Xero versus Ecoya – round 1!
Happy new year everyone!
To kick off the new year, I thought I would look at the 2 ‘glamour startup’ companies in the NZX, Ecoya and Xero. Xero as we know are a online financial software provider, while Ecoya sell ‘eco’ candles, body type stuff (obviously I’m a guy, but think smelly stuff for house).
Both companies are relatively new, with Xero (~2006) having a few years on its younger brother (2008). Ecoya obviously target a mass-consumer market (mainly cosmopolitan reading girls and the guys wanting to impress them), while Xero targets small/medium business (and accountants wanting to impress them!)
Neither has made any profit, with the March 2010 Annual reports showing revenue of 3.4 million for Xero, and 3.9 million for Ecoya. The Xero net loss for that period was $8.45 million, and Ecoyas was $2.35 million. So both companies are currently burning investors cash like a new years bonfire. In their latest (30 Sept ’10) interim reports, both indicate accelerating revenues (3.8million for Xero, 4.4million for Ecoya – note this is in 6 months), and increasing losses as expenses also ramp up, in Ecoyas case increased sales and marketing (no surprise) and admin (not sure why?) expenses. Xero are a bit less informative in their interim reports (which is funny for a financial software company! I find it funny. But my sense of humour is too ‘advanced’ for a lot of people).
So all up, both are looking… fairly startup-ish. Increasing revenues, increasing expenses etc.
Xero has dug a deeper hole in terms of current losses, but has a well-capitalised balance sheet. Ecoya has a bigger market (girls, and guys wanting to impress them!) but only 1.3million cash in the bank. Ecoya will definitely need some cash in the future, whereas Xero has enough to survive to their theoretical breakeven in 2011.
So thats the comparison in a nutshell. Xero, lots of cash on hand, high development expenses. Ecoya, pure consumer/brand play, huge market, not much cash.
On the face of it, the companies are pretty even. Xero is the more ‘glamourous’ stock at the moment, whereas Ecoya is flying very quiet. So its cash and celebrity that is the big difference between the companies.
So how much is Xero’s cash and celebrity valued at? In a startup, cash is worth much more than the face value. Cash in startup land = ability to survive another few months = not having to go back to market or raise debt = much less risk. If we do a quick market cap comparison, Xeros cash and celebrity are valued at approximately… $235 million! (thats the difference in market caps between Xero (270million) and Ecoya (33million).
Which… is quite a lot. Justified? Hmm. Ecoya will have to raise debt or go back to the market for more cash (unless Trilogy is an undisclosed cash machine). So there is a lot more ‘current’ risk associated with Ecoya. However, I would suggest that their model is easier, in that the high-end consumer products market is well proven, and the Ecoya board have a lot of experience (via 42below and the other board members) getting into that market.
So, although a much riskier current play, it looks like on pure revenue and model terms, Ecoya might be a reasonable bet. Oh yeah, if they can survive another year. Xero? At 10x Ecoyas valuation, the market sure does love Xero.
I love Xero too, but not so much at this valuation. I will be keeping a close eye on Ecoya, particularly with regards to cash flow over the next 6 months.
2011 is going to be an exciting/interesting year for both companies!