Can’t Have Exit-focused, Liquidity-driven Cos During India’s Nation-Building Phase: Zoho’s Vembu

In an exclusive interview with BW Businessworld’s Rohit Chintapali at Tenkasi (Tamil Nadu), Zoho’s CEO Sridhar Vembu discusses fervently on the topics of anticipated cuts in IT spends in 2023, global economy in doldrums, Zoho’s no-layoff policy, IPOs, startups and fabs. Excerpts:

Zoho and Zerodha have been standout companies in the Indian tech space who have always stayed away from raising and believed in strong balance sheets. But this year, the belief and industry reports indicate a bad year for tech and drop in tech spends from most companies. How do you see this unfold in 2023 and affect companies?

The way companies grew in last few years was finance- and monetary policy-driven artificial boom. A lot of money poured into India during this period. But I was cautioning about that even then. In fact, excess dollar-based capital was raised in both equity and debt. Now, the dollar sources are drying up because interest rates have gone up which has also led to bank failures. It is all part-and-parcel of the same trend, i.e., extreme liquidity that led to asset bubbles. And now that liquidity is being withdrawn. So, you see a bust. This is not really an economic cycle; it is a financial cycle. Unfortunately, companies that got caught up in this finance boom – raised a billion dollars and spent like crazy – they are the ones paying the price with everybody dependent on them – including customers, partners and more.

It was inevitable. Because it was too hard to control and was not sustainable. The debt levels were dangerously high. You had perpetually money-losing companies going and raising another USD 500 million – a unheard kind of money – if you are in India. Twenty years ago, it was impossible to raise USD 10 million. Then, last year and a half ago, people were raising a billion dollars, which was unbelievable. That boom is ending. And I don't think it's a bad sign because it also taught us a lot of bad habits. 

We are in the nation-building phase where long-term, sustainable, durable companies and R&D-driven companies are needed like those in Japan, South Korea, Taiwan and China. They need to be created. We cannot have companies that are exit-focused and liquidity-driven. In that sense, it is a very valuable correction. 

But will Zoho manage to do well and not suffer due to tough IT spending environment? 

Actually, we are seeing rapid growth in India. Because we are the value player. Let me give you an example: If somebody is doing business with Salesforce in India or ServiceNow, they are massively overpaying. Those technologies are not worth it. We can replace them at an enormous savings. This is true for our US customers and it is also true for European customers. This applies for our Indian customers as well. And we saw that switch just last month when we won a lot of deals in March.

I consider companies like Salesforce extremely bloated and expensive in terms of their product offerings and their pricing. That is why we are going to compete aggressively for the business. We offer a very good choice, in terms of both superior products and vastly superior value. That is why we think that even in an environment of tough IT spending, we are doing better.

At a recent event, IDC India MD said that we might get out of this kind of climate in some eight months or so. What is your prediction?

I don’t think we should sit around and ponder over predictions like “how bad will the recession be?”, “what is the financial cost of all this” and more. We saw the SVB collapse, they said it’s contained. But then First Republic Bank happened, they said the same. There was also Credit-Suisse collapse and they, again, said the same. Do you believe it is contained? (Chuckles). I do not have faith on any Central Bank or Federal Reserves – it’s the fundamental cause of uncertainty. We have very wrong economic theories driving their behavior and policy. That has serious consequences for the rest of us. This kind of uncertainty cannot be easily overcome by any one business alone. 

We are in a massive earthquake zone called the global economy. If an earthquake comes, the house will at least shake and may be some tiles from the roof will fall. That’s how I see it. How long it will take? It is not foreseeable. 

What is your suggestion then?

It’s better to take it month-to-month and also focus on fundamentals. On what matters now – long-term R&D and building a company culture. That's why we have taken a no-layoff policy at Zoho. We would rather share the pain with our employees. 

We are a profitable company and willing to take a reduction in profit. And we are also willing to take losses for a period if necessary. I mean, that's why you build up your reserves during good times so that we can take a loss during bad times. That way the employees have a measure of security, which translates into longer term R&D culture. That’s what we want to do.

.. but that is not something that all the companies are looking to go with and Zoho has been a lot about your ethos. Would you recommend for a leader of a company to stick to his/her ethos and ask the company to follow it? Is that suited for every business and company? 

If you are very financialised and have investors breathing down your neck – it's hard to do it. For example, I can say that I'm willing to take a reduction in profit and even some loss for some period. But public companies cannot say it. If they do that then someone will lecture them on shareholder value. In fact, if a CEO of a public company talks like me, they will get fired the very next day. That is the freedom we have and that is why we are private.

Interesting. But is it a good time for an IPO?

I, myself stay private, so I am not going to recommend anybody to go public. But I understand some companies know that going public would be good for them and I don’t oppose it. 

We need companies that have long-term mindset going public in a tough time. Because a company going public in a bad time will necessarily develop a long-term mindset. So, it may be a goodtime to go public in bad economic times.

Could you elaborate?

You won't get the greatest valuation at such times. But short-term maximising of valuation itself is a trap. Because you are to keep at it and it will be a situation of hyperinflated valuation and it becomes a new anchor and you must keep showing growth on top of that. So, the odds become harder. What tends to happen in such situations is – people see what's caught in the trap and they cash out and they leave at the top – leaving it to the next guy to inherit the mess. This happens repeatedly and then you can all blame it all on the next guy.

There’s not a lot of funding available in the current climate. What kind of mindset should entrepreneurs have to startup right now?

If you are a young entrepreneur in your 20s, these are good times because when the noise level is lower you can focus on the long haul. You have room to make mistakes and recover. If you are financially prudent and make a mistake, you will go to zero – at worst. You can come back up from there. But you don't want to be in the negative because you don't want serious debt. 

Overall, I think it is a good time to be an entrepreneur as our economy is poised to grow. There's a fivefold to tenfold GDP coming.

What more should they do?

I would advise entrepreneurs to focus on tactical and immediate opportunities – but with an eye on the long-term. For example, they must know about ‘how to create a culture?’ And also, I would urge them to look at Tier-2, 3 towns to keep their cost of operations low. For example, entrepreneurs from Tenkasi (Tamil Nadu) can look at cities like Bengaluru, Mumbai, Chennai or Pune as markets. Why? Because there are rich customers there. You don’t always have to look at Germany or Switzerland. 

A lot of leaders say that a country like India has semiconductor design talent in abundance and it does not need to go investment-heavy with manufacturing semiconductor. Do you agree?

This is a very western/American perspective. And America is, itself, reversing its stance on this. Because they are pumping in USD 50 billion into fabs now.

Traditional, Wall Street-perspective has been to go asset-light by focusing on the intellectual property and let Asians do the rest. I don't agree with the concept. 

India should build real assets with hardcore investments and I don't agree that we don’t need fabs while we only do designs. Because of geopolitics, if fabs are in the wrong hands, it can have a bad effect on us. We could get our supply choked. Geopolitically, it is a very uncertain world. People can decide to impose sanctions on us because they woke up on the wrong side of the bed one day. I mean, it's that capricious.

But don’t you think that the resources needed for fabs could instead be utilised for water shortages?

A high-end fab could require a 500–1000-acre land to produce a lot of the chips we need. Locally, it does impact but not nationally. But we need the fabs. Otherwise, we are paying tribute to somebody who wants the technology. What we have today is old-fashioned technology empires. Everyone else are vassal states paying tributes. So, it’s a question of whether you want to be running those empires or want to be the one paying tribute. That is the question for India.