Aussie payroll start-up Paycycle bought by Xero for $1.5 million

Cloud accounting software provider Xero has acquired Australian payroll start-up Paycycle for $1.5 million as it attempts to compete by adding new features into existing products.

The move confirms there is now growing attention being directed at tech start-ups by large, experienced players, with Groupon Australia and Deals Direct both acquiring start-ups within the past six months.

New Zealand-based Xero, which is backed by MYOB founder Craig Winkler, is pushing into Australia as it attempts to become the company’s main competitor. Australian managing director Chris Ridd says the pressing need to add new features quickly spurred the acquisition.

“If you look at the market here, most of the competitors provide a fully integrated payroll product, some better than others,” Ridd says.

“There are about two million small businesses here, and about 830,000 that employ people, so that gives us a large addressable market to go after.”

“But we need to continue to innovate. We work on a model that pays us subscription fees every month, and we have to earn that loyalty. You need to continue to bring new innovations to market, and we need to be comfortable to do it quicker than our competitors.”

Paycycle was founded in 2009 by Stuart McLeod and John Freeman, who met while McLeod was studying at Swinburne University. The two organised a beta product with a few months, with the company growing to more than 750 customers.

Freeman has previously worked with Qantas, the Federal Government and AusAID, where McLeod has previously worked as well.

The acquisition will be for $AU1.5 million, comprised of $500,000 in cash and $1 million worth of Xero shares, to be vested over three years.

But unlike some other more recent acquisitions in the Australian tech start-up scene, Ridd says the purchase won’t just be for the talented entrepreneurs. The Paycycle product will be fully integrated into the Xero platform.

“Both the founders have been involved in the payroll business. We’ve got some pretty compelling IP here, and we’ve definitely looked at releasing a product. But it’s about continuing to innovate.”

“In the timeframe we’ve been in the market we’ve had over 60 releases, and we see payroll being a continuation to that debate.”

However, Ridd also says future acquisitions may be out of the question, calling this purchase “an exception”.

“At this stage we don’t see any other acquisitions on the horizon. A big part of our success has been building an ecosystem of cloud partners. But payroll is the one exception where we felt we needed to have a great integrated experience.”

The cloud marketing is beginning to heat up among SMEs, as more mainstream products start offering cloud options. However, hesitancy is growing as more businesses are concerned about security.

Ridd says while there is still some hesitation among SMEs, “this has started to dissipate considerably”.

“We’ve got 36,000 businesses in the cloud now, and I think that’s a pretty solid vote of confidence in the industry.”

“If I’m a business, I don’t need to be worried about the complexity of IT, I don’t need to be worried about starting from scratch. All I need to do is just login and I’m up and running. The cost savings are compelling.”