mission critical and sticky. This seemed plausible to me.
Then one of my staff members pointed out that there are less than 6 million incorporated businesses in the US. And sure this doesn’t count sole-traders but it does make my 25 million customer target seem hard.
This of course led to a debate. How is it possible to have a million customers mainly in Australia and New Zealand (very small countries economically) and there only be a target market of about 6 million customers in the US.
The first answer was the one alluded to above which is that Australia and New Zealand both have value added taxes which means that everyone with any private business has to file regular tax statements and the vast bulk of them use software to comply. This will apply in Europe too. Xero should have gone to Europe before going to America.
The second answer (which I would love to confirm) is about the structure of the US economy versus countries without large pools of low-income labour. In the US there is a vast pool of labour at approximately $10 an hour which is lightly skilled. Many businesses work out how to leverage an entrepreneur’s talent through using dozens of these people. The average restaurant in America is much larger than the average restaurant in Sydney - and leverages one executive chef over many staff. By contrast this low-income labour pool barely exists in Australia - and of consequence I suspect the average small business is smaller and there are many more of them. Australia, not America is a land of thriving small businesses (at least by number).
I suspect the same is true in Europe. Indeed in Europe in many jurisdictions there are penalties for businesses getting too big. France for instance has different labour laws for companies that employ more than 50 people rather than less than 50 people and many businesses deliberately stop growing under that threshold. My guess is that the market is again relatively bigger in Europe than America . Just because there are more potential customers.
In all cases it leads me to the conclusion that Xero has focussed its energy wrongly (on trying to grow in America) rather than going to countries where it is a natural fit.
Done well though I think there are 25 million customers out there to win. Whether they can do it - that is yet to be seen.
But in this case thinking about how you get there explains it pretty well and also explains to some degree what the company needs to do.
Xero currently has about a million customers paying on average about $400 per year each. We pay a bit more mostly because we transact some of our business in foreign currencies and as we add optional features we would expect to pay more still. We would expect revenue per customer to grow over time and think $600 is not unrealistic. At least some of the customers become bigger over time. We know one 200 person business who runs the entire thing on Xero. Their next transition would typically be to Oracle accounts - but they do not feel this is necessary.
To get to $100 billion in market cap you probably need $15 billion in revenue at some point. Even that is fairly expensive at 7x revenue - but most of the tech giants trade at about 7x revenue.
At $600 per customer that means you need 25 million customers. To get to my BHAG Xero needs 25 million customers. It needs to be 25 times bigger.
My first cut was simple. Xero has the bulk of the market in New Zealand - its home market - and about a third of the market in Australia. It has a small market share in the UK and a tiny market share in the US. Australia is about 2 percent of the world - and so Xero could - if it got to this market share globally - be 50x bigger.
It is a superior product, mission critical and sticky. This seemed plausible to me.
Then one of my staff members pointed out that there are less than 6 million incorporated businesses in the US. And sure this doesn’t count sole-traders but it does make my 25 million customer target seem hard.
This of course led to a debate. How is it possible to have a million customers mainly in Australia and New Zealand (very small countries economically) and there only be a target market of about 6 million customers in the US.
The first answer was the one alluded to above which is that Australia and New Zealand both have value added taxes which means that everyone with any private business has to file regular tax statements and the vast bulk of them use software to comply. This will apply in Europe too. Xero should have gone to Europe before going to America.
The second answer (which I would love to confirm) is about the structure of the US economy versus countries without large pools of low-income labour. In the US there is a vast pool of labour at approximately $10 an hour which is lightly skilled. Many businesses work out how to leverage an entrepreneur’s talent through using dozens of these people. The average restaurant in America is much larger than the average restaurant in Sydney - and leverages one executive chef over many staff. By contrast this low-income labour pool barely exists in Australia - and of consequence I suspect the average small business is smaller and there are many more of them. Australia, not America is a land of thriving small businesses (at least by number).
I suspect the same is true in Europe. Indeed in Europe in many jurisdictions there are penalties for businesses getting too big. France for instance has different labour laws for companies that employ more than 50 people rather than less than 50 people and many businesses deliberately stop growing under that threshold. My guess is that the market is again relatively bigger in Europe than America . Just because there are more potential customers.
In all cases it leads me to the conclusion that Xero has focussed its energy wrongly (on trying to grow in America) rather than going to countries where it is a natural fit.
Done well though I think there are 25 million customers out there to win. Whether they can do it - that is yet to be seen.
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