‘If you don’t invest in R&D, you won’t have long-term growth,’ says Zoho Corp's boss Sridhar Vembu

Sridhar Vembu, the CEO and Co-founder of SaaS player Zoho Corporation, made the unusual trek from Silicon Valley to a village in the Tenkasi district of Tamil Nadu much before working from home became a thing. That’s not the only thing that sets his digital company apart from its peers. Zoho, a globally successful player, has never raised mind-boggling sums of money—in fact it has never raised funding. Vembu, who is the ultimate bootstrapped billionaire, has no interest in valuations, he tells Business Today’s Global Business Editor Udayan Mukherjee in a freewheeling interview. The Zoho CEO explains why the company will stay private, why it is important to nurture talent and why it is difficult to define moonlighting. Edited excerpts:

Q: You’ve always stayed away from venture capital funding and private equity funding, much before the difficult times arrived. What made you stay away?

A: From the early days, I wanted to avoid venture capital [funding] because I wanted to build a company for the long haul, with a focus on our freedom to be ourselves. I felt that if we took venture capital [funds], we would have to provide an exit eventually. This could be an acquisition, which would mean we would lose our independence; or go public, in which case, we would, again, lose our independence. I felt that being private would give us the freedom to invest for the very long term. A lot of the things we do are focussed on the long term… which is very difficult to do when you have venture capital or public markets breathing down your neck—because quarter to quarter profitability becomes very important. That’s why we decided to stay private.

Q: I take your point. But did you foresee that reliance on external capital might warp the business model of your company in a way that you will not be able to focus on profitability on an annual basis to drive the company forward, which is what a lot of digital companies seem to be trapped in today?

A: Yeah, it was clear. In 1999-2000, there was a dot-com bubble. A lot of companies raised huge rounds of money and then fell by the wayside in 2001-02; and then there was a big drought in VC funding for a while. That was a good lesson. And it also emphasised that if you raise money, you’re forced to spend it, and you’ll lose profitability. And then when the [funding] winter arrives, money is no longer available, and you’re losing money. So, we decided that we will do it profitably. That necessarily meant growth would be slower, but steadier. And we have grown steadily over the past few years; we have crossed $1 billion in revenue, and we are now accelerating. The reason for the acceleration is now we have the depth and breadth of the product portfolio, which we could not have built up if we had raised money—because that long-term investment was not possible. So, in a sense, venture capital forces you to grow faster by investing more heavily in sales and marketing, as opposed to R&D. And sales and marketing will give you an immediate boost in growth. But if you don’t invest enough in R&D, you won’t have long-term growth. So that’s the trade-off we were able to make: long-term growth versus immediate growth.

Q: How profitable is Zoho? Being a private company, not much information is available in the public domain. Could you give us a sense of what your profitability metrics are?

A: We pay taxes [to the Indian government every year]. Our taxes would give you an idea of the profitability. Last year [FY22], we paid Rs 600 crore-plus in taxes. We’ve been consistently profitable for several years now—actually decades—and we are also steadily growing. But we are reinvesting that profit into R&D, into our expansion, data centres, geographic expansion—all of that.

Q: Is there a desire to do an IPO and share Zoho’s success with public shareholders at some stage?

A: No, I prefer to stay private because even public companies are subject to quarter to quarter pressure. For example, three to four years ago, [our] profit declined 50 per cent because we had invested more heavily into R&D and in expanding [our] data centres. And somebody pointed this out from the government filings. But I didn’t pay attention to it as we are investing in years of growth. At a public company, I will have to defend why we are doing this at the expense of profitability.

Q: But you don’t see the need for augmenting or you don’t consider the valuation of your company that important then?

A: I truly don’t care about valuations. What matters is do we have enough resources to invest in the areas we are investing in? Are we growing steadily? Do our products come to fruition? Do we keep our employees happy? Do we keep our customers happy? Those are the concerns I have. And I consider that [not caring about valuation is] a luxury we can afford because we are private. And essentially I get to ignore our shareholders, which is something that most CEOs would love to do, but they cannot do. [But] if I go public, I cannot do this. And valuation is something that I’ve never paid attention to. If I said this as a venture capital company or a public company, I would not have my job. And that’s why we stay private.

Q: Do you think that [obsessing over valuations] is one of the core problems that is afflicting the digital universe in India today? That they thought of valuations before growing the business. And that is why all these problems are coming up with these unicorns?

A: Absolutely. Take the word unicorn itself, that’s considered a billion dollars in valuation. But valuations could come and go easily. As we saw crypto trading company FTX, a company worth $32 billion, vanish into zero. So I don’t consider these valuations meaningful. When you make valuations the real metric during a stock market bubble—as it happened in the last few years—you get extremely hyper-inflated valuations. And that became the principal objective for the companies. This severely distorts your decision-making [since] you’re not running the company to benefit customers or even employees. You can argue that employees have stock options and they benefit from the valuation. Well, they don’t. They [stock options] have lock-in periods. So employees cannot sell these shares. Even companies that went public with a six-month lock-in period, didn’t get enough opportunity to sell [their shares] at those inflated prices. So in a sense, this valuation obsession cost companies dearly in terms of market execution, in terms of R&D execution, etc. And this is the cost of bubbles. Bubbles always cause long-term economic damage. We saw this in the start-up sector, [where] resources got sucked into companies whose only focus was to inflate their paper valuations—FTX is a classic example of that. This, to a lesser extent, is reflected across the landscape.

Q: You speak about employees and the cost to employees Sridhar, and that is very apparent now with thousands of employees being laid off practically every week or month from the digital universe. Do you see this becoming even more painful because of the flow or flaws in the business model you alluded to?

A: Unfortunately, it is the cost of the bubble itself. There were inflated valuations that attracted more money into the sector; companies went on hiring sprees and massively over-hired. When the bubble burst, people lost their jobs. It is sad to watch the spectacle, but it had happened twice before—in 2001, and again in 2008-09. And both times, the exact same thing happened—too much money was raised, there were inflated valuations [and hiring sprees], and then there was a big crash and job losses. This time, the bubble appears to be bigger, which is why the bust seems even worse. And I am afraid that the pain has just started. It would get worse before it gets better in the whole tech sector.

Q: Do you see companies going belly up, being unable to raise venture capital or private equity funding?

A: Look at history as a guide—the best way we can predict the future is to look at past episodes where similar stuff happened. I remember this very distinctly. In Silicon Valley, we were exposed to the optical networking sector. That’s what we were serving in 1999-2000—our primary business was selling software to optical networking companies. There were 400-500 such companies in the US then. Two years later, around 95 per cent of the companies had shut down. Today, only one or two of them survive. And what is interesting is the optical revolution really happened. I’m in a remote village and I have dual-fibre optic links coming to my home. In 2000, this was unimaginable. Similarly, the wireless revolution happened. Everybody has a smartphone in their pocket, which was unimaginable in 2000. So the premise of the technology revolution was correct. Yet the companies that were betting on it, the venture capital that went into all this, eventually went bust. Again, it is Warren Buffett’s elegy: the sector flourished long-term, but the companies that overextended themselves—and a vast majority of companies did that—did not. The overall premise could be correct [and] the digital transformation would come true. But that doesn’t mean all the investment dollars that bet on the premise would get a return.

Q: How important is the Indian market for Zoho Corp?

A: Right now, India is No. 3 in terms of market share. In 10 years, it has gone from barely being in the Top 10 to No. 3. That tells you how fast we have grown in India in the past 10 years. In fact, until about 2012, India was a production base, but we hardly had any market. Today it’s No. 3, [and] also the fastest-growing market by far. And I see it becoming No. 2 in the next three to five years, and—based on current trends—could even be the No. 1 market over the next 10 years. That’s how important India is to us. It also reflects the broader growth in Indian economy that has gone from $350 billion 25 years ago to $3.5 trillion now. And I can easily see the pathway to a $10-20-trillion economy in the next 10-15 years.

Q: Let me ask you a question on the HR side because of your work with Zoho University, where you take in people without fancy college degrees. How do you see the problem of unemployable graduates from India for the technology sector? Because today, there seems to be a big scramble for talent, which is probably why issues like moonlighting are coming to the fore. How do you see this problem and the way around it?

A: A lot of companies look at talent as something as a given that you get from the market. We see, particularly in the Indian context, the challenge is one of creating and nurturing the talent. It’s a mindset shift. But we are a talent creation business, we are a talent nurturing business, not merely a talent acquisition business. So, we don’t assume that there’s ready-made talent available in the market. We actively seek to create and nurture the talent. That approach has been true for nearly our entire existence as a company and that has served us well. In fact, that is critical for our growth, as well as for our rural expansion, as well as for employee loyalty. All three are driven by the fact that we invest in talent, we create and nurture the talent, and that has fuelled our growth as a company. And it has allowed us to expand, by going into rural areas with an abundance of latent talent, talent that is intrinsically there, but someone has to go and nurture it, and then bring it out. And that also promotes employee loyalty. Because when you invest in people, they tend to be loyal. So all of that has been helped by our policy of how we look at talent.

Q: Any thoughts on moonlighting? Or do you have a specific stance on it?

A: It really isn’t a problem for us. But the problem in defining all this is if somebody is, for example, a really good software engineer who runs a YouTube channel on the side on cooking or organic farming… and I’m on Twitter, talking about macroeconomics—does that count as moonlighting? I read up a lot about macroeconomics, it informs my work as the CEO of this company, but there’s well beyond that. I talk about rural development [and other] topics like that. So that’s why I think it’s really difficult to define this. Our policy in Zoho is to use your common sense. There are some obvious ones—if you’re doing some work, and then you’re doing the exact same work for a competitor, and you’re getting paid for it, clearly that would be violation of trust. And so that’s where you just use your common sense. That’s the policy.

Q: You come from fairly modest roots. You grew up in a household where your father was a stenographer in the Madras High Court. Has that kind of upbringing gone a long way in shaping the person that you are?

A: Absolutely. My value systems come from my parents. My parents retain the exact life they’ve had well before this success happened. That is a role model for me. If it’s okay for my father to live a humble life, why shouldn’t I enjoy the same kind of life, which is a very modest one? That was drilled into our heads from childhood. My parents never took on debt [even though] my father’s income was modest. As a result, those values stayed with us. I’m truly blessed to have them as parents because those values are what helped me in terms of staying humble, staying close to my roots, and not getting over-excited about wealth itself. I separate the wealth from myself. It’s not mine, in a sense. It allows us to do some good for our society. And I live in a rural area and I, on a daily basis, come across a lot of causes that I want to support, and I’m blessed that the wealth allows me to do that. But beyond that, I’m not personally interested in that. I would want to be a true son of my parents, which means that I cannot be flashy about displaying wealth.

Q: Would you go as far as to say that when you see businessmen with almost a crude kind of display of wealth, you find it distasteful?

A: I don’t want to comment on other people. But I’ll say there is an ancient philosophy from our land, which advises moderation in all things. That helps all of us because we are, in a sense, custodians of the wealth. Father of the Nation [Mohandas Karamchand] Gandhi said this. He was never a socialist, but he said that capitalism was a custodian of the wealth. And that’s how I see it. Our family is merely a custodian of the wealth; we get to direct it to good causes. That’s how I see it. Based on my upbringing, I cannot have extreme display of personal wealth.

This interview was taken before Zoho announced it was entering the electric vehicles segment