First up please understand I am not an investment person but an accountant who understands business models, has been invested in this market and has been following it for some years.

I disagree on benchmarking etc, especially where you have clearly defined verticals. The value such data holds is huge but agree monetizing is a ways down the track, especially for those vendors going after a land grab – as is the case here.

We can argue over assumptions etc but those are incidental details given that all of us engaged with this market are groping for decent data points at an early point in market development. On BE v cashflow, I would have thought it was fairly obvious last summer why Xero would need to raise funds but as I understand it, this was all part of a planned strategy. All we were really missing was the price. The market – however rationally or otherwise – has spoken.

You're asking a chicken and egg question. I have seen SOC co's very happy on modest numbers of customers but going for the slow burn. I've seen others do well with services that went viral at very low cost. Still others are looking at the Xero model and wondering if it can be mimicked in the SMB space. Each has its merits and attractions, depending on where you are in the investment circle.

In the past, I have been against taking external investment because of the VC pressure that can mean. In recent times my position has changed based on seeing some excellent deals. (for the founders that is.)

It has taken companies like NetSuite and Salesforce.com close on 10 years to realize profit although each has demonstrable share. This is still a young market and so the 5 year time horizon many not be appropriate. The key is getting under the skins of the professionals who often control the relationship plus having an offering that is end user drop dead easy. Those caveats aside, I see massive opportunity. Let's put it this way – I don't know anyone who isn't developing for SOC.

The name is Sam Stewart not Sam Schwartz – no offence taken?

The focus of my post was from an investment perspective and involved a high level fundamental (not technical) analysis of Xero’s performance to date and a framework to evaluate the current valuation. As with any early stage growing business this is a subjective exercise so I tried to make my assumptions as transparent as possible and included the workbook I used for others to consider their own views.

The reference to the prospectus was not intended to hold Xero accountable to their expectations over two years ago but to highlight the differences to the current situation to the assumptions in my analysis made at the time of the IPO.

Xero CEO offers an explanation for the drop in ARPU in the comments on my post.

The potential for benchmarking and other data aggregation services has value but these offerings require a level of scale to be meaningful. I don’t think the ARPU goes out the window in this model, the number of customers and revenue from these services would need to be significant to displace the return provided by the core offering.

I think you have misunderstood the breakeven analysis. I have used a simplified approach of estimating the number of customers required to breakeven at the EBITDA line. This analysis forms no premise for an argument of any nature it is merely a framework to highlight why Xero needed to raise additional capital and the likelihood of any further capital raisings being required. Analysis based on cash flow would have provided a more accurate estimate but would also have required additional assumptions.

As I stated in my post:

Despite Xero’s relatively high profile and the recent media coverage of the capital raising and financial results there has been little or no analysis of the implications for investors of the capital raising and latest financial results. This post considers the implications of the recent capital raising, the number of customers Xero requires to reach break even and deliver the required rate of return to investors.

Xero have raised over $45 million in capital and I would like to think my analysis has added some value to thinking about how this investment should be evaluated. Given your knowledge of the market and business model I would be interested in your view on the investment opportunity.

Cheers
Sam Stewart