Today, Salesforce announced their biggest acquisition to date: ExactTarget – revenue under $300 million, accumulated losses of over $60 million over 3 years – for $2.5 billion. Here is the interesting part: ExactTarget, which competes with our Zoho Campaigns product, has about 1600 employees, while all of Zoho Corp has about 1600 employees. By way of comparison, Salesforce has nearly 10,000 employees, and they are adding those additional 1600 employees today. With all that headcount, they still don’t have the breadth and depth of Zoho. At our annual Zoholics event last week we launched 3 new products (Zoho Pulse, Zoho Vault and the very handy Zoho Leads mobile app), and also announced numerous enhancements to the entire Zoho suite of offerings.
Are we very efficient or are they very inefficient? Well, you be the judge: we fund our extensive R&D investment out of profits, while ExactTarget has lost money for years and Salesforce is not exactly a profit-machine either – they spend over 65% of their revenue on sales, marketing and administration and only 12% on R&D. I don’t know a more unbalanced structure in all of technology. Most acquisitions fail, but in this case, maybe the two companies do have a deep cultural fit, because they both know how to spend loads and loads of money to “acquire” customers while never turning a profit.
We happen to know ExactTarget well. We started development on our competing Zoho Campaigns product 3 years ago. We put in a lot of hard work, and today it is enjoying rapid growth and market acceptance, thanks to its nice feature set and the integration we offer with Zoho CRM. To get that same level of integration, Salesforce is shelling out $2.5 billion. The contrast between what we do and what they do cannot be starker.
So how does it all matter to you, the customer? First, if you are a Salesforce customer, you are going to have to pay for this acquisition – and not just monetarily. I am a software engineer, I review code, I design frameworks, so I know a thing or two about software. I will say with confidence that integration projects on the scale needed to integrate ExactTarget into Salesforce are extremely difficult to pull off in any reasonable time frame. Just the technological challenge of integrating totally separate code bases is immense, and then you add culture clashes, political rivalries, geographic separation, large teams – I wouldn’t ever want to be the project manager who has to integrate this acquisition. It is a thankless job, and at the end of the integration, all you accomplish is that the combined product falls way behind nimbler companies like Zoho. Salesforce has done these deals before, without ever integrating them. Let me enumerate.
About 3 years ago, Salesforce acquired Heroku, shelling out $212 million for the company. Just last week, the Heroku founder announced he was leaving. Visit Heroku.com and see if you can detect any sign of Salesforce anywhere. How is that for deep integration? From a business point of view, can anyone claim that Salesforce is on track to recoup the substantial investment it made in acquiring Heroku? Now, visit Do.com and Desk.com – both of which Salesforce acquired a while ago – yeah, there is nice logo level integration, I will give them points for that. Try to sign in with your Salesforce account in any of these sites.
The Salesforce playbook is simple. Benioff feels restless, he sees stagnation, sees companies like Zoho continuing to innovate, he just goes out and does a blockbuster deal to feel good, more money the better. Who cares if the acquisition actually pays off long term? This playbook can only work as long as the stock price keeps levitating – and for that, let’s give credit where it is due: it is not Benioff, it is Bernanke. How companies with continuing losses year after year could reach a valuation of nearly 10x annual revenue is a topic by itself, but that would take me on a major tangent on our broken bubble-blowing monetary policy, and the wanton stupidity of policy makers like Bernanke.
I am putting my conviction to the test. We are expanding our investment in R&D in Zoho. We see a massive opportunity to seize leadership in the cloud because we believe the Salesforce strategy is going to fail long term. They already face engineering stagnation – their core SFA product hasn’t improved in years. Second, they have to try to stick it to customers to make the money back on these blockbuster deals. The end result is that customers will revolt and seek alternatives. While our strategy of investing in R&D is slower in the short run, as we gain speed over time, our breadth and depth increases. Here is our promise to customers: we will continue to out-innovate Salesforce, while offering incredible value.
How can we make that promise? Simply because we don’t throw around money like them. We owe it to you, the customer, to be efficient, and pass on the results of efficiency in terms of lower prices. We don’t do ego-boosting acquisitions to create hype in the short term, only to be forgotten a couple of years later. Instead, we hire engineers and write code, because we believe that serves our customers better.
Zoho is already beating Salesforce on Internet reach, on the sheer number of new organizations signing up for our platform month after month. We will continue our relentless execution.