Rod Drury chief executive of Xero in Canberra on Monday 15 march 2010. Photo by Andrew Meares / Fairfax for BRW SPECIAL 2222 BRW100318

Rod Drury. Photo: Andrew Meares

HE WALKED away from his first accounting software start-up, MYOB, a couple of years ago with more than $120 million in his pocket.

Now, Craig Winkler is well on the way to doubling his money, this time not from his day job, which is in the non-profit sector, but from a start-up that is out to eat into his old firm's business.

In 2009, Winkler invested $NZ17.5 million in the accounting software start-up Xero, based in New Zealand, which he topped up to a $NZ21.55 million stake earlier this year.

Craig Winkler. Thursday March 4. 2010. ........BRW First Use Only........      Pic James Davies 
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Craig Winkler  Former founder and CEO of  MYOB
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Xero founder Craig Winkler. Photo: James Davies

That outlay is now worth more than $NZ115 million ($90.1 million), as he rides the wave of disruptive technology that is rewriting the rules of commerce - not just in old line industries such as retailing and the media, but in fields such as software as well.

Xero - which is yet to make money - already boasts a sharemarket worth approaching $500 million, putting it comfortably ahead of the locally listed accounting software company Reckon, which is valued about $300 million.

From a solid New Zealand base, Xero is now pushing hard into the Australian market, with an internet offering of its software that has stolen a march on MYOB and Reckon, which have been around for much longer.

Both have followed suit, but with a six-year head start, catching up with Xero will not be quick, or easy.

And as an online offering, this gives Xero a significant cost - and price - advantage over its rivals, which are now faced with imploding margins.

This week, Xero listed on the Australian Stock Exchange, as part of a plan to lift its profile in Australia.

Winkler now devotes nearly all his time to working in the non-profit sector, most notably assisting indigenous and disabled groups, while leaving the running of Xero to the serial entrepreneur and co-founder Rod Drury.

''I looked under the covers and liked what I saw,'' Winkler says of his decision to invest in Xero when it was being set up.

''I know the space well, and have a good feel for what has a better-than-even chance of succeeding.

''Technology changes in waves, beginning as a swell and then the wave comes through.''

In the 1980s and '90s, for example, the first ''wave'' was the advent of DOS [disk operating system] that opened the door for personal computers. This was followed by the graphic user interface, which paved the way for several new developments.

''The online cloud wave is here now, and very big businesses now live entirely in the cloud,'' Winkler says. ''It was clear some years back we'd see a cloud-based wave. When these waves come through, they wash away a lot of existing businesses. I consider that Xero would be a survivor.''

Online business models have revolutionised product sales and distribution by lowering the entry barriers.

''Low barriers to entry is a dual-edged sword,'' Winkler says. While markets may now be easy to enter, it is still a ''really high barrier to develop a successful business'', especially in servicing accountants who need a highly dependable system. ''Anyone can get a product up online - low barriers to entry, but high barriers to sustainability.''

Drury says Xero is being run hard to maximise its potential.

''We have been doubling revenue every year. ''In the year to March 2011, we did $NZ9 million [in revenue], rising to $NZ19 million last year, and by the end of the September half we had an annualised run rate of $NZ38 million.''

The company is yet to break even on cash flow, nor is there any indication when this is likely to occur.

''We have around 300 staff, and when MYOB was first sold it had around 1000 staff,'' Drury says. ''Intuit, the dominant group in the US, has around 8000 staff.''

Xero now has more than 110,000 paying customers, with more than half in New Zealand, about a third in Australia, and the balance split between the US and Britain.

An aggressive Australian entry would mean challenging MYOB head-on. It holds an estimated three-quarters of the market for accounting software in Australia, with Reckon holding about 20 per cent.

''MYOB is a terrific brand, built very carefully over a long time,'' Winkler says. ''Whether it will make it in the next phase is an open question. Incumbents typically struggle.

''There's another wave [of change] coming through, and the challenge for MYOB is to make the leap. Incumbents like MYOB, they cling to the past.''

Private equity investors paid $450 million for MYOB in 2009, on-selling the company for a hefty $1.2 billion in the middle of last year. That price tag looks to be highly inflated, in light of the technological revolution under way.

The British software group Sage missed out on buying MYOB last year, and there is lingering optimism among some Reckon shareholders that their company could now be a target.

But with a soft economy and competition from Xero, Reckon is looking exposed until it formulates a competitive response.

''Xero is targeting the micro-business end of the market - SMEs who run their companies off Excel spreadsheets,'' a fund manager says.

''I'd expect it will have a small impact on Reckon's cashbook product, which targets that end of the market. From the feedback we've been getting from the marketplace, the Xero product is better than MYOB, and on a par with Reckon.

''Certainly, Xero is a threat, but it is still a long way off making money.''

The rapidly changing industry landscape has seen Reckon cutting itself adrift from Intuit, which provides it with its QuickBooks software in the Australian market.

Reckon is developing its own software, although there are question marks about how successful it will be in protecting its franchise and at what cost.

Additionally, Intuit is expected to enter the Australian market with an online product, and this may change the industry dynamics once again.

''Reckon's share price has struggled over the past year,'' the fund manager says. ''The market is adamant it will have to lift its R&D spend, but management says not.''

By contrast, Xero has investor sentiment strongly in its favour, which has helped lift its share price. This will give it access to cheap money if it decides to tap the markets.

For now, its rising revenues will help stave off a return to the equity markets for fresh funds, after it raised $NZ35 million through a share placement and share purchase plan a year ago. Its quick revenue growth has left it with about $NZ30 million of cash in hand.

''Listing in Australia is to boost the Australian profile,'' Drury says. ''Being on the ASX gives us that option'' of raising funds in the future.''

Stockbrokers and investors have expressed interest in the company's progress, giving it some funding flexibility down the road. However, its appetite for funds will depend both on how fast it can increase revenues and on the number and size of any acquisitions it makes.

''We are planning a number of small acquisitions around our 'eco-system','' Drury says.

Winkler adds: ''For us, the plan is to grow the business aggressively and go for it while we have the opportunity.

''The size of the Australian market means that it will soon emerge as the largest single market for Xero, as it continues to gather strength to make inroads into the US market, where it is already trying to rev up its presence.

''Just in terms of market size, the US is likely to be enduring in its growth,'' Winkler says, which could demand more funds in future.