Zoho: The Little Engine That Could (Take on Both Microsoft and Google)

Written by Bernard Lunn

We all love the David and Goliath story. What about David vs two Goliaths? That is the improbable story of Zoho, the Web Office startup competing head on with both Microsoft and Google. On top of that, Zoho is from India and who ever heard of a product company from India? Indeed Zoho has only 10 people in America, yet it is winning really big enterprise accounts in head to head evaluations with both Goliaths. What's more, they have not taken a dime of external money - having bootstrapped it from the start.

At Web 2.0 Expo in New York this week I met up with Raju Vegesna, one of Zoho's founders, to find out how they're succeeding despite the odds.

Defying Conventional Wisdom

Everything about this story is improbable. And gloriously old fashioned. When I met Raju Vegesna, I kept on thinking this was some kind of time warp. Zoho has simply ignored much of the conventional wisdom. Consider:

1. Product breadth. Look at the range of products they sell. This defies the conventional wisdom that you should focus on one thing only. When I put that to Raju, he replied that the 'one thing' model "works if you are building to sell the company". That's right. The classic model is to build one product that slots right into the acquirer's portfolio. In Web 2.0, when speed is everything, even products take too long and so you just built features. The hierarchy is: features go into products and products go into companies. But Zoho is clearly building a company.

2. Building to last. Every startup says they are build to last, publicly. Nobody advertises that they are building to flip. But Zoho looks like they really are building to last. They don't have VCs on board with an exit compulsion. Nor do they need VCs. They can finance internally and make money personally the old-fashioned way, from dividends, knowing their equity value is also building every day.

3. They run their own data centers and buy all their servers. No, they don't use Amazon Web Services or even conventional hosting vendors. They run 1,000 servers in two data centers, one in California and the other in New Jersey. In a SaaS world where performance/reliability are differentiators, running data centers is a core competency. They have the cash flow to buy their own servers!

4. They charge real money for their software, with no advertising. But the price is really low. This is like WalMart. This is like Basecamp, reasonable prices for great software. That is so boring! In branded consumer goods, buying expensive conveys status. In software, buying expensive when there is an equivalent at lower cost, simply conveys a willingness to burn money.

A Serious Contender

Do you still think that Zoho cannot possibly be a serious contender? GE, after a vigorous evaluation including Google and Microsoft, selected Zoho. That is 400,000 desktops up for grabs worldwide. GE is a master at taking costs out of established processes, they do it relentlessly and continuously and they know how to evaluate and manage the risk of working with start-ups. Where GE break a trail, others are likely to follow.

Jason Fried's Advice - Follow the Chefs

At the Web 2.0 Expo in New York last week, Jason Fried of 37 Signals, another company that has done well by defying conventional wisdom, advised entrepreneurs to "follow the chefs". He meant that great Chefs give away their recipes. That just makes you want to come to their restaurants even more. Particularly if the recipe looks complex. And Zoho's looks complex.

So I hope they won't mind me giving out the recipe they revealed when I met with Raju Vegesna, one of their founders, last week. I noted 3 major ingredients:

1. New ways of competing for talent

2. A related cash cow business

3. Pragmatic, non dogmatic approach to winning business

New Ways of Competing for Talent

If I had to select one "secret sauce" in Zoho's recipe, it would be how they recruit. Zoho (with parent company, Adventnet) has 700 developers. All the developers are in India, specifically Chennai.

India is a ridiculously competitive market for developer talent currently. I see parallels with Silicon Valley in 1999, when average developers got inflated expectations and inflated paychecks. Attrition is problem # 1.

Developers see their career path as managing other developers. Your mojo is based on how many people you manage. Managing 1,000 makes you ten times better than managing 100 and so on. This is the reverse of America where a developer will drop custom service work as soon as it is possible to work on a product.

This is a terrible environment for a product company to compete for talent. How does Zoho compete for talent in this market?

1. Hire from school. Yes, school, not college. So they don't compete to hire from final year of College or in the even more hot market of developers with a few years experience. Great code is typically written by young people - which explains a lot of the "college drop out makes $ billions" stories in America.

2. Pay one year of college fees. This is a salary, not a loan, with no strings attached. According to Raju, 90% join Zoho at the end of that year, but there is no obligation. This gives Zoho an edge with the brightest at school as they have an unusual offer.

Zoho's philosophy is that 4 years college when you are young is not right for many people. Better to have life-long learning but get real world experience early and get some cash while you are at it. This gets a big "yes" from parents paying college fees!

Zoho have their own Zoho University. This is not uncommon for big employers in India. It is a necessary complement to hiring early.

Related cash cow

Zoho has a related cash cow business that enable them to fund Zoho. This is not unlike Google. Microsoft's problem is that their cash cow - Office - is the one that both Google and Zoho are going after. That gives them one nasty Innovator's Dilemma.

Zoho's initial cash cow business is selling network management tools. This has been profitable for 12 years. Zoho itself is due to be profitable next year.

The network management tools business is doing the same as Zoho - products at least as good as the competition for a fraction of the price. This business also gives Zoho a capability for running large data centers, which is a core competency for a SaaS business.

Pragmatic, Non Dogmatic Approach to Winning Business

By all accounts, Zoho won GE's business in head to head competition with Google. GE wanted to cut cost and enable collaboration, which meant Microsoft was less of a contender. Google was the obvious "you never got fired for choosing" winner. Why did GE choose Zoho? There are two likely reasons:

1. Zoho allowed GE to run the software in their own data centers. GE has the economies of scale to run their own data centers and clearly prize the control that this enables. Zoho specified the hardware, but GE bought it and deployed it. Is a "Zoho Appliance" far behind?

2. Visual Basic Scripts in Spreadsheets. Current tech orthodoxy frowns on VB, but if you have thousands of existing Excel spreadsheets running VB that would be a show-stopper.