Happily Bootstrapping: Zoho CEO Sridhar Vembu (Part 7)
Check other articles in the series...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.
This segment is part 7 in a 7 part series
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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.
“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.
These are the kind of leaders we need.Those who don’t follow the set stereotype rules.
Kudos!
—Sri
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.
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
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 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
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,
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
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.
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
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,
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
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.
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
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…….
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.
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.”