Xero doubles up but challenges remain – and they’re not alone

As the ‘big dog’ in the SaaS/cloud accounting space, it is always interesting to hear an update from Xero. The main numbers:

• Operating revenue for the full year ended 31 March 2012 will double 2011 (which was $9.3m).
• Committed Monthly Revenue (CMR) is now $1.75m or $21m annualized. We’re delighted that 50% of CMR is from offshore markets showing that we becoming a truly global company.
• Paying customers using the Xero business software worldwide exceeds 60,000. There are 240,000 user accounts.
• There are over 3,300 accounting firms now using Xero. The accountant and bookkeepers channel model, proven in New Zealand, is showing similar early signs of success in offshore markets.
• The company now employs 170 staff across four countries. The US sales office has been established with six staff in San Francisco.

All of which sounds fine. But then in comments I see a few grumbles. The one that stands out to me is this from Jeff Nutbeem:

Congratulations on all that income. All the more surprising that you have built this on accounting software which doesn’t produce a remittance advice when paying a supplier, nor allows for multple cheques to be entered prior to banking them. And those are just two obvious omissions which spring to mind.

Remittance advices is such an obvious requirement, yet none few of the SME systems provide this capability. But then some of the big systems don’t cover that spot either. Xero is not alone in getting their lumps. Over at FreeAgent, the ongoing grumbles about multi-currency handling has caused some ill will.

In one sense I am pleased to see these early pioneers getting a few knocks. It is a sure sign they are on their way to becoming mature businesses. I suspect the days when they’d likely get something of a free pass on functional gaps is coming to an end. They now have to figure out how to make the next jump in maintaining the ethos of providing a service that people continue to love. It is not easy. NetSuite went through a terrible time a few years back. Its service was a mess and I was one of those who was highly critical of the company’s approach. Three plus years on and the major issues have been fixed. Last week I met with their people in San Mateo, just outside San Francisco and they have some good stuff in the pipeline around e-commerce.

I also met with BrightPearl in their San Francisco office. BrightPearl are rapidly evolving their business model and with it the functions they deliver. Chief among these is multi-channel marketing. Those with good memories will recall that BrightPearl started out as a a cloud company delivering basic accounting, some CRM and a bit of web shop functionality. Now, they are working feverishly to plug in as many channels as possible for retail and wholesale businesses. That might include Amazon, Google Checkout, PayPal and many others who are emerging in this space – including mobile. Why? Because that’s where modern business is moving. Check out the case study from Lahloo Tea.

But perhaps the most interesting tidbit I picked up while in the Bay Area is that venture capital is very interested in business applications of the kind BrightPearl, Xero, FreeAgent and others provide. Those same VCs see the value that business apps bring and naturally want their piece of the action. That, along with hockey stick growth will drive values up. All good news for the cloud incumbents – yes, I think we can call them that – and customers.

What happens next with these companies will be interesting to watch because with all the growth (and growing pains) we are entering something of an inflection point in the market.