Social Capital in Action: From Nought to Xero MMIM590 by Karen McKeefry 300065582 Supervisor: Professor Pak Yoong Submitted to the School of Information Management Victoria University of Wellington In partial fulfilment of the requirements for the degree of Master of Information Management 16 October 2009 Abstract Typically internet start-ups (e-ventures) are innovative, independent, original companies that focus on information as their competitive factor. They are characterised by enormous growth potential, giving rise to technical and market risk. Resourcing these ventures can be daunting usually requiring significant financial and human capital and once the venture is formed they are subject to a liability of newness with no track record, legitimacy or endorsement for the product/service. Whilst entrepreneurs bring their own resources and skills to the business it is necessary to seek additional complementary resources through sustainable exchange relationships to ensure the ventures success. This report has used a case study of a New Zealand e-venture to provide qualitative evidence of how resources were secured to start and initially grow the business. Using Napahiet and Ghoshal’s (1998) three dimensional model of social capital it has analysed the evidence against scholarly theory to determine how social capital assisted the founders and the company to fulfil resource requirements and overcome the liability of newness. Napahiet and Ghoshal define social capital as “the sum of the actual and potential resources embedded within, available through, and derived from the network of relationships possessed by individuals or social unit” (p.243). The report found that the high level of social capital the founders brought to the venture assisted in gaining quick access to finances, skilled staff, competitive information and potential customers. The social capital used to develop personal business relationships for the venture has been transferred into the company’s organisational relationships that will provide future growth opportunities. The founders have benefited from having a diverse range of strong and weak contacts that provided referrals to new contacts and assisted in establishing a good reputation and trust, thus facilitating the exchange and combination of resources. Social capital has given the e-venture a uniqueness resulting in a competitive advantage that competitors would find difficult to imitate. Keywords: entrepreneurship, e-venture, innovation, internet start-up, networking, software-as-a-service, social capital MMIM 590 – Social Capital in Action: From Nought to Xero Karen McKeefry 300065582 ii Preface This report is not confidential. I wish to thank Xero’s co-founders Mr Hamish Edwards and Mr Rod Drury for allowing the case on Xero to be conducted and making themselves available for interviews. I would like to thank my supervisor Professor Pak Yoong, who provided tremendous support, guidance and advice during the six months it has taken to complete the study and resulting report. I would like to acknowledge the assistance of Jackie Bell for proof reading the final copy and my husband Mr Patrick McKeefry for his enthusiastic encouragement and the hours he spent proof reading the report at various stages. Finally I would like to thank my entire family for their support and motivation to get the report completed. I certify that except as noted, the report is my own work and all references are accurate. Karen McKeefry MMIM 590 – Social Capital in Action: From Nought to Xero Karen McKeefry 300065582 iii Table of Contents ABSTRACT..........................................................................................................................................II PREFACE ........................................................................................................................................... III TABLE OF CONTENTS....................................................................................................................IV LIST OF TABLES............................................................................................................................VIII LIST OF FIGURES.............................................................................................................................IX 1 INTRODUCTION....................................................................................................................... 1 2 THE CASE OF XERO................................................................................................................. 3 2.1 Getting off the Grid ................................................................................................................................4 2.1.1 Developing Useful Social Connections ................................................................................................4 2.1.2 Associates Assist to Formalise the Idea...............................................................................................5 2.1.3 Getting Prepared – Money, Contacts, Consultation............................................................................7 2.2 Complementary Skills and Shared Agreement of Ownership..................................................................9 2.3 Utilising Social Networks to Mobilise Resources...................................................................................10 2.3.1 A New Zealand Start-up using Capital Markets.................................................................................10 2.3.1.1 Leveraging Friends and Family.................................................................................................11 2.3.1.2 Good Relationships Help Subsequent Funding........................................................................12 2.3.2 Shoulder Tapping Potential Directors................................................................................................13 2.3.3 Past Contacts Used to Establish Multi-disciplined Team...................................................................15 2.3.3.1 Motivation to Work for Xero....................................................................................................16 2.3.3.2 Leadership, Passion, Inclusiveness and Collaboration .............................................................16 2.4 Relationships, Learning and Product Development ..............................................................................18 2.4.1 Finding out What Small Businesses Want .........................................................................................18 2.4.2 Meeting Known Customer Needs......................................................................................................19 2.4.3 Community of Customers..................................................................................................................20 2.4.4 Networking to Grow the Product Out ...............................................................................................21 2.5 A Networked Company – The Eco-System ............................................................................................22 2.5.1 Partnering with Banks .......................................................................................................................22 2.5.2 Partnering with Telecommunication Carriers....................................................................................23 2.5.2.1 Telecom New Zealand..............................................................................................................23 2.5.2.2 Telstra Australia .......................................................................................................................24 2.5.2.3 British Telecom ........................................................................................................................24 2.5.3 Certified Professional Partners..........................................................................................................25 2.5.3.1 Utilising Hamish’s Background to Promote “Certified Partner” ..............................................25 2.5.4 Partnering with Other Online Providers and Complementary Solutions ..........................................26 2.5.5 Open Relationships............................................................................................................................26 2.6 SaaS Revenue Model ............................................................................................................................29 2.7 Australia and Beyond ...........................................................................................................................30 MMIM 590 – Social Capital in Action: From Nought to Xero Karen McKeefry 300065582 iv 2.8 Going to the United Kingdom – A Case within a Case ...........................................................................31 2.8.1 Aligning with London’s Kiwi Mafia.....................................................................................................32 2.8.2 Then there was Two ..........................................................................................................................33 2.8.3 Networking with British Accountants................................................................................................34 2.8.4 Forming a SaaS Business Cluster .......................................................................................................35 2.8.5 Connecting to the Beachheads Programme......................................................................................35