Zoho is a remarkably different enterprise software company. It has no VC investment, it has an inbound, web-centric sales model which allows it to reverse the industry spend on sales/marketing v. product , it runs its own data centers, it has very low employee turnover. It has taken strong positions on data privacy, it keeps delivering more and more value without raising prices, it has presence in many global markets many larger vendors don't even bother with. You can read much more about what I have written about them here, here, here and here.
It flows from the top. I have been a fan of Sridhar Vembu, the CEO since I first met him 15 years ago. He is humble, super smart, and I learn something new from every conversation with him. Here are some of my earlier notes about him here, here and here.
I had a chance to sit down with him recently after the Zoho analyst day. We covered plenty of ground around productivity in small teams, rural revival in India, the influence Japan has had in his life, data privacy and many other topics. Here are some extracts from the fascinating and long conversation. It is cerebral, and will likely be controversial to some. BTW, apologize for the long post but actually this is only a fraction of what we discussed.
Small is beautiful
Sridhar, I heard you talk about small development teams, distributed R&D sites, not leveraging hyperscaler data centers. Sounds like you believe we have reached "Peak Economies of Scale"?
The tech industry has long benefited from Moore’s Law. It has now plateaued. It has been slowing down, for at least for ten years now. The fact that we are using our laptops longer and longer, even phones are lasting longer and longer, it's evidence of that
In my own field (Electrical Engineering), in terms of the bits per second per hertz that we can squeeze out of a communication channel, there's a mathematical limit set by the Shannon Capacity Theorem. We have long been close to the limit. There isn't a lot more to squeeze out of bandwidth.
There's a great book called Lost in Math, written by Sabine Hossenfelder, a physicist in Germany. She says theoretical physicists for a generation, that is my generation, have not made any breakthroughs at all.
Charlie Munger, vice chairman of Berkshire Hathaway and Warren Buffett’s longtime business partner, recently said “I do think that my generation had the best of all this technological change,”. Munger, 96, noted medicine has improved dramatically during his lifetime while inventions such as air conditioning have increased the standard of living. “I don’t think we’re going to get as much improvement in the future because we’ve gotten so much already.”
In every field there are rapid advances and then you reach a knee of the curve and then it goes in a pretty stable configuration.
On the other hand there are, for example, fields like biology - especially molecular biology. They are making advances in labs and in medicine. That, actually, is one area where plenty of new things are being learned. But even that will not be forever – there is a cell biologist I listened to recently who said “the more you look at a cell, the more you realize the more there are things that we will never understand.” It's that complex. We are reaching the limits of our ability to understand.
We are also reaching certain limits in the economic realm. Let's compare the U.S. and Japan, two polar opposites. Both are advanced countries. Both have high GDP, however Japan has had 30 years of GDP stagnation.
Most leading economists would say Japan’s economy is in doldrums … that it is stuck. But as a subjective visitor, you can see that the Japanese live quite well. The standard of living is quite high. The quality of life is exceptional. They have not paid any price that we should visibly see from the nominal GDP stagnation.
I am questioning that notion of GDP growth itself: what we are measuring and how we are measuring it. This comes back to corporate value add. GDP is accumulated value addition in the entire economy and corporate value addition. We know, for the last several years, corporations have been playing financial engineering tricks, buying back their own stock to boost their earnings per share.
There's an analyst named Jeffrey Snider who points out, for four or five years now, the total profits of the U.S. corporations filed with the government, the government's statistic, shows a profound stagnation and, in fact, a mild decline.
Charlie Munger in that interview I mentioned earlier also said we are victims of "wretched excess" and too focused on metrics like EBITDA
I'm a technologist. I want to, of course, invent new things. But I look at these fundamental trends and ask what are the likely consequences?
To me, one consequence is that economies are available at lower and lower scales. A number of people point to consolidation in industries as a direct consequence of technology and taking advantage of economies of scale. That's the traditional argument for concentration of industry. I have a contra-argument. In field after field, when technologies get mastered they actually become more accessible to more people..
Reverse engineering anything is always easier than inventing it in the first place. China caught up a lot faster than Japan's catch-up to the West, and Taiwan caught up a little bit faster. Korea caught up faster. I have a controversial opinion, but I will say it anyway. The West is underestimating Chinese technological prowess. No more jokes about “cheap, it is Made in China.” In just the blink of an eye, they've caught up. 5G is evidence. We can say that they cheated. This is not a commentary on their political system. But reality is, China is really, really, good in many, many fields. This is just about their technical prowess.
My claim is that that it is becoming, actually, easier to (scale down) in many fields, because of wider access to information. The U.K. tried to keep the cotton gin a closely guarded secret but after a while it became available in the US. Sitting in a remote Indian village, today, you now know how CNC machines work in Germany. 50 years ago, a village technician would not know that. He may have heard about something called a CNC machine in Germany. Now, not only do you know that, you know the principles behind it, you know how it works. We see a lot of diffusion of technology.
The revolution that happened in computing is happening in capital equipment. Equipment is becoming cheaper and smaller businesses can afford to adopt it. In approximately a decade, I believe a small scale semiconductor fab won't be any more complex than an MRI machine. I hope it comes true because I would love to own a small fab. I don't want a massive fab.
The cost of tape-out on an older technology has been falling. The latest TSMC (Taiwan Semiconductor Manufacturing Company) fab is what they call seven-nanometer. Intel calls it ten nanometers. Nanometer has become a marketing term not a dimension now, which itself tells you the problem.
But look at 45 or 16 nm, which is older technology but good enough for many applications. The cost of taping-out that technology is falling. This is something I know because there's a fabless company that we fund and they give me insights about what is happening in that corner of the industry.
For example, it used to be $1 million to $2 million to tape-out a chip. Now, I think it's about $200,000 - $250,000. Not the latest technology but the older technology, which was the latest version six to eight years ago. Still usable technology.
There are two dimensions in which we can make progress on: trying to squeeze in more on the seven-nanometer to five-nanometer to three-nanometer, but the fabs are costing $25 billion, $30 billion, $40 billion in investment. Or take older 40 or 60-nanometer technology and keep lowering their cost.
Here is another example. The electric revolution — the electric car, electric scooter, electric tractor etc. — has an interesting implication. The electric machines are a lot simpler mechanically. (that means a simpler and cheaper bill of materials.)
We are talking about an order of magnitude, but this has an interesting implication for that industry. You could technically, for example, take the Indian auto-rickshaw, the tuk-tuk. You could imagine a marketplace of components that are then locally assembled. We could see a kind of reinvention of the rural craft, assembled locally in various configurations for the local needs where the motors and the parts are procured in the open market.
Rural revival
Sridhar, you have opened an office in Tenkasi in rural India. You are spending much of your time there. Tell our readers about your passion for rural revival, not just in India
I grew up as a country boy. My village was my heart and soul. I still long for that life. I never wanted to be in the city. I'm a reluctant migrant, so to speak, to cities.
It saddens me to see village life slowly deteriorate. It was a lot more healthy when I was a kid. My kid does not see the same village that I saw, a healthy village. You can see the steady deterioration.
Smart people leave. I'm one of the people who left, so I cannot complain about other smart people leaving. But slowly, the topsoil erodes. The economy deteriorates. Agriculture becomes even more precarious. Alcoholism, suicide, depression, all of these issues have become a worldwide phenomenon. You see this in Wisconsin. In India. Everywhere.
I've been thinking about what we could help and the broadband revolution facilitated it. So we opened this office in Tenkasi about six years ago and that office now has 450 people. Most of them were hired locally. In some cases, they would come with college degrees. In some cases, we trained them. But even in Chennai, our biggest office, a number of recruits came from rural areas. We used to previously encourage migration away from villages. Now we are arresting it. Keeping employees a lot closer to their roots.
That experience in Tenkasi convinced me to expand our rural growth. Late last year, I decided to move myself there. I spent most of my time there last quarter. I went to the local temple. I began to understand local social issues. Even in a small village, you find a lot of widows because men kill themselves from alcohol.
Then I realized we need to create a lot more jobs there. I've been thinking about what those jobs are and I am aware of these technological trends I talked about. Could we create easier to navigate technology on a smaller scale things with local production and still that can meet quality and economic objectives? I am still in the very infancy of these initiatives, but I'm definitely thinking about them.
Then there is our own software development. We are spreading out some of our R&D units. That is easier to do because our software has always been developed by small teams. It could be three, four people, but sometimes it gets bigger. When it gets larger, we break them up into smaller teams. Amazon has a similar principle around smaller teams. Jeff Bezos calls it a two-pizza team. Every startup knows this, so its is not an unique observation. But … the breakthrough is you can actually put it in the small team in a village because of the broadband today. Our belief is we can work anywhere. Why don't I put our own claim to the test? I have very good connectivity in my rural location. The Jio (Reliance Jio Broadband network) has revolutionized the Indian telecom scene. We get data plans at unbelievably attractive prices.
India is densely populated, so it's very easy to put base stations everywhere. There's fiber running everywhere now. My remote village, which is the last village before the national forest, gets actually pretty good 4G connectivity now. That's what I use to tether my laptop and do work. The data plans are really cheap. You're talking sub $10 a month for a very generous data plan.
We couldn't have dreamed about this 5 years ago, without this broadband revolution. Now, 5G is coming and it is going to only make it even better. So what is the implication? What kind of knowledge work can we do remotely? Your own work, you could do it anywhere in the world today. Absolutely anywhere, in the remote Indian village, remote village in Costa Rica. It's the age of the digital nomad.
I am interested in applying those principles to relocate talent. Once you put that talent there, local problems automatically find better local solutions. In my village, having been there only a quarter, people ask me, "Can you take the leadership on this issue?" This is bringing technology to rural locations.
It is also reinvigorating farming. Today, the modern urban resident has no idea where their food comes from. This has serious spiritual and health consequences. Food is medicine -that is old Ayurvedic wisdom. Modern science is also telling us that our food is the most vital part of our health.
However, most of us are cut off from an understanding of our food supply. Rural living is not merely about just locating in the pretty place but also connecting back to the food supply chain. We have our own farm with cows and chicken. I'm trying to get our office supplies from the farm. The goal is to be organic.
It also allows us to connect back to nature. We see rising depression among our young employees. It's happening in Chennai. In fact, one of the most requested things now is that we hire a counselor. This is a phenomena everywhere now, with young people. It's even more so in Silicon Valley. They'll say it's not work-related. We love our company. It's relationship breakdown, they are torn from their roots, its the atomization of society. People tell me, "I go home to nobody." Loneliness in young people. In India, these issues are unknown 20 years ago. We've been in business 25 years. I've never seen this before.
We are hiring a counselor, but I also launched an initiative that is seemingly off tangent. We'll do urban farming in Zoho. We will have our own small plots of land. They will grow grass or ornamental trees. We tell teams to take it over and farm something. Only rule is to be organic, but farm anything you want. People are developing a taste for this. Many are doing it at home now in their own rooftops, their balconies.
This allows us to connect back. One thing that's known about depression, even in scientific literature - when you see greenery, your mood improves. If you go roaming in the hills, your mood improves.
Rethinking education
Sridhar, you are known to hire employees without college degrees, forget those from top tier schools. Tell us about your philosophy
We have to connect back to working with our hands. That is true even with software. Even for software jobs, there is this notion that people need to go to college and get a degree. Universities today are marketing devices collecting lots of money. We run an internal Zoho University (Zoho’s alternative to college education that has been recently renamed Zoho School of Technology)
The cost to run Zoho University is tiny compared to the value it delivers. The question comes up - do the students not miss out on computer science abstraction. In my observation, most people are Concretists. In other words, if you talk abstractly, most people get bored. That doesn't mean they are stupid. That just means that they want measurable, concrete things, use cases, applications
Professors (at Universities) are Abstractionists for the most part because they love those concepts. Most of their students are sitting there bored. I question how much they are learning. We are teaching people about the theory of bicycles before we ever let them ride one. We believe that actually doing stuff promotes knowledge gathering.
Data Privacy
Zoho has taken a strong stand on data privacy with statements like "We are not going to let surveillance companies track users on our properties". I have known you a long time and believe you when you say you are "intensely moderate". Explain the unusually strong stance about privacy.
Remember how prevalent smoking was 30 – 40 years ago, on buses, and planes, it was very common to be seated next to a smoker and their smoke – everywhere in the world.
Today, it's gone. It's both social awareness, personal awareness about what damage smokers were inflicting on others and related legislation.
Privacy to me is that today's (cigarette) smoke. We live in a world where privacy violations are pervasive, like that smoke issue. We were (earlier) exposed to smoke whether we liked it or not. Today we are now exposed to privacy violations by merely going to a website just like being seated next to a smoker.
See, we are in a world where our technologies have enabled something that our social, biological instincts never knew. For example, if I'm in my street, I'm walking around, and I'm sneezing, I'm doing something maybe embarrassing, maybe a couple of people saw it. Today, that thing could be broadcast to the entire world. This capability did not ever exist. This is new. This is like an atomic bomb of personal privacy. That you could have the ability now to transmit any thought, anything from a moment to the whole world, and that is new.
The full ramification of these technology has not been understood and, once it's understood, I believe that we as citizens – I'm not talking about consumers, producers, or all of that – citizens are going to demand action. Human civil societies evolve to a point where we want control over our governance. So, we passed something called the Constitution. Then we passed laws to protect ourselves. Same with the concept of religious freedom. In very ancient societies, there was no question of religion. People did whatever they wanted. Why did a code of religious freedom have to arise? Privacy is the same issue. The concept didn't exist in the past. The technology today cannot be wished away and we want that technology because it's convenient. We all love it, which means that we need to protect ourselves from our own worst instincts.
It's the same reason why law enforcement exists. If every one of us are law-abiding citizens, why would we need the police? It has to exist because to protect ourselves from our worst instincts. It's the same thing with privacy, I believe.
The recent story about Practice Fusion is a wake up call. Here's a cloud software company which "admitted that it solicited and received kickbacks from a major opioid company in exchange for utilizing its EHR software to influence physician prescribing of opioid pain medications". The company was fined seriously - $145 million. This is not a small amount of money, so this could have bankrupted the company if they had not sold themselves in time.
We saw social pressure which said smoking is not okay. We will see similar social pressure around privacy violations. I do believe legislation is coming. GDPR is a classic example. California has passed a law now and it's going to spread.
Morality of causes
Sridhar, I see too many tech vendors publicly supporting causes. Many industry events have become more like political conventions. Are you concerned about customers reacting negatively to some of your positions?
Definitely, I don't mean to moralize to our customers or others. There is a little bit of a cultural perspective here. The Indian way is, like Mahatma Gandhi put it, "Be the change you want to see in the world." I'm not going to preach to anyone, "You move to the rural area." I'm going to move myself. I'm going to try experiments and publish the results.
For example, I take issue with campaigns like “we'll boycott North Carolina or we will boycott Indiana”. This is not because I agree or disagree with their position. It's because that style of discourse, this cancel culture, I take strong issue with that.
We are not in the business in moralizing to others. In fact, morality does not arise by moralizing. It comes by living the example.
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