A Bootstrapper's Guide to $500 Million in Revenue with Sridhar Vembu, Zoho Corporation

I put it this way, once a company reaches a certain level, you have enough profits, enough, all of that, to pay people reasonably well. And beyond a point, though, money doesn't have that much value. So that's why beyond a point in a private company, once it reaches the trajectory, money ceases its motivating factor. At least not for me anymore.

I need some traction. You need some traction. Let's get some traction.

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22 years.

22 years. A startup that's 22 years old and you've raised a lot of money in the meantime, how much have you raised?

0.

He's raised no money. How many customers do you have?

300,000.

Now 300,000 customers. And how much revenue?

We don't disclose. But here's a lot way up there. A lot.

That's quite the story.

One of the reasons we don't disclose we are private. It's the benefit of being private. Right? But you never raise money.

When you started 22 years ago, what were you thinking? What did you actually want to build at the time?

We wanted to build a long term company, but I was focused on survival. My first thought, first year, maybe the second year was we shouldn't Go out of business. That's the overwhelming thought I remember. But I knew that at a theoretical level, I haven't proved it myself, but if we survived, we would thrive long term. But we had to first survive. So that's the first thing that happened.

Did you think you weren't going to survive at that point?

Not really. But when you are focused on that, then you do things that, for example, you are initially able to optimize for revenue. Revenue, revenue. Everything you do has to be pay the bills, pay the employees, meet payroll, all of those. So that was the first year too. And then it slowly became what was.

Your product back then? Because the Zoho we know today is different from what you did back then.

How many of you heard of this thing called snmp? Anybody? So one person in the room? Two?

Three?

Maybe Three? Yeah.

Four, five, six?

Actually, we still sell that product. You can go to a domain called webnms.com, webnms.com that's our domain. We still sell this product. This was the very first product we launched way back in 96 and that still brings in a couple of million dollars a year in revenue. But it's an obscure small niche. I'm glad nobody knows this because if too many people knew it, too many people will be in it, right? But it's a small niche, right? It's not a big market. Even after 22 years, we only do like 1 or 2 million a year. So no VCs would be interested in markets like that. But there's a lesson there. This is the kind of markets that bootstrappers your best bet because you have a small niche to yourself and it's easy to grow into it, easy to find customers, because it's not. I mean, if you find a niche which not a lot of players, then easy to find customers, all of that. That's what happened to us. And we picked it almost deliberately as a choice that, like, remember this was a time when Yahoo was born. But I knew that if you're going to go compete with Yahoo, you would need a lot of money. So let me stick with something that's, you know, small and obscure.

If you're in that small niche though, you can only grow so much.

Yes, that is true. But the way I figured is if we had the capital, then we could become our own VC and invest in the next thing, right? Not a lot of people think like that. But once we made started making money and within about seven years our next division was born that is called manageengine in Fact, right outside we have a booth for it and this provides IT management products for a broad audience.

That was seven years.

Seven years.

That's like the iPhone is barely seven years old. But it's a long time.

Exactly. But then by the time we had accumulated both know how to build products, how to serve customers, how to market all of these, and then we built our next set of products in Manage Engine and then Zoho Division was born. 2005. Exactly. On actually on TechCrunch. That's where we were announced in August of 2005.

TechCrunch was barely born at that time.

Exactly. TechCrunch was born at that time too. Yes, yes.

You started Zoho. It was basically a Zoho writer, I think was the first product.

Exactly.

Basically Google Docs of its time.

In fact, Google did not have Google Docs. They acquired a company called Writely six months after we launched our word processors over Writer.

Did they try to acquire you instead?

No, actually they knew we were part of a bigger company. Right. Thing is though, that is a lesson right there. Actually when we entered the cloud, the word processor, spreadsheet or presentation, nobody was doing it. But six months after we launched it, Google acquired Rightly and then they acquired a presentation tool. I think they acquired a spreadsheet also around that time. Within about a year they acquired a lot of these things and that's what became the G suite today. And we were still of course a much smaller company than Google and we are going up and against them. So that of course changed our business plan on Zoho. We pivoted towards CRM more at that time because I figured it's easier to compete with Salesforce than with Google. Right. Which one would you choose? Right.

Did that turn out to be true?

That turned out to be true. And of course we still kept investing in R and D, so we now have a very broad product suite. But definitely this was one of those calculus where we had to change the plan when Google muscled its way in and which can happen to any company that Google can enter your space now.

Did that help? Were you worried that that was going to bring your company down at that point?

I mean, we already had reasonably established divisions in managed engine webinars, all of this. So this wasn't going to kill the company. But definitely we had to rethink our plans for Zoho itself. So at that time, if you go look up articles in TechCrunch covered us a lot at that time you'd be known as like the web office Suite at that time. But today we are much known for the CRM and other business software. So we had to do that pivot today.

You have, I counted earlier on. There might have been more by now, but there's 44 products. Yes, 44 different products. It's pretty crazy. And every one of those products goes up against somebody who seems to be the market leader.

Yes.

You know, Salesforce and Google and email and Slack, QuickBooks and Intuit and everybody else. You do everything. How do you do everything? Right?

Well, it's not. Maybe you're not, but this is early on we, we have this DNA of really strong focus on engineering product development. Remember, we came from a totally different product line which still ships that SNMP still brings in money that has nothing at all to do with CRM and that has nothing to do with accounting. Right. So we built. Our core competence is building this product as a private company. We could focus on this. The second reason we did that, this was a deliberate strategy. The reason was early on I figured we wanted to stay private. We don't want to raise money, we don't want to sell. If you don't go public, you cannot acquire easily because most companies will use the stock as their acquisition currency. And in fact, it's a very good bet that a single product company today, once they go public at some point they will diversify their product portfolio. Their growth objectives will demand that. Right. That's why they go and acquire. I mean Salesforce has acquired maybe 60 or 70 companies in the past like seven years and all of them will do that. Slack when they go public or Dropbox when they go public, they will have to do it because to meet the public market's expectations, which puts pressure on a private company because you ought to be able to have a diversified product portfolio to compete with those companies. Right. Early on I figured this out and I said, well then we have to build a product in order to survive long term against our coming public competition. So I figured out we will invest in engineering first, build out the portfolio and then when we are at a sufficient size, compete harder. So we adopted a different strategy.

Basically, it's a very broad strategy.

Yes, it is. And it played our strength that we could build a product. Just two weeks ago we launched a product and this is particularly relevant here to manage events like this in the Zoho suite, it's called our Backstage. Literally it's called Backstage in Zoho. We launched it because we conduct a lot of events. Now we automated it ourselves and now we launched it as a product. That's an example of how we think about this.

That's a very niche product compared to CRM.

Yes it is, but it integrates with CRM. So when we conduct events, the people who show up go into your CRM, then you can run campaigns to them, all of those things. So that's how the product portfolio expanded. Based on that kind of thinking, it's.

The ultimate idea that somebody can just run their whole business on Zoho.

Basically, yes, that's the idea. And that's why we call ourselves the operating system for business. And at some size and once you have enough maturity, the message resonates more and more. It is now we are at 300,000 customers now, organizations around the world and now the growth rate has actually accelerated this year. Our growth rate is better than the last anytime in the last five, 10 years because the product suite is now more mature and so more customers are discovering it now.

When you started out, did you know you did not want to take any money? VC money?

Maybe the first. Okay. When we started out, there was no money to be had. Even today we. I mean contrary to the extreme amount of venture capital available, the average person who's going up for venture capital is going to be rejected. In fact, 90% of the people are going to be rejected even today. And except that at that time maybe 99% or 99.9% would have been rejected. That was the difference, only difference still the mass majority will get rejected. So we had only an engineering background, we knew how to code at that time that wasn't an easy pedigree to raise money though today it is, but at that time it wasn't. So the first two years we knew we were not going to get money.

So we were afraid of getting rejected, rejected.

And so we didn't go up at that point. VC started approaching us at about 99, 96, 99. We had VC interest by then we had reached like about 5, 6 million revenue. In fact 2000 we crossed 10 million for the first time and we realized we didn't need money. We were actually where cash flow was very good. Then I thought about this question. In fact, the only time I got a term sheet was in 2000.

Everybody got a term sheet.

At 2000 the VC approached us, we got a term sheet. It's funny, the valuation was good. Everything was good actually. And I looked up the. Luckily I read the full fine print of the contract, right. Normally we don't do it, but I read it said we are committing to an exit or liquidity in seven years. Actually a pretty standard clause, right? I said, no, I don't like this clause. He said, well, it's funny, you are negotiating something nobody negotiates, but actually you are not negotiating valuation anything. I said, no, I don't like this clause. He said, well, this is standard. Then I consulted other people, they said, it's standard. At that time I started to think, why is it standard? Why should we have have an exit or liquidity clause? Then I realized it's a financial investor, they need an exit. But my interest is not aligned. I'm not interested in an exit. I'm married to this company. I'm going to be here forever. So that means we have two people whose objectives are fundamentally different. They want an exit and I don't want an exit. So I said, then I don't want the money. He was actually taken aback. He said, why would you reject something that the term sheet is good? I said, because I don't want to exit. And after that, we decided we'll stay private forever. That's true story. I'm at it now, 2000, now it's 18 years later, we are still at the game. So I don't want to exit.

You're still married. Was there never a temptation, though? Somebody must have come and said, we want to buy you.

Was that. But, you know, I put it this way. Once a company reaches a certain level, you have enough profits, enough, all of that, to pay people reasonably well. And I don't live like a monk. I mean, I live reasonably well. I don't. I'm not, you know, so it's beyond a point, though. Money doesn't have that much value. I mean, whether you have, you know, the next $1 million doesn't have that same impact anymore. So that's why, beyond a point. In a private company, once it reaches the trajectory, money ceases its motivating factor. At least not for me anymore. Which means that your objectives become broader in life. What else do you want to do with the money? So that's where we are right now.

It's a comfortable place to be.

Yeah. And then you have the freedom. You have the freedom to put your money where you believe in and freedom to pursue projects you believe in. And I don't have the answer to shareholders every quarter. And that's why I'm able to be in the game, because I don't have a burnout. That's something that we don't see. I meet, in fact, I have peers, public company CEOs. They tell me I'm so envy you that you don't have to do all this shit that I have to put up with.

One of the reasons people tell me they really want to IPO though is to give their employees the ability to liquidate.

Correct, but think this way, right? Yes. You give your pre IPO employees the ability to liquidate. But there are going people who are going to be joining three years, five years down that after that they're not going to be able to liquidate anything usually. That's right. I'll ask you this way. In Silicon Valley there's amd. Now who is joining amd? Is anybody joining AMD for Infinite riches tomorrow? Not happening. They're joining AMD because they want to build chips. They have passion. We attract a lot of those people actually. So people know our model. We are private, we are going to be in the long haul. We pursue interesting projects, we invent a lot of technologies so people join for those challenges.

Now the Silicon Valley counter argument would be that so you're not attracting the best people.

Well, we'll show them in the market who is attracting the best people. That's all I'll say we'd love to compete with those that mindset.

Fair enough, fair enough. See, when there was never a temptation to ipo, there's never a temptation to take BC money. Can you see why a startup would want to take that money totally and can't feel like you.

Yeah, it is. If you are in a currently hot market and if you have a limited time span, I mean you have to take money. Right. Because other guys are taking money. For example, if you are going after, if you are going after social networking in 2004 and Facebook is raising $500 million, I don't know how you could bootstrap and compete with them. We didn't, we wouldn't have. Right. In fact, you can see that we pivoted towards CRM and other markets because Google entered the market. And in that case I don't know that even 100 million 500 million in VC money would have helped us because you are competing against Google who has 50 billion, 100 billion in the bank. So it is, you know, you have to be aware of what your means are to pursue a particular market. And the way that I say it is, if you think of this as first five years, I said start in year minus five as a bootstrapped entrepreneur, the first five years is to earn enough capital, the VC level of money, the first round, a round of money too for the next five years. Then maybe in 10 years you have that BC round of money at some point. We now have public company kind of money. In other words, our public competition doesn't have any more money than we do. So we can compete with them now more and more. So that's the idea that takes so much patience. Yeah, that is clear. I said this. Anything really worth doing in life does take patience and perseverance. I mean, sometimes you can hit the lottery and be very successful in a very short period of time. But you cannot go in expecting that to happen to you. It can only be an accident or a lucky accident. The expectation for most people, entrepreneurs in particular, has to be that it's better for you to think that I'm in it for the long haul. Maybe you get lucky and the long haul is not so long haul for you. But you cannot have an expectation that I'm going to get rich in five years because mostly you will fail to meet that expectation and you'll disappoint yourself. So our expectation from the beginning is it's going to be long slog. And actually, you know what? It has been a more fun ride than I would have predicted at that time.

You never wanted out.

Yeah. And honestly, there was never a month where we had a payroll crisis. There was never I had to max out my credit cards. None of this. And I sleep well at night. I've always slept well at night. So those are things I'm thankful for.

It's hard to sleep when the VCs.

Keep calling you or you're overstretched in some way. So we try to actually take risks that are proportionate to our means. Always.

So the competition doesn't keep you up at night either?

No. I mean, I study the market, but we never get phased by. First of all, because we are so diversified. I mean, look at our product line. It's not like any one company is going to put us out of business. We have such a broad portfolio now, so it doesn't. I mean, we learn execution from other companies. We study it constantly. In fact, I was talking to this Traction event itself. We conduct our events. I said there are some things Traction does better. We are going to learn from this.

Right.

So I'm constantly learning, but it's not like there's something that keeps me awake at night. Oh, shit. If you don't do this, we are screwed. That's never the mindset.

Now here's the problem you have that most startups don't have. You've got 44 products.

How do you market those yeah, that is a. You know, it's in the increasingly now one of the things for most companies, particularly in SaaS, it's true the cost of customer acquisition has skyrocketed. I mean if you go to a keyword like CRM on Google, it's 70, $80 or $100 now, right. And anything. It's true if you go for online chat or something or project management, any of these keywords is expensive. So this marketing issue has come to our advantage now where we can now cross promote across our own products. So if you acquire a customer for one product, we are able to sell other products to them. In fact, over time that has been driving our growth strategy. This thinking is not all that unorthodox actually because part of the reason why your profitability grows in a public company even is that once you acquire a customer, you are able to sell multiple products into them. We have that exact same strategy and it's working now. So yes, for a single product, take the backstage we introduced. The marketing challenge is immense. But once it now it has a 300,000 customer base. In fact, on day one we found maybe 50 or 100 customers because of our existing Zoho customer base.

What's the next? How many more products are you going to do?

We are building out a lot of things. We pursue a lot of R and D ideas because we can and I'm fundamentally an engineer at art and so we have a lot of teams pursuing a lot of interesting ideas. Everything from operating systems, compilers, browsers to crazy ideas like that. We do because a lot of those have payoffs in our other products. We take an idea and then we incorporate into our currently shipping product. The customers love the feature. So we do a lot of these and we have hardware being built in a subsidiary. We have even semiconductors. A lot of things going on. That is.

Hold on, you're building your own semiconductors?

Well, fabulous, right? We design and then get it fab somewhere else. But the idea is the engineering challenge involved in it. That's partly why we are doing. We have some really cool engineering talent that wants to build it. That's one of the reasons people join us and stay with us because of this fun element.

Here are those CRM specialized semiconductors.

I mean someday there might be. Actually someday. That's an interesting thought.

What I'm hinting at is that's a fun idea, but what's the point?

Well, I'll tell you what the point is, right? Actually I'll tell you why Semiconductor, Moore's law, the One where the chip capacity or the speed doubles every two years, that's dead, or it's kind of dying. Your semiconductors are not getting faster and faster. So a lot of your software productivity or speed is going to come from full stack architectural innovation. Not merely just that you write better code. You have to have full stack capability. Actually, Google invest in semiconductor, Microsoft does, Amazon does now. So a lot of software companies are looking at these now because you need that full stack to speed up the software now. So that's why it's not as crazy as it sounds.

Sure, sure. And it kind of makes sense. You told me earlier on, before we got up here, that you're running your own data centers as well.

It's at scale. It is cheaper to run your own servers and your own thing than the public cloud at scale. In fact, Dropbox, just today, their earnings, they announced their gross margins went up because they moved out of AWS to their own infrastructure at scale. It makes a lot of sense to do your own, right?

For a startup, it probably doesn't.

For a startup, if you have like 50 servers, it probably doesn't. But at 5,000 servers or 50,000 servers, it definitely does.

So semiconductors, I know you've got some healthcare thing going on as well.

We actually have a subsidiary that does your electronic medical records, the practice management, revenue management for practices. This is built on the same cloud infrastructure as Zoho, but it's a totally separate subsidiary we run because it's a regulated business, HIPAA compliance, all of that. So we keep it separate.

You talk about software, you make hardware for that too.

Yeah, we actually have a hardware subsidiary that builds hardware for hospitals. But that's tiny right now. It's just R and D right now.

So you're sleeping well at night, but how do you keep focused?

Well, you know, you look at. I mean, there are guys like Elon Musk, who has hundred more things going on. Right. Look at him. I mean, I admire.

Well, he's going slightly crazy right now.

But that's a. I mean, at Tesla, as though that challenge is not enough. He's firing rockets and he's drilling holes under the ground. I mean, the truth is, the way I look at the challenge is you're all smart people. It's not like I go and write the code in that thing.

Right.

And smart people want challenges. There's a lot of smart talent in this world that just wants, desperately wants to put their talent to work.

Sure.

So I find the talent and, you know, just unleash them on some Opportunity, that's it.

Good for you.

And not being public gives us the freedom to do it, right? To deploy our capital that way. So we are our own sort of internal VC that way. Sure, that's what it is.

So you don't like VCs but you're.

Making your own in a way? No, but it's different though, right? I'm not interested in the financial return aspect of it alone. I'm interested in making a difference in that area. So it's a different mindset right.

Now you mentioned talent earlier on and it's hard to find talent. You do have Zoho University as well. Maybe you can, because he doesn't have enough things to do. What is that?

Yeah. So early on it came from the observation. Most of you will recognize this, right? If you worked at all for three, four, five years, you know these things to be true. The grades in college, the degrees and the job performance don't correlate very well. Just because somebody has excellent grades in college doesn't mean they're awesome at work. And just because someone came from a fancy school doesn't mean they're going to be very successful in the job. Right? These things we have all observed. The thing is, oftentimes we make these observations but we don't act on them. But about 15 years ago I had the same observation and I decided, let's run an experiment. So we went to a neighborhood school in Chennai where our main R and D center is and where we said, let's hire kids who are not going to college. Even today, even in America and even In Canada, maybe 50% of the kids are not going to college. So we'll target that group. Let's put them through our own training program, see what happens. Let's see what happens. Right? We hired a professor, college professor, and we hired six kids out of a school. And after one year of this intensive program, hands on program, they joined the team. Within two years they became very productive. We said, wow, this is a very surprising result. And these kids were not going to college. They were not going to go to college. Then we expanded and expanded. Now we have 10 faculty members and 150, 140 students entered our program this year, just now in June after the school got off. So 150 kids, all about 17 or 18 age group, and we have 10 faculty. About 15% of the engineers who work for us don't have a degree at all. I mean they have our own certification which is what we call Zoho University. And now I become Passionate about it because it solves a lot of the, you know, we pay these kids when they join the 17, 18 year old who is in our program. They get paid a stipend, a living allowance and so that they don't have to take on debt. And then within about a year and a half to two years they will become full time employees and then they start earning and that way. Now it also serves a social cause where you are hiring kids who may not have gone to college, they may never have gone, for example, a Google would never have hired them, would never have seen them. Right it because they don't go to a fancy college, but they exist, they have clear talent. So that is the reason.

So it's very different from Trump University. You don't have to pay for it.

We don't collect a dime, we actually pay them.

You actually learned something probably. How do you find those kids?

So by now we have established a pipeline in a lot of schools where there is experience because this was the experiment started 15 years ago. Now we have branched off into a lot of schools and word of mouth. This year we had actually about 2,000 applicants for our 150 slots, believe it or not. So it has become a clamor to get into this program now.

Are you planning to scale that out?

Yes, in fact that is my mission in life now. I no longer care about just the money we are making because that doesn't excite me anymore. I don't need the money myself. But definitely this program, I think it could be 10x bigger and I believe in this passionately because I mean we hear about inequality, we hear about college debt, all of these, I believe private sector has to solve these problems. I don't think we can just say oh, the government somehow has to come up with solution. We as entrepreneurs, capitalists, all of us have responsibility and to me this is my passion now.

Are you working with other tech companies on that?

We actually are spreading this. Other companies are learning. Visit us to learn exactly how we do it. We are willing to share this liberally. Any of you want to visit and check us out, we'll be happy. We are willing to open source all the methodology because I passionately believe in this. If every company did this, a lot of inequality will actually drop. Because you are extending opportunity to those who would not have got an opportunity.

And are you extending that to North America as well?

Yes, actually. And we also have a thing in Japan that we are doing Japan for an interesting different reason. The demographics is so poor, you cannot find people and we have a subsidiary there. We just can't find anybody. There's no 1 million. Japan is losing about 1 million people a year because the death rate is so much higher than the birth rate. So in Japan, this program is to attract the unusual talent and to bring it into Soho. So we are doing this in Japan.

Right now and it's in Tokyo, in a big city.

We are actually in a small town. And here is the interesting part. I visited this town about a year ago. Their demographics is like this. 6,000 people and only 20 kids a year are born. And if you do the math, the population will drop to 1600 because of the 6000 people, only 20 kids. So there is a desperation there for some investment, something, somebody coming and turning it around. They even like the fact that we could bring in people from India there because they're saying our village will die otherwise. It's interesting how bad the situation is in Japan.

That's very special.

We think Zoho University could have a role to play in that respect there. At least keeping the kids there. Otherwise they will leave, the population declines faster.

Fair point, fair point.

Zero time clock.

Our time is over. This is it. I know you're gonna come up with more ideas, so we'll talk next year. Again, we've got 66 products and three universities. Thank you very much.

Thank you. Thank you.

I need some traction.

Thank you for listening and we hope you enjoyed this week's episode of the Traction podcast. If you enjoyed the show, please leave us a five star review and you can find more information and all the resources mentioned in today's episode at Boast AI that's B O a S T A I forward slash blog.

Now I know that it's no way for you to build a unicorn. You need distribution to get growth in the truest form. Just like Stuart did with Slack. Put a billion on your back. Don't get caught up in the hype or you might just fall. I need some traction. You need some traction. Let's get some traction.