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Happily Bootstrapping: Zoho CEO Sridhar Vembu (Part 7)

Posted on Monday, Jul 16th 2007

Sridhar’s thesis around Zoho is to ride on top of the market awareness already created by Salesforce.com, Webex and others around On-Demand / SaaS delivery models for business applications like the Office Suite, CRM, Web Conferencing, Project Management, etc. and simply do a dramatic undercutting based on price. He insists that the amount of Sales and Marketing dollars spent by his competitors is something he will not need to spend, but rather, be able to pass on the P&L savings to his customers.
Having a team of 600 engineers in India, and just 8 people in Silicon Valley positions him in a unique place to be able to potentially pull this off successfully. Ofcourse, we don’t know yet, the next few chapters of this story. However, as an investment thesis, I am with Sridhar, and I actually am quite convinced that this model can succeed.

SM: I like your model. I think, many Indian companies could replicate this model in other domains or on other applications. It’s the low-cost manufacturing model that China has perfected. Once upon a time, flat panel monitors were expensive. But today, we buy purely on price. I have a no-name monitor by a company called SOYO sitting on my desk, looking just as slick as an HP or an Apple. The functionality is standard. I care only about the price. Software will likely also go there, and if Indian entrepreneurs can play their cards right, they will be able to build businesses using the exact same model as what you have just described. SV: Exactly right. We are in a very different phase of market maturity today, and how you build companies will be very different.

SM: So Sridhar, you have done a remarkably good job of building your company without any external financing so far. For the next phase of growth, now that you are taking on more ambitious goals, do you intend to raise capital? SV: Absolutely not. We plan to keep doing this with our own money. Our OEM and Manage Engine businesses generate enough cash to allow us to bootstrap the Zoho piece.

SM: You have 600 engineers in Bangalore. Do you face attrition problems? SV: We don’t. I believe, most of the attrition happens from boredom related issues. We try to keep our team motivated and challenged with interesting work, and as a result, they don’t leave because they are not bored. Of course, we have good compensation, a strong bonus plan, etc. You see, we don’t intend to sell the company, so there is no stock option plan, because it is meaningless. However, we have a great bonus plan, and people learn and grow with us. It works.

SM: Boy, you really are a contrarian, Sridhar! Good luck to you. I will watch your company with great interest.

Note: in 2015, Zoho is a $300 million a year revenue company, still private, still bootstrapped! That makes Zoho a bootstrapped Unicorn!

[Also check out my Entrepreneur Journeys book, Billion Dollar Unicorns]

This segment is part 7 in the series : Happily Bootstrapping: Zoho CEO Sridhar Vembu
1 2 3 4 5 6 7

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I would like to get in touch with Sridhar.

We have a project where if he plays with us we can hit a sixer together … in every field he is involved in – with an explosive growth.

We were setting up (just a concept and model … with a Patent app in 2000) … All SaaS, OnDemand, Grid, seamless Horizontal/Vertical integration (… and other factors including Web 2.0 or Enterprise 3.0 elements that were not even on the scene) … all rolled up into one project.

Kirti Patel Thursday, January 24, 2008 at 11:17 PM PT

“Let the costumer use it for free, and when he´s confortable he will migrate over.”
Sridhar you are my hero!

A company not intended for selling, going IPO, and which started from nothing but this guy´s love and focus. When I grow up, I wanna be like him.

Rafael Monday, February 25, 2008 at 1:36 PM PT

These are the kind of leaders we need.Those who don’t follow the set stereotype rules.
Kudos!
—Sri

Sridhar Oruganti Monday, February 25, 2008 at 10:14 PM PT

Nice Post! Thanks SM and Kudos to Sridhar. Entrepreneurs like SV make a lot of difference and has a lot to offer to the socio-economic-betterment.

Janardan Bir Bom Thursday, February 28, 2008 at 2:11 AM PT

Sramana – you quote this entrepreneur with having said —

“You see, we don’t intend to sell the company, so there is no stock option plan, because it is meaningless. However, we have a great bonus plan, and people learn and grow with us.”

Could this be another way of saying “I prefer to keep 100% of the equity for myself so that as and when time DOES come to sell, I reap all of gains?”.

I didn’t say he is looking to sell or go public today, but I doubt that he will not want to, some day. there’s always a price… and this contrasts sharply with say Infosys where Narayana Murthy is credited with having spread significant wealth to all those who took the journey with him when he was creating the company…

Sridhar’s approach sure sounds quite selfish to my cynical eye.

Nimish

Nimish Mehta Friday, February 29, 2008 at 9:06 AM PT

And to my cynical eye, Nimish, Indian IT workers all want to have the cake and eat it too. There is a trade-off in cash and equity. To get solid equity, you must trade off cash. In India, IT workers don’t want to do that.

So why should Sridhar or anyone else offer them equity?

As for Sridhar and his personal motivation, I have to say, I share his instincts. Investors are headaches. If one can do without investors, it is a very welcome situation.

It turns out, that Sridhar has managed to do this venture without investors.

Public markets are also a headache. Sridhar doesn’t want to go public.

He also doesn’t want to sell the company. He wants to build it, use it has his platform to do good work. Including what he is doing with hiring and training talent from poor high schools … people without high-flying college degrees.

In that scenario, what is the meaning of “equity?”

Instead, he is giving them “equity” or “success fee” in form of cash. Why is that selfish?

Finally, reserve your judgment until you meet the guy. I have come to know him well, and can tell you, this is not one of the inch-deep people we encounter in our Silicon Valley greed-grid.

Sramana Mitra Friday, February 29, 2008 at 9:25 AM PT

Sramana and Sri,

So delighted to read this move to the new world. Had visited and signed up on the zoho site a few months back. Now restarting the use of a wiki for some “research” work….
About three years back another SV and me were doing some consulting work for a large service and solutions company out of Mumbai. As an outcome of the research it was clear as daylight that this had to be the way forward…..absolutely thrilled to see this taking place.

And you are spot on about investors, IPO and mindsets of the average individual “employee” and employer in the service sector….currently living in a world that is fading fast…..

thanks once again

Anil Paranjpe Saturday, March 1, 2008 at 5:45 AM PT

Sramana – I am in sync with your logic on most Indian IT workers appear to want to have their cake and eat it too. And the fact is that many other employers (at least in the larger cities like Bangalore, Hyderabad) DO offer senior managers a combination of equity on top of their cash comp. This is true today, and has been for a while now.

So the source of my questioning was: how exactly does Sridhar get away without giving at least SOME of his employees equity?

There are two possible explanations. First is that he is paying above market cash compensation or he is hiring people from “poor high schools – people without high flying degrees” that allows him to get away without giving them equity. These people have fewer choices given their location(s) and relative lack of education. And I simply wondered if Sridhar was taking advantage of that.

If it is the former, I recant my comments and stand corrected. If it is the latter, then you see the source of my cynicism.

I am not attacking Sridhar in the slightest bit. I have the deepest respect for anyone who can build this revenue run rate, with this sort of profitability. He really sounds very resourceful and innovative, and the world needs more of this type…

The points about investors and public markets being a headache are of course spot on. You and I have discussed that…

Nimish

Nimish Mehta Saturday, March 1, 2008 at 10:38 AM PT

Nimish,

I will ask Sridhar to comment, here.

However, I would say, even if it is the latter, the fact that he is training and engaging a workforce that is otherwise unemployable, isn’t that worthy of tremendous credit?

The Indian education system, beneath the top 2-3 layers, sucks. All employers know that. That’s what’s driving up the price of the real good people.

But, by giving them very specific training, Sridhar brings into the workforce a population that would otherwise make nothing close to the cash they are making now, forget about equity.

I don’t see why getting caught up in this equity discussion is so important.

The reason I chose to do this story at such scale (Forbes, etc.) is that I see this as a model that the rest of the IT industry should replicate. The education system won’t change quite so fast. But this is a very viable and scalable model, if employers commit to employing 30% of their workforce from the poor / rural high schools, without worrying about college degree etc.

Frankly, I don’t give a damn about equity for these people. I think, Sridhar has been giving them life, dignity, pride.

Sramana

Sramana Mitra Saturday, March 1, 2008 at 11:01 AM PT

Nimish,
First, staying private indefinitely is not a model we invented. There are multi-billion dollar software companies like SAS Institute that have done this well. HR and compensation policies clearly have to be structured to take the fact of being private into account, but that is very possible. Our attrition rates are quite low, and voluntarily so – most of our people do have a lot of choices in the market, particularly because of the work we do.

Please note that regardless of what qualifications someone comes in with, after 3-4-5 years, what counts is what work experience they have. This is true in much of the private sector, particularly in software. All we have done is extend it back a few years, and abolish formal credentials as a requirement for entry. Given that we have a competitive market for talent everywhere, particularly in India, the talent we develop in-house has a referenceable external market value in just a few short years. Either we pay that market value or the talent will leave.

Finally, your cynicism is the product of what the last 10 years of this credit boom has done to us. The fact that stock based compensation has seemed so much sweeter than normal compensation is a function of a public market that was willing to massively overpay for a given dollar of revenue or earnings. We confused asset inflation with wealth creation. We have seen the same kind of warped expectations in the real estate market as well – a home not as a place to live, not as a place that costs money to keep up, one that may keep pace with inflation (as it was historically), but as a hot investment.

In any event, if you are cynical about our model, go ahead and build a better one and compete! That is the beautiful thing about (real) capitalism – you can prove anyone wrong by execution.

Sridhar Vembu Saturday, March 1, 2008 at 11:40 AM PT

Yeah you are right. The equity piece is certainly not the critical piece in the larger scheme of things. To tell you the truth, I was also curious since I too am bootstrapping my company and was wondering how Sridhar was avoiding giving equity to his employees, particularly senior managers. But lets drop it for now.

Your larger point seems to be about doing social good using this rural hiring approach. This point about Indian employers committing to hiring from rural / poor high schools is also very interesting to me. The question it raises in mind is if such a model is the most efficient to do social good vs the alternative that companies like salesforce.com and Google have adopted (the 1% equity / time / profits model).

Anyway, none of this is suited to a blog-style discussion I suspect. So lets pick it up at some point in the future on the phone or over coffee.

Nimish

Nimish Mehta Saturday, March 1, 2008 at 12:10 PM PT

Sridhar – thanks for the reply. I agree with your comments on private companies… good points. And your explanation of eliminating the requirements for credentials is very clear. I get it now.

I don’t agree with your point about confusing wealth creation with asset valuation but lets not debate here…

BTW I just signed up for Zoho CRM as a result of all this back and forth:-). It looks promising!

Nimish

Nimish Mehta Saturday, March 1, 2008 at 1:21 PM PT

Nimish,

Why just doing social good? I think it would be the way companies would stay competitive in the long run. By tapping into a workforce that would otherwise not be part of the system.

Instead of competing for the same set of people, and driving up their salaries, if the Indian companies started training “new” people, then the supply of trained workers would go up systematically, and keep the ridiculous salary hike rates and attrition rates in check.

Sramana

Sramana Mitra Sunday, March 2, 2008 at 11:39 PM PT

It´s natural for the holders of the degrees to try to defend their salaries and guilds against what they see as the “threat of the degree-less”. What they fail to see is that in this new context becomes fashinable, the only way for them to keep their income that high is by starting their own companies. And like you said, most are just to “cushied” in their jobs to even think about that. I guess it puts them out of their comfort zone.

Rafael Monday, March 3, 2008 at 7:21 AM PT

Hi Sridhar,
You mentioned that SAS Institute is a private company. But, the level of benefits that SAS provides is worth more than giving a piece of stock.

I am sure you would know that their attrition rate is less than 3%. Please visit this link – http://www.sas.com/jobs/USjobs/benefits.html

The reason I ask you this, is how do you manage to control attrition. You yourself have mentioned that in 3-4 years time it does not matter which engineering school the guy is from all that matters is the work experience.

How does that prevent your employees from jumping ship to other companies?

It would make for a lovely organization culture and HR case study.

Looking forward to your response.

Regards,

Venkatesh

Venkatesh Sridhar Thursday, March 6, 2008 at 8:01 AM PT

Hey ppl stop fighting about why or why not SV gives cash and not equity to employees.
I develop siebel CRM for oracle and am already considering jumping to SVembu s company……… He s …………just a genius…….

Sriram Friday, March 14, 2008 at 12:16 PM PT

Quote:

“I have come to know him well, and can tell you, this is not one of the inch-deep people we encounter in our Silicon Valley greed-grid.”

I fully concur. You have to meet a person like Sridhar to know what simple living means.

And from my experience, I can tell that, if AdventNet ever goes public, employees will be given their share. Sridhar, as I know, is not one of the fancy stock/share/equity games hotshot valley entrepreneurs. You can ask any Advees or ex-Advees.

And why I put it? No amount of debate or logic can beat what employees think and believe of their employers.

And of course, you will ask me why I leave AdventNet? Well, life takes you to places where you never dream of, sometimes even forcibly.

Finally, to write or not write!

Quote:

“Frankly, I don’t give a damn about equity for these people. I think, Sridhar has been giving them life, dignity, pride.”

Sramana,

I find it offensive and below your level. People are not entities.

Ex AdventNet Employee Wednesday, June 11, 2008 at 12:23 PM PT

And yes, one more to add.

People coming from AdventNet have terrific reputation in their domain, in any company – starting from the Infy or Wipro to Cisco or Nortel. They deliver.

AdventNet epitomizes the spirit of Dell in a subtle different way.

“Underpromise, overperform and do it silently. People will take notice of it, for sure.”

Ex AdventNet Employee Wednesday, June 11, 2008 at 12:36 PM PT

Great series of posts.

Thanks, Sramana, for it, and Sridhar, for sharing your experiences.

– Vasudev

Vasudev Ram Sunday, August 10, 2008 at 1:57 PM PT

“You have 600 engineers in Bangalore. Do you face attrition problems? ”

I think 600 engineers in Chennai and not in bangalore

Nice Interview.

Thanks.

Krish Wednesday, August 20, 2008 at 3:30 AM PT

Krish you are right when you say they have engineers in Chennai.

Well I have to all 3 of them (Blore, Chennai, Hyderabad) in south india and also Mumbai and Pune. Chennai has the least attrittion: reasons are,

1. It is comparatively closed city compared to others and it has mostly localites. I guess it is the only metro in India where you will find over 90% of local population.

As other population do not get in, you have the least competitive culture. In Bangalore, it is a potpurri of Indians from many parts. And as talent comes from all parts of India, so also competition, aspirations and people switch for better pay packages.

2. Ask anyone from outside, even someone from Karnataka or AP, there will fear to go to Chennai. You will be forced to interact almost always in tamil. How many would like to do that?

So the talent remains there and they do not want to go out much. Also, in my interactions I have found, for them it is better to stay in the same company as the cost advantage of joining from one company to other is not that much.

3. Bangalore has seen explosive growth for many software companies. There are almost all of them.

Putting aside the reasons for climate and water (Chennai has an extreme climate and water availability is very poor), Kannadigas are perhaps the most accepting culture I have come across.

You will see close to 40% tamilians in Bangalore, in Chennai though it is NOT just possible. I guess not more than 1% Kannadigas will be there in Chennai!!!

Culture wise, as mentioned, Chennai is very insular and people do not prefer to go there.

4. In Chennai, as compared to Bangalore the pay package is less – much less. Well, Chennai is very low cost when you take food, transporation and leaving, so far. I have heard it is changing.

Bangalore comes with high package and only house rent is expensive. Rest, one can save. So people prefer Bangalore. So even Tamilians prefer Bangalore!!

5. In TN, there are many engg. colleges; but quality wise there are few – IIT, Anna, REC Trichy, and a couple of other. Rest are of very poor quality.

In Bangalore you have IISc, IIIT, Mysore University and not to mention people from best engg. colleges across India prefer to come here. So also, there are ISI, HAL, ISRO, HAL, ITI and many other industries from where people have jumped to Software – reason aspiration. So when you have bunch of talented and aspiring individuals come – they will seek better opportunities.

Honestly, as I have seen, Tamilians only prefer Chennai and vice versa. It is a kind of closed ecosystem which has got developed. So you see less attrition.

Omkar Thursday, August 21, 2008 at 6:20 PM PT

Omkar,

This is a nice article. However, why have you made it into a litany against Chennai and Tamilians? I think openness is not just linguistic but also includes religion, values etc; I have lived in several states and probably TN scores very high on religious tolerance and flexibility; It used to be insular but is getting there. I am a Bangalorean myself, but the sheer laziness of governance has made sure that Bangalore is well behind Hyderabad and Chennai in terms of infrastructure. No one know Seattle all that well before Microsoft. If Sridhar and his cohorts create such companies in Chennai ( Like Cognizant in services) people will move.

Ramesh Thursday, November 6, 2008 at 11:35 PM PT

Ramesh,

And you went on blind on the previous comment! I am not very surprised as tamils in bangalore think the very same way. They like blore for climate mostly, but their allegiance, passion, love goes to chennai. I have seen generations (even 4th gen) tamils pledging their love to chennai than bangalore.

Ask anyone from south or any part of India, people will dread to go to Chennai. In fact, I wish it changes some day. Regarding religious tolerance, the fact is south is better than many parts of India. No need to blow your chennai trumphet here! And how I wish Cognizant is actually Microsoft – what a great oxymoron you gave!!

Omkar Friday, December 19, 2008 at 6:39 PM PT

Interesting post. I enjoyed it from the part1 – part7.

Dayo Nurudeen Monday, January 25, 2010 at 2:21 PM PT

Wow. Treating people with dignity and respect. Developing a product that delivers real value and pricing it to compete. Responding to the market. Taking responsibility for one’s actions. That’s what capitalism was supposed to be.

It’s rather messed up that we’re so cynical about his motivations and model. “Equity”? You’ve got to be kidding. Equity does not put food on the table, or power the lights. Neither, in fact, does a bonus. Such “discretionary” payment structures ultimately do wonders for employers, and nothing for employees. Pay employees what they’re worth. Now, not when the company feels it’s made enough. Instead, give employees the raises they deserve at appropriate intervals. Keep your equity. Keep your bonus. From an employee’s perspective, these are discretionary gifts and can not be used to determine a position’s real compensation.

JJ Friday, January 29, 2010 at 7:59 AM PT

I just needed to say that I found your site via Goolge and I am glad I did. Keep up the good work and I will make sure to bookmark you for when I have more free time away from the books. Thanks again!

Trina Cooper Tuesday, February 2, 2010 at 2:55 AM PT

Very interesting post. Nice to see India competing with the giants with products rather than concentrating on projects. A suggestion to Vembu though. He should popularize ZOHO suite at home. ie. in India as I believe the local market is set to explode in a few years. One more idea would be to localize the products to capture a wider audience. The market is definitely there and it’s just a matter of time when ZOHO would put Chennai in the world map. Kudos to Vembu.

taknev Wednesday, February 17, 2010 at 6:35 PM PT

Kudos Sridhar.

Adventnet had been one great place to work.

I still remember the transition time from NMS to Web based products.

Sridhar said these words in the conference – “Change is the only constant thing” . Yes he adapted at the right time & gave all the young minds there, right amount of work in right direction :-).

Kudos again to Sridhar & all my good old friends still there.

Had been following Zoho for a long time & had referred to some friends. They are impressed & have bought the CRM suite too 🙂

Meena Thursday, March 11, 2010 at 11:47 AM PT

I just came across this blog by chance and it's very interesting. Has anyone got any experience in trying this business model in tier-3 level cities? I guess it would work in tier-2 cities too, but just very curious about trying it in tier-3 smaller towns.

Karthik Tuesday, September 21, 2010 at 9:02 AM PT