Zoho Corp’s Sridhar Vembu has built a US $150 million-a-year business with no debt and no external investors
Zoho Corp’s founder Sridhar Vembu might live and work in Silicon Valley, but he turns to German car manufacturers and moviemakers for inspiration. He suggests that building software is no different from directing a movie. The ‘feature sets’ in a movie, more often than not, are eventually decided based on the gut feel of the director and the crew. But it is the market that eventually decides the success or failure of the film. And Vembu says the same holds true for a software product. He should know. After all, as the founder and CEO of Zoho Corp, a software product company, Vembu has launched over 70 products, including Zoho CRM, Zoho Productivity Suite, Manage Engine and WebNMS, over the past 16 years.
As the success rate of a software product is not really predictable until it hits the market, Vembu emphasises on the importance of employee productivity and the need for quick turnaround times in product development. “The web-based software industry is almost like the fashion industry. New technology comes and goes – fast cycle time on development is crucial,” he says. Additionally, he emphasises on the importance of research. “Look at car manufacturers like BMW. They keep innovating and investing in research constantly. IBM is still relevant today, thanks to its focus on research,” he states.
Vembu is non-Silicon Valleyesque in several aspects. He has consciously avoided raising money from venture capital investors; he hardly talks about valuations, simply because he doesn’t plan to sell out. His focus never veers from one thing – shipping out great products. Unlike his primary competitors in the U.S. (Microsoft, Google and Salesforce), Vembu cares very little for college degrees or grades while recruiting people. While he sells his web-based software across the world (with most of his customers based in the U.S.), his engineering team is based in Chennai, India. In order to recruit a workforce that will stick with him, Vembu goes to Tier II and Tier III schools in Tamil Nadu to recruit his team. The company then puts them through training – both classroom and on-the-job, empowers them with interesting job responsibilities, and in a while, they swear by Zoho Corp and what the company has done for their personal and professional growth.
Over the last 16 years, the company’s growth has been remarkable; especially considering that the business has been bootstrapped since day one. Founded as AdventNet in 1996, the company started selling network management software. By 2000, it touched revenues of US $10 million selling this software to companies in the U.S., Japan and a few other global markets. The next few years turned out to be tough, as it was for several technology companies, during the dotcom recession. Vembu and his team took rearguard action, focused on R&D and launched newer products – a software-as-a-service network management software called Manage Engine and Zoho, the suite of Microsoft Office replacement products, productivity and collaboration applications on the cloud.
“I’m an optimist when it comes to business and technology, and a pessimist when it comes to macro-economics. I strongly believe that debt is the cause of the world’s economic problems.”
The company built a robust yet cost-effective engineering team – over 600 engineers in India (and eight sales and marketing folks in California) – by 2007. This allowed it to build a whole range of products in a short span of time. One of its competitors in the CRM space, Salesforce, had about 100 engineers at the time. Vembu says, “Our business model is unique in its own way. The frugality we bring to our development model is one of our core strengths.” This allows the company to price its products differently and offer a wider range (compared to Salesforce) of products to enterprise and professional customers. Salesforce’s enterprise CRM product is priced at US $125 per user per month while Zoho Corp’s CRM is priced at US $25 per user per month. While the product offerings are comparable, the business model adopted by Vembu is engineering-centric with marketing spends being fairly low, while at Salesforce the whole model is marketing and sales driven. Vembu is convinced his frugal, engineering-centric model is certainly the way forward. In addition to direct sales, the company grows primarily through word-of-mouth and through customers who hear about its products through the Internet. Today, with annual revenues of US $150 million and still growing with newer product ideas in the bag, Vembu’s approach seems to be working.
The workings of Zoho University
A Ph.D. in electrical engineering from Princeton University, Vembu grew up in India with a typical focus on education and grades. He completed his Bachelor’s degree from IIT-Madras, one of India’s foremost educational institutions. For a man with such a background, his thinking seems to have taken an about turn sometime in his career. His candid admission is almost shocking. “Let me tell you frankly, I wasted time doing my Ph.D. In economic terms, it is a sunk cost,” he states. At Zoho Corp, the belief is that a vast majority of students, especially those who attend second-rung colleges, learn very little; it is a waste of time and a waste of parents’ money. Vembu and his team thought they could turn the college education model on its head.
The team, headed by Professor Rajendran, went directly to high schools in Tier II towns to recruit students into their learning programme – at that time called AdventNet University (it is now called Zoho University). They recruited six bright students, those who had done reasonably well in school but didn’t plan to attend college for economic reasons, into the first batch in 2005.
The university focused on imparting education in software programming (HTML, PHP, Java etc.), computer science concepts (network and webapp security, compiler construction) and in basic math and communication skills. It intentionally got rid of courses like advanced mathematics that software programmers hardly use. The enrolment gradually grew over the years and in 2010, the intake was 44 students. “While we interview students to enrol into the university, the first thing we look for is commitment. In our first batch, five out of the six students hadn’t seen a computer before. But that doesn’t matter. We train them and it works. One of our best programmers came from our first batch and he had never seen a computer before until then,” says Vembu.
Today, over 15 per cent (over 200 people out of the total staff strength of 1,500) of Zoho Corp’s employees come from Zoho University. “The university was a very small experiment when it started. Today, it looks a lot more radical than it actually is. We look at it as a long-term strategic investment for skill building that allows us to identify and work with some wonderfully talented coders,” he says.
The 10x effect
Vembu switches to an analytical mode while discussing product strategy and development. It is what makes Zoho Corp what it is today. In an official blog posted on Zoho.com in 2011, Vembu explained a concept he calls the 10x effect: two products that have been developed by similarly sized teams in the same amount of time, but one does 10 times the sales revenue of the other product. Till date, the company has launched over 70 products and, according to Vembu, 30 of them are profitable. Some are highly profitable and some others are reasonably profitable. The ones that don’t see traction are either fixed (by improving feature sets and making changes to the business model) or shut down.
Vembu’s mandate to his product managers is simple – keep teams small and productive. Ideally, Zoho Corp is shooting for a 10x or maybe even a 100x product, ones that will bring in 100 times the revenue (compared to another product) with the same effort on the engineering front. “In any case, the small team’s approach is crucial in a product environment unlike in a services setup,” he says.
One of Vembu’s biggest challenges is that he is competing with cash-rich players like Google, Microsoft and Salesforce.com. This gives his competitors the ability to experiment more, fail more often, and yet have the financial wherewithal to survive and look for the next 100x product. His product managers constantly keep tabs on what the competition is up to in their particular product line. But, at a broad level, Vembu is confident about his company’s approach and operating style. “Google has a completely different model (revenues through advertising) but we do look up to them for engineering prowess. I believe Salesforce.com has a bloated business model and its products are a lot more expensive,” he says.
It’s not just the big players that Zoho Corp competes with as several software entrepreneurs are working towards creating the next big enterprise. On the productivity product line, Chicago-based 37 Signals-owned Basecamp run by Jason Fried gives Zoho Projects – the online project management tool – a run for its money. For now though, Vembu’s strategy of a large team in India and a small onsite team gives Zoho Corp the cost advantage.
At a sector level, Vembu is convinced that any enterprise or professional software now needs to be made available in multiple platforms – something he refers to as fragmentation of the platform. Recently, the company launched the Zoho CRM app for the iPhone. “We are closely looking at how we can organise our productivity to deliver on the potential offered by both cloud and mobile,” says Vembu. The Zoho Creator platform is slowly working towards offering tools to capture each and every aspect of a business process.
The other term that is often heard at Zoho Corp is agility. Sometime in late 2010, when Basecamp got rid of its US $24 per month plan (the cheapest plan became US$ 49 per month), Zoho Corp observed that several people moved from Basecamp to Zoho Projects. To make it easier for these new customers, the company quickly launched a tool called Zoho Projects BUMP to import data from Basecamp and ease the move. This tool was launched and announced within a day after the change at Basecamp. It is this ability – thanks to its large engineering team – that lies at the heart of Zoho Corp’s success.
The humble experimenter
Productivity, agility and engineering frugality – all these characteristics define Zoho Corp. If there is one other factor, it is the company’s willingness to experiment. Vembu says, “The trick really is to try multiple experiments and keep them really small,” he says. A few years ago, the company launched Toondoo.com, a web product to create cartoon strips online. “The product was launched for the web but it didn’t work. It would have probably made sense as an iPad app. But it failed on the web. As experimenters, we need to be humble,” says Vembu, adding, “This is true not just for product development. When we started Zoho University, the plan was to keep it really small. If the experiment of turning underprivileged high-school students into programmers had failed, chances are you wouldn’t have heard about it.” Vembu swears by this mantra till date.
Ask Vembu to define Zoho Corp and he will quickly respond with something like this: “We are in the business of making well-engineered software products that are contextual to our customers. Our products will keep changing as they have in the past.” Vembu’s definition might sound vague, but he seems to have things sorted out in his head. With a strong focus on research, backed by an efficiently managed engineering team, Vembu doesn’t want to restrict himself within a defined boundary. He’s ready to make any kind of software product and going by the past, he will do it frugally.
ZOHO CORP – A SNAPSHOT
Founder and CEO: Sridhar Vembu
BUSINESS UNITS: Zoho.com: CRM, Mail, Office Suite, Project Management, Web Conferencing
MANAGE ENGINE: Enterprise IT management solution
WebNMS: Network management solution
OFFICE LOCATIONS: California, Austin, Chennai, New Jersey, London, Tokyo and Beijing
CRITICAL FACTORS FOR SUCCESS:
Unique recruiting model
Ability to build and launch a huge range of products
Limited marketing spend thus transferring the cost benefit to customers
ZOHO IN NUMBERS
FY 2012 revenue : US $150 million
No. of employees : 1500
No. of employees from Zoho University : 200
Products launched till date : Over 70
Profitable products : Over 30
No. of customers : 6 million