From Xero a hero

by The Listener / 17 October, 2013
He’s the $3 billion man who embodies New Zealand’s new tech dream, but can he deliver on investors’ starry-eyed hopes? We talk to Xero’s Rod Drury.
Rod Drury, Xero Wellington
Rod Drury in his Wellington office: “We’re missing out on this massive technology change.” Photo/David White


Rod Drury was recently named EY Entrepreneur of the Year for 2013.

Growing up in Hawke’s Bay, tech entrepreneur Rod Drury had a disabling stutter that dogged him into corporate life in his twenties. “I couldn’t use the phone. Or anything.” says Drury, of his first job at accountants Ernst & Young.

At 27, he took a course to master his stutter, practising his new knowledge by talking as much as possible. These days he addresses 1000 people a week, as the salesman and chief executive for the highest-priced and most glamorous local stock on the New Zealand sharemarket, Xero.

“That’s why I really enjoy public speaking, because it’s terrifying. It’s very satisfying to do it. There’s nothing more terrifying than doing a radio interview or TV,” says Drury, whose stutter has receded to an occasional quiet gulp.

At 9am at Xero’s head office in Wellington, a snaking line of twenty- and thirty-somethings wait for their morning shots of coffee from the in-house barista. The air is thick with chatter and optimism. Drury, 47, rolls in from Auckland, wearing a 70s-style dark-brown leather jacket with big lapels, an untucked patterned shirt and jeans. His mate Sam Morgan, the Trade Me founder and a Xero director, describes him as someone who would be a rare commodity in even much larger markets, “a really good tech entrepreneur”.

Rod Drury and Sam Morgan
Rod Drury with Xero director Sam Morgan. Photo/Glenn Taylor


The company has made some of its early shareholders rich, with shares issued at $1 in 2007 having risen to a dizzying $16 by mid-June, even though the company has yet to turn a profit. The Drury family’s stake is currently worth more than $300 million.

Drury has conjured up a new New Zealand dream: a global business, based here, working from home in the provinces two days a week, and still having time to go surfing between conference calls to New York.

The question now is whether he can deliver on the dream and create a business that matches the almost $1.9 billion value shareholders have been putting on it. Along the way he will test whether New Zealand can truly join the new tech century as a home for global software businesses, or whether it will continue to sell off its best IT ideas lock, stock and barrel to offshore buyers.

Gregarious, energetic and a compulsive networker, Drury is also uncommonly accessible. He has no executive assistant to screen calls and seems constantly available to his peers, staff, media and even the public through Twitter. He tweets often, interacting with other users on tech issues, business and politics. In-between he’s liable to post a picture of the view from his hotel room in Hong Kong or comment on the cab fares in Sydney.

“He would be one of the few people I would phone who I would have a high degree of confidence that he would pick up the phone within a couple of rings – any time of the day. He’s very productive; he works all the hours that he’s given,” says Morgan.

The Xero sceptics are out there, says Drury, and are welcome to abuse him on Twitter. The cynical view is, “‘Hey, you guys have raised a whole lot of money at a crazy valuation and we’ve seen these things crash and burn before.’ But if you do it right, have a good board, have a good time, you can create real value.”

Milford Asset Management’s Brian Gaynor says it isn’t naive local investors who are pushing the stock price up – it is some of the savviest tech investors in the world. “These are people mainly in New York and California with big teams of analysts, and this is their bread and butter. Who am I to say they’re wrong?”

REVOLUTIONARY OPPORTUNITIES


Drury says the unfolding technology revolution offers the chance to build really big tech companies here, creating a new frontier for exports. Whereas a global business used to be hard to build because it needed a global sales team, the new generation of internet com­panies no longer have to be primarily based in the US.

But those hopes of a new frontier risk being throttled by lousy broadband. At Xero, “we have 11 offices around the world, and it’s really hard to communicate with them,” he says. “I can’t do videoconferencing with more than two people at the same time – it just doesn’t work.” He dismisses the Government’s $1.5 billion ultra-fast broadband project that’s being unrolled around the country as “a waste of time”.

Fibre internet cable
Optic fibres. Photo/Thinkstock


That’s because the project is a road to nowhere – great for running around the neighbourhood, no good for connecting to the rest of the world: “We’re building the world’s fastest intranet.” At Drury’s Havelock North home, where he paid $10,000 to have ultra-fast broadband installed two years early, he isn’t seeing the results. “I’ve got fibre and it isn’t any better than DSL [the standard broadband service].” That’s because the real bottleneck is lack of capacity on the country’s single international cable to the US.

Drury, who was part of the Pacific Fibre consortium that tried and failed to get a second cable under way last year, is now talking to Treasury officials about how to bring the plan back to life. The basic cost would be $400 million, but it would only need a $50 million deposit from the Government to kick-start it, “and then the market would come in and fund it”. Drury says as he’s got older he’s realised government does have its uses. “We’re a small subscale market, so I think there are occasions when you need to work together and engineer stuff, and an obvious one is a new international cable. It’s vital infrastructure.”

We meet the week after Peter Dunne’s ministerial resignation in the wake of a leaked GCSB report, a time of intense speculation over the contents of Dunne’s email correspondence with the journalist concerned. “We’ve got this petty domestic politics which is kind of nasty. It’s kind of salacious, but it doesn’t make the boat go faster. If we want better schools and hospitals, we need to export more.”

He wants the Government to appoint an industry leader as chief technology officer, much like chief science advisor Sir Peter Gluckman, to advise on technology. “We’re missing out on this massive technology change. We’re already demonstrating with Xero the value that can be created by aggressively exploiting this change. We could be doing this as a whole country, not just one or two companies. We’re missing the boat.”

He maintains New Zealand’s tech sector could be 10 times as big. “What I’ve found is a lot of really senior people in the IT industry are down here all the time. New Zealand is a fantasy destination. Why don’t we have a maximum of $1 million tax so these people don’t have to leave here after 180 days – they can base themselves here. And if we were on the same network as the US, software firms there could move some of their staff here and pay local taxes.”

A GOOD BASIC START


Drury is the son of electrician Ken Drury and office manager Annette Drury. The oldest of three children, Drury grew up in Napier and was a keen skateboarder and surfer who spent summers volunteering as a surf life saver. He still uses a skateboard.

At Napier Boys’ High School in the early 1980s, Drury fell under the spell of the emerging new world of technology with the help of computer teacher Bob McCaw. Students were offered the chance to buy a $100 share of a computer and had turns taking it home for the weekend. “We learnt how to program in Basic and it was like you could use your brains to build something and the machine would do the work. That got me.”

After a commerce degree from Victoria University, Drury landed a job as an IT consultant with accountancy firm Arthur Young, later to become Ernst & Young. A creative young team was working in the burgeoning new world of “information engineering”. His then boss, Denis Urlich, would probably remember him as “the worst employee he ever had”, says Drury. (On the contrary, Urlich says Drury was diligent.) Another boss saw him off with parting words that included “disruptive influence”.

“I found it difficult being in a straitjacket. I can’t stand rules. I can’t be put in a box.” You don’t like other people’s rules? “No.” But aren’t his shareholders the boss now? “Our shareholders give us the right to do these really cool things, so I love that we’re making money for people; that feels really good.”

BUILDING THE WAR CHEST


In 1995, Drury and Tony Stewart, both 29, left their safe Ernst & Young jobs and set up one of the country’s first software companies, Glazier Systems, with $10,000 capital. The pair sold their share in the business in 1999 for $7.5 ­million to the US-based Advantage group, with Stewart buying it back a few years later. Now called Intergen, the company employs 450 people.

Rod Drury, Xero Wellington
Rod Drury gets in a game of table tennis at his Wellington headquarters. Photo/David White


Stewart says Drury works at high speed. “Some people who didn’t keep up with him think he can be a bit difficult and arrogant, but it’s not that: he’s just going at 100km/h and looking for solutions to problems.” Popping into the office on a Sunday, Stewart would find Drury interviewing someone for a job who he had met at a party on Friday night. “Some of them were the best people we ever hired.”

Drury went on to build another company, AfterMail, in 2004, selling up two years later for what is thought to be $65 million. He had a quarter share. That provided the war chest for Xero, which he founded with accountant Hamish Edwards in 2006.

Xero’s cloud-based computing software has been a godsend for many small business owners, who use it to import bank statements, keep track of expenditure and receipts, and generate GST returns and invoices.

The combination of a good product, Drury’s salesmanship, a crack team and careful business staging has seen American investors pile into the business, giving it a growing international profile. Xero reported a $14.4 million net loss last month, but its revenues doubled to $39 million. Customers doubled to 160,000 and staff numbers are almost 400.

Back in 2007, Drury said he planned to create a $1 billion company. Is he there yet? “Market cap is a funny thing; we don’t really control that,” he says. The next goal is $1 billion in revenue, then $1 billion in profits. “So we’ve done the first one.” To those who say Xero can’t deliver on its valuation, Drury invites them to put a million customers at the top of their spreadsheets. That is Xero’s next goal. “That’s a very achievable goal … it’s not a huge market share.

THRIVING SUSTAINABLY


The classic entrepreneur model is for business leaders to flog themselves, sacrifice family life and then retire exhausted, but Drury and his fellow founders wanted a more sustainable model that included family. So they structured the businesses to put much of the work in the hands of their executive team, leaving Drury, Edwards and chief operating officer Alastair Grigg more time to concentrate on strategy, while working from flexible locations.

The result is that Drury works two weekdays from his home in Havelock North, where he lives with his wife, Anna Stuck, and their three children, aged five, seven and nine. Stuck, formerly a dentist, gave up her job to manage the home front.

“That’s the prize – being able to live in provincial New Zealand, have the stimulation of working in Auckland and Wellington for a few days a week, and then the overseas travel just gives you this fantastic perspective.” He tries to walk the kids to school some days, and be available for dinner and bath time. “Then we’ve got a beach place at Waimarama that we spend most weekends and most of the summer at. So I just love doing a big call to New York on Skype and then going for a surf or making some sandcastles. Once the kids are in bed, you’re back on the Skype and doing overseas calls most nights.”

Rod Drury and team, Xero Wellington
Rod Drury with some of the Xero team. Photo/David White


Xero’s stylish low black wedge of a building, near Te Papa, houses a clutch of thriving Wellington businesses. Fellow tenants are Trade Me, Infratil and HRL Morrison & Co. In a city beset with gloom about a shrinking corporate sector, Xero is a rare bright spot. The company is set to increase its Wellington staff of 210 by another 150 this year, and more beyond that. Drury may love ­Wellington, but he says the Prime ­Minister is right in saying the city is dying. “Of course it’s dying. A lot of the big corporates are going.” He says Key’s comments have been a wake-up call for the city to start a ­discussion about where to next.

But for Xero, it remains a great place to do business. Drury maintains it has the edge over Auckland and Christchurch as a tech centre. “Wellington will always be a hotbed of software. One reason is it’s a small compact city with bad weather. And you have a very diverse group of people who interact with each other and build deep relationships, so you can build these cross-disciplinary, multifunction teams with very diverse skills.” And the flow of government IT work provides a base for companies to build on.

Although Drury said in 2007 he hoped to see another 10 tech companies list on the stock exchange behind Xero, so far the pickings have been thin. But he takes great pride in seeing Christchurch-based SLI ­Systems successfully list recently.

SELLING OUT NOT PART OF THE STRATEGY


Despite his agreeable public persona, Drury does get nasty over anything he sees as interfering with business relationships that could be good for the country. Recently he attacked Russel Norman on Twitter after the Greens raised questions about a US software firm’s role in New Zealand’s spying and surveillance. US firm Palantir, co-founded by billionaire entrepreneur Peter Thiel, has set up a Wellington office and has advertised for an analyst to be embedded with the Government.

Norman tweeted: “When crony govt meets surveillance state – John Key appoints Peter Thiel’s Palantir to spy on NZers.” Drury leapt to the defence of Thiel, a friend and major investor in Xero. He tweeted: “Don’t be wankers”, followed by “Hey Greens. Cheating NZ out of $200m on Mighty River Power, now spinning this rubbish. Please put NZ ahead of yourselves.” He added: “Why I’m pissed is you’re putting relationships at risk that we’ve worked hard for and are good friends of NZ.” The pair later agreed to meet for coffee to sort out their differences.

Rod Drury with some of the Xero team in 2007. Photo/Mark Mitchell


With keen overseas interest in Xero, Drury and his partners could sell the company any time they like. How big a cheque would it take? Drury says selling is not part of the strategy. “Our strategy is to build. There’s very little temptation to sell it. What would we do with all the money? We’d have to think of something else to do – that’s stressful. I think we’ll make more money by doubling down on Xero.”

Morgan says it surprises him how Drury has maintained his enthusiasm and energy for the business. “He hasn’t shown the slightest sign that he’s tiring of it at all. If you ask him what he’s doing in 10 years, he says I’m doing this in 10 years.”

Says Drury: “I’ve never been at peace. I couldn’t do a normal job, I couldn’t do a business as usual job, I couldn’t just be running something. I just need to change the world. And technology gives you such a great set of tools to change things.”
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