Anti-burn: How bootstrapped Zoho survived two tech bubbles

(Zoho CEO here) My analysis of financial bubbles informs how we operate in Zoho. I believe the Greenspan-Bernanke-Yellen era will go down in history as one of the biggest bubbles the world has ever seen.

The economy is now fully addicted to bubbles, and the start-up ecosystem is particularly affected. Withdrawal from this bubble-drug is going to be painful.

A couple of anecdotes about the last big tech bubble of 2000. At that time, there were 300+ optical networking companies in silicon valley. We had sold our network management software to about 150 of them. By 2003, only 2 were left standing. We survived because we had saved up some money for that eventuality, and we reinvented ourselves using those savings.

One painful bubble memory I have is the real estate lease that we had no option but to sign in 2000. We moved from San Jose to Pleasanton to escape the worst of the bubble-rents but even in Pleasanton, while the rent wasn't ruinous (about $20 per square foot per year), the landlord forced a 7 year lease on us. Still, the rents fell to about $10 per square foot per year by 2002, but we were stuck with the higher rent for 5 more years. Fortunately, the company was financially strong enough to withstand it but the episode taught us a lesson in bubble-planning and bubble-survival.

I am shocked that people are signing $50-100 a square foot per year leases for 10 year terms these days.

Our goal right now is to survive the present bubble, bigger in some ways than even the one in 2000. I tell our people that there is going to be a serious bust and we should aim to survive it first.

When everyone in the Valley was signing 10 year leases at $10 per square foot – a bubble indicator that we’re seeing again today – the company relocated to Pleasanton, where it remains today, and instead invested in keeping its headcount up.

“We don’t really agree that a short-term, mercenary mindset and incentive structure is required to hire the best talent,” Vegesna says. “We issue cash bonuses at the end of a good period, whether it’s a month, quarter, or year. It actually ends up being a better outcome for most employees. And, of course, we have free lunch and all the other typical perks. We have had extremely low employee churn...”

Something not mentioned in the article: according to Wikipedia[1], 90% of Zoho's employees are based in India. While I'm sure that some in the Bay Area will scoff at this, I don't think there's any question that when the business cycle turns, the ridiculously high costs of employee salaries and office space will be the undoing of countless Bay Area startups.

It's nice to read stories every once in a while about companies living within their means. Ironically, they're usually the ones that could actually afford to live large if they wanted to.

[1] http://en.wikipedia.org/wiki/Zoho_Corporation ↗

“We issue cash bonuses at the end of a good period, whether it’s a month, quarter, or year. It actually ends up being a better outcome for most employees."<

With all the obsession we see over the stock options/startup lottery, I think this point bears consideration. A stable, low employee churn organization with great cash flow can make you plenty rich if the founders and board put aggressive profit sharing and bonuses in place. I think for bootstrapped businesses this is a great alternative to complex options plans that have no value until an exit/IPO. Wish this approach gained more publicity, even if they've offshored the bulk of the operation.