Zoho – the consummate bootstrapper

SUMMARY:

A bootstrapped vendor can be just as competitive, if not more so, when bootstrapping is done right. Zoho is an excellent example.

2016 blog - ZOHO 0For the last several years, the technology media has been focused on firms that raise (and burn through) lots of capital. There are so many of these lately that I’d forgotten about bootstrappers. These are the cost-conscious firms that grow without the help of well-heeled third parties. Their firms are mostly self-financed affairs.

Booststrapper capital comes from a combination of excellent operational, development, sales and partnering decisions. Many costs like data center buildout are avoided, some are deferred and some expensive options are passed over when lower or no cost options (e.g., the use of open source software) are available.

The best bootstrappers have such a low cost structure that they can, over time, eat into major players’ installation bases with a vengeance.

Zoho – a bootstrapper case study

I recently had the opportunity to attend a Zoho analyst event.  Zoho offers a large suite of cloud application software. Their solutions target the small-to-medium sized business (SMB) and include a number of front and back office applications.  Specifically, the company has modules for:

  • Finance (Books, Invoices, Subscriptions, Inventory & Expenses)
  • HR (Recruiting & People Management)
  • IT & Help Desk (MDM, Service Desk, Support & Assist)
  • Business Process Management (AppCreator, Site24X7 & Reports)
  • Office/Personal Productivity (email, docs, chat, notebook, etc.)
  • CRM (forms, campaign management, contact management, etc.).

What makes Zoho a bootstrapper? Zoho is an entirely self-funded firm. Previously, the founders created two prior firms (WebNMS and ManageEngine) that are both financially successful in their own right. These firms threw off enough cash flow to permit the launch of Zoho without bringing in external capital. And, the company still has not accepted outside capital.

That information might seem humdrum except that the company has already surpassed a number of major growth milestones. To date, Zoho has over 300,000 active business customers and over 20 million end users. It has 5 global data centers and is adding new customers at a furious clip. Its users have already placed over 1 petabyte of non-relational data on their cloud service.

Zoho owns its headquarters building. It’s a big two story affair in Pleasanton, California. More specifically, it’s a 40,000 square foot facility that 30 (that’s all) folks call home. The company bought it outright during one of those few but powerful real estate crashes that occasionally affect Silicon Valley. That asset alone has probably appreciated by a form factor by now.  The building can host hundreds of customers and partners at a time.

Zoho uses a lot of open source software like the PostgreS database. The beauty of this is that the cost of many of their tech stack components never changes no matter how many customers the company has. This acts to drive the incremental cost of instantiating a new customer close to zero.

Of Zoho’s approximately 4000 employees, only 60 or so are in the United States. Most of the remaining employees are based in India. Zoho relies on partners to help them establish beachheads in other countries. Partners also resell the solution and absorb a lot of the sales costs other firms with direct sales models incur.

Zoho also encourages potential customers to test drive the applications so as to further reduce sales costs and sales friction. All in all, these (and other measures) keep headcount costs to a minimum and keep a large number of people working on the development of new applications (not selling).

Years ago, I remember Greg Gianforte of RightNow Technologies schooling me on how he bootstrapped CRM vendor RightNow (now owned by Oracle). If I remember correctly, he started creating the software once he had a CRM deal with a customer and understood the specifications for the product. Future sales influenced and financed the development of more functionality.

Dave Duffield and Aneel Bhusri, founders of Workday, largely self-funded Workday up until the time of their IPO. And, even in that IPO, they structured the deal so that they owned the voting class of stock and third parties could only buy non-voting stock. They got to a point where they could maintain control of their firm and still raise additional capital. That’s a founder’s dream come true.

What these entrepreneurs get via bootstrapping is:

  • Control over their company and destiny. They are not beholden to the whims and wishes of venture capitalists or others with equity or debt interests in the company.
  • No dilution of equity. Would you rather own 100% of your firm or just a few percentage points after all of the external investors got their piece of the pie?

Generally, there are three styles of firms based on their capital appetite and by inference, their willingness to dilute ownership.  These are a minimalist capital appetite a la Zoho, a moderate approach, and, a voracious appetite for other people’s money (see below).  Implicit with each approach are common signals re: how the vendor will behave as to market share aspirations, use of third party software, desire to have their own computing hardware/data centers, etc.

Capital needs - soho

Some of the coolest bootstrappers I have known have been New Zealand based software firms. From the onset, they realize that they can’t afford to fly to the U.S. or Europe anytime a customer wants a software demonstration. They make the software available via free user testing. They also can’t afford to fly over expensive senior executives and attorneys to negotiate contracts. So, they make the purchase as effortless as possible with simple, standard terms. If you need to negotiate with these firms, you better be some colossal potential customer.

Bootstrappers don’t have a problem with partners. Zoho has over 1200 partners, many of them focused around Zoho’s initial CRM offerings. Bootstrappers love firms who will help sell their solution for them. To make the products more partner friendly, vendors like Zoho create product customization templates, partner marketplaces, open platforms, tons of extension tools, etc. A partner to them is like a Trojan Horse – it gets their products slipped into countless other firms for next to no cost.

The best bootstrappers use their low-cost structure to their advantage. They can consistently price their solution just under that of competitors’ products while maintaining much larger margins. This has a couple of beneficial effects for bootstrappers and devastating consequences for higher cost competitors.

The lower cost solutions siphon much needed revenue and margins from higher cost competitors. This allows the bootstrappers to continue to develop more and better products for sale into ever larger and more diverse markets.

Their competitors find R&D and expansion funds to be tight and must either scale back their growth plans or seek additional capital. If they take the latter path, they’ll suffer further equity dilution.

What this requires readers to consider is not whether a vendor has the access to ever growing piles of capital or debt but how efficiently and wisely these firms use their capital (see below).

type of tech company

As a classically trained Finance person, I’m of two minds re: capital.

It’s usually a good idea to leverage other people’s money to fund a company if it can be done so with acceptable dilution and risk. It’s also a good idea to use other people’s money when you/your firm lacks the funds to do so itself.

The other part of me loves the idea of maintaining control of the firm you founded. By bootstrapping, you avoid the battles over control, ownership, growth rates, etc. and you don’t have to share the gains from all of your hard work with other often passive investors. This latter approach maximizes your personal return. The former can speed up market acceptance of your solution, though.

Where all this talk of bootstrapping can quickly fall apart is when a company is facing hockey stick growth.

hockey stick

Hockey stick growth can severely test a firm. Where it could take several years just to get a few hundred business customers, the next thousand could occur in a few months. This outsized growth can stress a software firm’s data centers, executive ranks, customer support functions, implementation service groups and more. Besides these service and organizational cracks, the growth may not be supportable at all if there isn’t sufficient capital to bring on piles more people, twice as many data centers, etc. Capital is often the key to successfully navigating hockey stick growth.

It is when a bootstrapped firm confronts this outsized growth that new capital infusions may be needed. And although top Zoho executives dismissed the need for such capital, I suspect Zoho may be getting to this inflection point in the near-term. It’s a great problem to have.

The Zoho culture

This was my first exposure to the company. To me, the management was laid back but dedicated. During all of their growth, every executive has had to roll-up their shirt sleeves and take on several different roles – a phenomena still occurring now.

Zoho doesn’t care about job titles, college degrees and other vestiges of status. 20% of their software engineers don’t have a college degree. In fact, Zoho University will take high school students and teach them how to code. Results get noticed within this firm.

Of their 150 or so managers, 146 have never worked anywhere else. People seemed to genuinely like their work, their cohorts and the company.

Ideal Zoho customer and market positioning

Zoho has grown from a provider of a single CRM app to a provider of several integrated application suites. Smaller firms will likely find the breadth of functionality and low price points to be real selling points.

Zoho is positioning its solutions as an ‘Operating System’ for business. As such, it is expanding both the breadth and depth of its applications. This wider focus (and the product extensions its partners provide) makes it possible to solve more business issues for more firms in many more industries. The growing depth of the product functionality would suggest that Zoho and its partners could be inching upward to ever more upmarket clientele.

Zoho has enjoyed success selling to US businesses and while the numbers of new US-based customers continue to grow at a healthy clip, sales in most every other part of the world are increasing at a faster growth rate. Growth is occurring within existing customers via in-fill sales activity while net-new customers are buying larger suites right out of the gates.

Future of Zoho

As mentioned earlier, Zoho’s product line is continuing to grow in breadth and depth. Monthly sign-ups are well over ½ million and growing which bodes well for the company. In fact, it’s the ever accelerating growth curve that convinces me that ZOHO is beginning to hit the hockey stick growth phase of its lifecycle.  How Zoho navigates the next chapter of its growth will likely define the firm.

IoT (internet of things) is a stated growth area of Zoho. Only partial details were offered as to how they will integrate IoT data into their solution set – CRM will be the first entry point. As Zoho expands beyond its front/back office orientation and into more operational functionality, the IoT capability could increase in value. Partner solutions might take advantage of this first, though.

Machine learning & process automation will drive another wave of product enhancements.

Beyond functional footprint expansion, Zoho is focused on handling greater user loads, scaling its solutions, expanding data centers and other technical and user experience capabilities.

Concerns

Zoho plans to create a global payroll solution. That got my attention as no major payroll service provider or ERP vendor has ever cracked that puzzle. I’ll be watching this space for future progress reports on this.

Zoho’s growth globally is picking up steam. How the firm consistently transports its culture and practices to other countries will also be another must-watch item.

My take

There’s a lot to admire in a company that’s already bootstrapped itself to the size and scale of Zoho.  The product has certainly expanded well beyond its CRM roots and some of the partner extensions we saw were functionally solid and already well received within their markets.

The cost structure behind Zoho gives it bags of leverage. They can generate very favorable margins and use these to hurt competitors while increasing R&D spend.

Zoho’s fit for small businesses is obvious as is its low cost structure. The economics for partners are also good. How far upmarket Zoho can go will likely be a function of Zoho’s deepening product functionality and the ability of partners to create compelling vertical solutions.

Image credit - Story images via Brian Sommer - Techventive Inc. Featured via © iQoncept at Fotolia

Disclosure - Zoho covered most of the author's travel and expense for attending the analyst event.