My last post on why we compete with Google attracted a bit of attention, and quite a few questions. Ignoring the questions on my IQ or my competence in English (isn’t the internet great?), let me come to the most central one of all: if business software is so much less lucrative than consumer internet offerings, why does Zoho want to be in it? To rephrase it, if the argument is that it won’t prove to be lucrative enough for Google, why does Zoho want to do it?
The pat answer, of course, is “Zoho is not Google”. The long answer is “AdventNet is not Google”, and what that means is you should understand our history. In a nutshell, for AdventNet, this market means moving up in the value chain, while for Google, it represents going down that value chain. Here are a couple of quick examples to illustrate this process: why does McDonalds want to compete with Starbucks while Starbucks clearly isn’t going to enter the fast food business? Why does Wal-mart want to offer organic foods, while Whole Foods is never going to offer clothing or toys? Coffee has better margins than hamburgers, organic food has better margins than clothing.
AdventNet, the parent of Zoho, is an unusual company: we have never ever raised any outside investment in our 12+ years in business, and we still remain private. We are over 850 employees now, and the company has multiple divisions, Zoho being the most recent and the most glamorous. But we haven’t forgotten our roots. We are still the leaders in the market we started to serve 12 years ago. That is the business of selling software to network equipment vendors (the so-called OEMs). It has been a good business for us, but it is also a famously low margin business. We cut our teeth in that tough business.
So why would we enter a low margin business? Leaving aside the IQ question of the CEO, a low margin business let us get a toehold with relatively little marketing/sales/branding investment, relying purely on our engineering skills.
By 2004, we had gained sufficient scale to enter the next higher level in the food chain, with our ManageEngine suite of products, sold directly to business customers. It offered us the opportunity add more value than we could in the OEM business, but it also required higher investment in marketing and branding. We have been quite successful in that business.
In 2005/2006, we took the next step, with Zoho. Clearly, Zoho addresses a far bigger market than what our OEM or ManageEngine product lines address. To address that larger market, much larger investment in infrastructure, marketing and branding would be required. Fortunately, AdventNet is at a size now to be able to afford that investment. Of course, Zoho also offers us more opportunity to differentiate our offerings, which is the key to creating higher value.
None of this is particularly original. Most bootstrapped companies go through these phases. Microsoft started as an OEM software company. Oracle was originally a consulting company. 37Signals started out as a design consulting company, before evolving to be a strong player in software-as-a-service. Atlassian started out offering issue tracking software, before branching out into Wikis and enterprise collaboration, which is a much higher margin product. Let’s not forget that Google got its start OEMing its search engine to AOL and Yahoo – a much lower margin business than the one it is currently in.
The reason this model looks odd to most people is the relative rarity of bootstrapped companies in recent times. The venture capital model enables companies to leapfrog these evolutionary stages, directly going higher in the food chain, in their quest for rapid value creation. That comes at a price, which we have not been willing to pay at AdventNet – more on that topic later.
So to answer the question on Google vs Zoho: the business software market makes perfect sense for us, as a move up the value chain. I am not sure it makes all that much sense for Google.