From Xero to hero

Xero is a New Zealand success story. It is now the most widely used online accounting system in New Zealand and is expanding rapidly into Australia and the UK – and to a lesser extent the USA. Not only has it managed to disrupt the accounting industry in a good way, but it has achieved the impossible by turning what would normally be dreary and poorly attended accounting conferences into something more akin to a gospel revival session: thousands of accountants applauding and hooting Xero founder Rod Drury as a messiah. Any company that can excite accountants is destined for international success on a McDonalds-type scale!

Xero listed on the New Zealand sharemarket in June 2007. Its pathway has been typical of a successful IT start-up – a big vision, a culture of aspiration, staff motivated by a cause rather than a job, a huge investment in innovative technology, and significant losses over an extended period. Only now is Xero getting to the point of being cash flow positive and self-sustainable.

The shares were issued at $1 a share, but dipped below 70 cents shortly afterwards. Once investors became more convinced that Xero had a viable business, the shares started rising; peaking at $45 in March 2014. They are currently trading at around $33.

In October 2012 it listed on the Australian Stock Exchange (ASX), and has traded on both the ASX and NZX since. Most of the shares continue to trade on the New Zealand exchange. It was therefore a surprise when last week Xero announced that in February it will delist from the NZX. The company said, “As Xero continues to grow, having enhanced access to deeper capital markets, increased trading liquidity and a broader base of potential investors is critical to fulfilling the company’s aspirations. A sole listing on the ASX will advance these goals”.

It seems the NZX was not going to serve the needs of a company with global ambitions. It’s a slap in the face for the Exchange and should be a wake up call. Xero’s departure has raised questions about what role the NZX is actually serving. Even its role as an incubator is questionable given the lack of new listings over recent years. It simply is not acting as the capital raising mechanism that would encourage enterprise and a vibrant business sector.

Investment commentator Brian Gaynor has made the comment that “…the company [Xero] added that one of the issues was the structure of the domestic market, where more than 50 per cent of trading was off-market, and the dominance of one broker. Consequently, many major overseas fund managers will not invest through the NZX because they don’t trust our market’s integrity and transparency…The NZX needs to address these issues immediately if it wishes to boost the integrity and long-term viability of the New Zealand sharemarket.”

Having a sharemarket that lacks integrity is a problem, more so given we are continually told by our political leaders and some economic commentators that our the economy has suffered because too much money has gone into “unproductive” property investment. My response is that people invest in property because there ain’t any good alternatives.

If we had an efficient and successful stock exchange then maybe more companies would list. To be honest, there aren’t many opportunities around to invest in new businesses so discretionary investment capital is either invested in property, sits in the bank treading water, or ends up being invested in an overseas managed fund. None of these scenarios are “productive” for New Zealand.

The sad reality is that over the last few decades some politicians and lobby groups have successfully manipulated public opinion into thinking that anyone who has managed to do well for themselves financially has done so at the expense of the poor and needy.

It’s an absurd perception in my view, but it’s not a view shared by the majority. That’s a shame because success should be encouraged not condemned, and our country badly needs people with insight and innovation. It’s only fair that they should be rewarded when they produce goods and services that other people want.

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