Want to build a billion dollar organisation without VC money? Learn from Sridhar Vembu

Innovation at Zoho Corp is growing at an electrifying speed, as the organisation gets closer to $500 million in revenues, with over one lakh paying businesses and 18 million individual users. It has plans to sign up one million (ten lakh) enterprises in three years, a target that came about purely because of the tenacity of Sridhar Vembu, Founder, Zoho Corp, and his team.

Sridhar has a large fan-following in the startup industry, which seemed to have created a mythical narrative around the man for turning down venture capital money. One of the interesting stories is that the domain name 'Zoho' originally belonged to a US-based hospitality startup that had raised $53 million in 1999 to scale up. Unfortunately, the fairy tale story of great valuations turned out to be a nightmare for this hotel aggregator, which went into liquidation in 2000-01. Sridhar and his team loved the domain name and picked it up from the court that was handling the liquidation process.

The domain cost Sridhar an expensive $5000, in the year 2004, and it turned out the best decision his team had made. They used the domain to launch a suite of office products for the parent company, AdventNet Technologies. Sridhar rebranded the company as Zoho Corp by 2010.

The rest was history. Sridhar Vembu’s company is now one of the fastest growing companies, which is prepared for a world where software will be the business driver for every organisation. Be it in networks, smart offices or smart factories Zoho believes software will change IT businesses forever with subscription-based business models uprooting licence fee-based business models of proprietary software. Currently, Zoho is experimenting with over 100 different ideas and has seeded four productivity tools – Zoho Writer, App-Creator, Notebook and Gamescope – each of which helps an enterprise deploy IT rapidly in the organisation.

“Readily deployable IT is the future,” says Sridhar. But there is more to Zoho than just productivity tools for the office. Its Manage Engine software suite manages network nodes of enterprises, and its WebNMS platform is building Internet of Things (IoT) applications for industry.

Being an IT veteran, Sridhar believes startups in the B2B business should focus on building businesses without any funding, and they should learn to make customers pay for the services they deliver. He also believes a bigger global financial meltdown is around the corner and that funding could dry up soon. Here are the excerpts of the interview:

1. You want one million enterprises to sign up with Zoho in three years. Is that possible? 

SV. I am confident we can achieve it. Organisations are moving a lot of applications to the cloud. We are a company that is known for office applications and we see many small businesses that are going to use our products. A lot of medium-sized enterprises are moving to the cloud too, and they can use our applications with minimum support and implementation. The cost of IT is going to drop. Consumerisation of IT is the future and it will be about readily deployable apps and automation. The old world of IT, which is about large-scale implementation, is going to go through a rapid transformation. Most of our products are digitally marketed and word of mouth wins new customers for us.

2. You managed two downturns. Are you poised for any financial crisis?

SV. Each time, in 2000 and in 2008, we had enough cash to work on new technology areas. In 2000, we served the telecom as our major clientele. When the industry collapsed we had to use our internal accruals to build new network management technologies for enterprises across verticals. Similarly, in 2008, a lot of businesses went into cost-saving mode and began to experiment with our products, because even at the low price we offered quality. It served the needs of enterprises because proprietary software remained inefficient to catch up with the world facing a financial crunch. In 2000, we self-funded our growth; the second time around – in 2008 – we had the products that were accepted by the market. Now we are ready for the future, which is going to be about mobiles and changing IT architectures.

3. Was it tempting to go to a venture capital fund?

SV. I will never go to a VC. In fact, I was given a term sheet in 1999. But a clause put me off. The clause said that I must go for an IPO or generate liquidity in eight years. I did not know finance back then, but my mind kept saying that this clause is just not right. However, that is a standard clause for all VCs and everyone signs it. My point is that the whole construct is questionable and not glued to reality. The philosophy of taking somebody’s money and promising them what they want looks like a gamble to me. So, like a good man, I said no to the money. But, at the time, I was termed arrogant by the VC and he left the office fuming. It was a good decision because today I can experiment with technology and invest 50 percent of my money in R&D without having someone telling me where I should put my money. That said, many VC company founders are my friends. I respect that theirs is a different philosophy and it is their view of building companies. Now, I have shown everyone that sometimes you do not need VC money. Deep down I think Google and Apple would know that after a certain scale you do not require to go public. I must advice startups that you need partners or investors who will stay invested with you for life and help build great technology.

4. Have you invested in startups and how do you manage leadership in a culturally diverse organisation?

SV. I have invested in four companies and the founders share a common vision of building long-lasting businesses. These startups are in the areas of core technology. I am open to ideas in my organisation, which is why we have every team working with an idea that can become a product. Failures are good and experimenting is a key to success. That’s how most of our products in Zoho were born.

As a leader, I believe in being fluidic. Indian culture has been a fluidic culture and it teaches us to accept so many changes. For example I am Tamil, but I can also speak English. My company is global and yet I have not forgotten my cultural roots. I say English is important for economic growth, but one should also know everything about his or her culture. I relate this to dynamic leadership because it enables me to understand and accept people across borders. Just to illustrate this concept. Ten percent of my young engineers are from Bihar and this number is only increasing. Now, I am learning Hindi because I want to be able to communicate with my new hires. The mark of a leader is to learn constantly and understand different people without being troubled by their expectations. I think Indian philosophy and global history has enough examples of preparing leaders for running global companies. You have many Indian global CEOs; the same cannot be said about many other Asian countries.

5. You have two big businesses, Manage Engine and WebNMS. What are the plans for these businesses?

SV. Manage Engine is still a large business by value. But the Zoho suite of products will grow faster. The Manage Engine business is for large telecom vendors who want software to manage switches, nodes, printers and other access points of an enterprise. It enables them to figure out the downtime and availability of nodes. The delivery of this product will also eventually move to the cloud as enterprises begin to share their APIs to deliver such service. The WebNMS business is about preparing firmware of the future, which can then be implemented with device manufacturers for an IoT play. IoT, as you know, has many applications in the connected world.

6. What about the mobile? Could anyone have predicted its growth in such a short span?

SV. This was one thing that no enterprise predicted. In 2007, when the first iPhone was out, I was invited to a conference and almost everyone in that room had the iPhone. That changed the entire ecosystem of services on the mobile. Today, this small device can control large machines. Software is the business today and business is defined by the power of software. Today, our mobile device management application for enterprises is a popular product. Our suite of office productivity apps and the CRM have all moved mobile. By the way, building a mobile app is not about replicating the web world to a mobile form. It is about an entire new platform that has its own dynamics of user interface and performance.

7. You have mentioned a few times that there is downturn waiting to happen. Why do you say that, and what are the implications for India in such a case?

SV. The problem is over-leverage. The world’s debt is high. India is lucky because of the RBI managing the economy. Over-spending by consumers and high leverage on the enterprise side is the problem. Part of the larger problem is that the private funds bloat up valuations of everything in a short period and then when they leave markets, during a downturn, there are social ramifications. Loss of jobs and cultural identity is a reality that we have to get used to. Look at India, the growth is happening in four or five major cities. The opportunities are not trickling down. Although India’s domestic consumption economy is what everyone is betting on, the financial world is clearly global. The central banks have no control over foreign capital. The Indian central bank has done a wonderful job of reining in debt by not lowering rates. I think companies have to be frugal and conserve cash. But they seldom do because they embark on building swanky offices and spending on promotions. I can give you an example of a startup that spent $35 million on rentals per year. Now, for a 1,000-employee organisation this roughly can be estimated to about $25,000 per employee as rental cost. It is insane and worrisome.