Extreme accounting? NZ's rugged tech startups aim high with business software, not social media
WELLINGTON (Reuters) - New Zealand technology firms are rolling into global markets, selling software to businesses that locks down mundane tasks like accounting and expenses, rather than developing slick social media apps that consumers download free of charge.
Led by Wellington-based Xero Ltd (XRO.NZ) and its self-styled "beautiful accounting software", the South Pacific island nation's blossoming cloud-based tech industry is now the country's third-biggest export earner behind dairy and tourism.
Though many firms have yet to make profits, official data shows exports of technology services have doubled since 2005 to NZ$682 million ($582 million) in 2013. It's the fruit of a government push to promote high-growth start-ups that has made Wellington a fertile breeding ground, including grants and incubation finance like a NZ$160 million investment in the New Zealand Venture Investment Fund, a public-private venture.
The practical New Zealand approach diverges from the mass consumer offerings developed by some counterparts in the United States, like messaging service WhatsApp or photo sharing site Instagram. These were ultimately bought by deep-pocketed social media giant Facebook Inc (FB.O) for billions of dollars.
While Internet entrepreneur Kim Dotcom grabbed headlines with his New Zealand-based Megaupload online file sharing site, shut down in 2012 amid charges of mass copyright infringement, the country generally lags developed economy peers in broadband Internet coverage. New Zealand's software sector has had to find its feet in spite of that comparative connectivity deficit.
"If you're in a small market, you can't just do a glitzy little photo thing that's an advertising based model, because you'd only get $1,000 a year in revenues," Xero CEO Rod Drury said in an interview. "So you're forced to solve problems with solutions that people will actually pay for."
Though eight-year-old Xero has yet to turn a profit, its share price quadrupled in 2013 and it's now New Zealand's second-largest listed company by market value, worth about NZ$5.7 billion ($4.82 billion). That has attracted the attention of international investors, as well as an array of smaller players seeking capital and working on plans for listings of their own.
Drury, a keen surfer and paddleboarder who divides his time between Wellington and Hawkes Bay wine country, is unapologetic about the fact that, like many a tech startup, Xero has never posted a profit nor paid a dividend since listing in 2007.
"We have NZ$200 million in cash, so we have to spend it," Drury said. "Investors don't want us to give it back to our shareholders, they want us to invest and grow really quickly. We'll make losses for the next few years while we build our teams."
A growing number of fund managers and venture capitalists, mainly from the United States, are now sniffing around New Zealand for other tech firms that might follow in Xero's footsteps, said Brian Gaynor, managing director at Milford Asset Management in Wellington. He declined to identify potential investors.
"Five or six years ago, there would have been nobody looking at New Zealand tech ... It's still small, but it's increasing," said Gaynor. "They've seen Xero and they think maybe something is going on here."
Speculation is rife among domestic market participants that more firms will list this year, including online corporate travel booking software firm Serko Ltd. While Serko declined to comment on local media reports about its listing plans, Vend Ltd., the biggest cloud-based retail management platform in New Zealand and Australia, says it's "constantly considering" an initial public offering.
With local investors hungry for new stocks to buy, New Zealand technology companies list at home first, with some like Xero going on to adopt a dual listing structure taking in Australia.
Though their products differ from the consumer-social media offerings in development by many Silicon Valley counterparts in the U.S., many of the successful New Zealand companies are led by a similar breed of entrepreneur - experienced self-starters who are willing to take a risk to branch out in previously uncharted territory.
At Xero, software provides integrated processes including accounting, payroll and taxation via the cloud, minimizing data entry and enabling mobile bookkeeping.
It's the market leader in online accounting at home and in Britain. It's also a serious competitor in Australia, where it is nipping at the heels of number one player MYOB, one of whose founders, Craig Winkler, is a major investor in Xero. The three regions together accounted for around 90 percent of its first-half revenue of NZ$30.3 million ($25.7 million).
Xero's investors include U.S. billionaire Peter Thiel, a co-founder of eBay Inc's (EBAY.O) PayPal online payment business. The company raised $150 million in October to fund expansion in the U.S., where it plans to take on the country's biggest financial software company, Intuit Inc (INTU.O). "The U.S. is our big priority this year," CEO Drury said, noting Canada and Asia are also in his sights.
Serko's business centers on integrating travel reservations with expenses in real time and the company has plans to expand into Asia, particularly India.
CEO Darrin Grafton says he expects Asia to account for around 40 percent of revenue in five years, without disclosing details of his company's revenue or profitability. Serko currently makes nearly all of it revenue from Australia, where it says roughly 50 percent of global multinationals are set up to use its software.
"We've made fantastic inroads into Australia, but there's a lot of countries in Asia, and there's a huge amount of potential sitting there at the moment," Grafton said. Profits are not the focus while the company grows, he said. "If we wanted to be profitable, we could slow down our R&D, but that's not in our DNA. Our DNA is to get out there and expand."
Grafton says his knack for developing practical solutions was honed on the dairy farm where he was raised - where he never had access to a computer. "If a fence was broken, you'd go out and fix it, and you'd fix it with whatever you had," he said.
At retail management platform operator Vend, the plan is to increase business in the U.S. by partnering with PayPal and Twitter Inc (TWTR.N) founder Jack Dorsey's Square mobile payment system, rather than competing against them.
CEO Vaughan Rowsell, who started Vend in 2009, the same year he cycled the length of New Zealand solo on a whim, said capital raising is likely this year.
"We know we need to go a lot faster than we're going at the moment, so we'll be needing to gas up this year. The timing and the amount and how we do that is still up in the air," he said.
($1 = 1.1713 New Zealand Dollars)
(Reporting by Naomi Tajitsu; Editing by Lincoln Feast and Kenneth Maxwell)