The enterprise technology market is in a bubble, distorted by cash from venture capital hoping the companies they back will win the greatest share of the market.
That’s the view of Sridhar Vembu CEO of Zoho, an enterprise software company he founded in India in 1996.
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“If you look at any particular sector of the technology landscape now, you have massively funded players, who are willing to spend whatever it takes to conquer markets,” Vembu told Which-50 between sessions at the company’s Zoholics conference in Austin last week.
“It’s gotten crazier and crazier over the last five years.”
An “extraordinary amount” of venture capital has distorted the economics of the market, he argues. In particular, companies are spending a large share of revenue on marketing and sales to drive customer acquisition and dominate categories. That approach is distorting company priorities.
“When you go into this bubble mindset, a lot of the focus becomes how do you spend the most to conquer markets? So your whole structure of the company distorts towards marketing, sales and spending more money.”
“So you lose focus on your technology, you lose focus on that R&D. This is very detrimental for the long-term health of companies. In the short-term it [might] actually win some market share, but long-term for the company it’s not good.”
Winner takes all
Vembu argues the category winner mindset — pushed by VC — is misplaced, and market forces mitigated against a winner takes all dynamic.
“Firstly, enterprises don’t like monopolies, because that means they pay more and innovation drops,” he said.
The second, more subtle shift, is the assumption that the winner will have the lowest cost, thanks to the economies of scale.
“There is a sweet spot where the costs structure remains low, but VCs think there are somehow infinite scale and the cost keeps dropping, it’s actually not true,” Vembu said.
He argues, in many technology markets greater volumes will lower the cost per unit — until a certain point. Beyond that, scale doesn’t reduce the unit cost any further, and can, in fact, introduce “dis-economies of scale” — when bureaucratic “large company disease” that bloats cost.
Eventually bubbles burst and markets contract. Vembu noted that during the dot-com era, “business was too easy”. In 1999-2000 customer numbers tripled, and then came the 2001-2002 bust and a lot of their customers went out of business, he said.
Vembu argues Zoho is built to survive these bubbles. The business is privately held, has never raised money and isn’t planning any kind of exit. This financial independence plays out in the company’s approach to product, marketing and culture.
Zoho currently has 45 million users across 180 countries, its revenue growth rate of 39 per cent year-over-year. It’s aiming to get to 1 billion users – an aspiration the CEO wants to achieve over the next 10 to 15 years.
“The boldness of vision has to be matched by the patience of execution,” he said during his opening keynote.
The company does not participate in merger and acquisition activities largely because it believes they have a negative impact on customers associated. Its wide-ranging software suite, which includes more than 40 applications, is created exclusively in house.
Zoho has 7,000 employees more than 4,000 are in product development, R&D type of work. “Which is an extraordinarily high ratio for any company.”
“Comparatively we have more people in support than sales, which tells you the priorities of the company because we want to take care of the customer,” he said.
Also discussed “leaving money on the table” and never raising prices, to build customer loyalty.
Earlier this year the enterprise software company opened its first Australian office in Byron Bay. One of new global offices in Singapore, Mexico, United Arab Emirates and the Netherlands. Australia has always been in its top three or four markets, behind the US and UK.