Zoho’s Sridhar Vembu On Investing In R&D In India To Navigate The Global Economic Slowdown

If there’s one quality that defines Zoho and its cofounder and CEO Sridhar Vembu, it’s the lack of pretension and flash. Even as the company announced today that it had reached $1 Bn in annual revenue in 2021, Vembu and Zohos focus is not just on hypergrowth but sustainability.

The CEO was quick to add that while growth has slowed down quite a bit in 2022 compared to 2021, Zoho’s investments in research & development (R&D) have held the company in good stead when it comes to customer acquisition.

“Our profits will continue because we spend three times as much on R&D as what we do for marketing. This helps us keep our costs low and maintain profits even as we have seen some slowdown in 2022,” Vembu said on the sidelines of a Zoho presentation in Delhi.

Even as most companies are cutting costs and conserving cash till after the macroeconomic slowdown, Zoho has committed to increasing its R&D spending over the next five years to build a robust tech base.

The Chennai-based SaaS giant plans to open 100 network PoPs (points of presence) over the next five years to not only improve the speed of services such as collaboration software and CRM, but also be ready for blockchain, advanced AI applications and more.

What is critical to Zoho’s profitability is the fact that the R&D team is based entirely in India and therefore the company is able to maintain a relatively low cost of tech development.

Vembu pointed out how Zoho’s focus on data, data processing and data storage have helped it mitigate the typical increase in cost of product development and iteration at scale, especially given the many disparate products as well as its Zoho One unified platform.

R&D Investments Beget Profits

Startups often complain that India does not have the R&D infrastructure that is critical for tech development, with many pointing to Indians working in Silicon Valley to develop the building blocks for big tech companies.

But instead of looking outside, Zoho decided to take the R&D challenge head on. This is best reflected in the vertical integration that Vembu spoke about, which brings in cohesion and interplay between Zoho’s umbrella of 55+ products.

“We invested in R&D over the past many years because it leads to better products. The central R&D team develops technology that can be used across products. We are able to keep the price of our products very affordable due to this,” Vembu said, pointing to the vertically integrated Zoho One platform.

While many other companies have struggled with managing a large suite of products in the current economic climate and have had to pull back from markets, Zoho is doubling down. Plus, the fact that Zoho products reduces some operational overheads for small businesses has also been a strong selling factor in a down market.

Zoho One, which is positioned as an OS for businesses, is built around products such as Zoho People (HR management), CRM Plus, Zoho Workplace for collaboration, and a finance and bookkeeping suite.

Each of these products, Vembu claimed, required a different technological bedrock. But the centralised R&D funnel feeds the various product teams working on them. Instead of creating R&D setups within each product team, the company prefers to centralise this development and distribute these pieces as and when required by a product.

Vembu cited examples such as building an in-house optical character recognition (OCR) for receipt digitisation in Zoho Expense, or the mathematical and machine learning models used by Zoho Analytics or natural language processing seen in the Zia (Zoho Intelligent Assistant) chatbot.

He also added that AI and ML models are built with privacy at the core, with a less-data approach and deletion of personally identifiable information (PII) from business interactions as far as possible.

Zoho’s India Growth Story

Vembu’s belief that R&D is the key to organic marketing stems from the fact that Zoho was able to grow its India revenue by a CAGR of 65% over the past five years. The company claims its India revenue grew by 71% in 2021, however, we were not able to independently verify this claim

These numbers are for the calendar year 2021, while Zoho’s filings for FY21 (April 2020 to March 2021) show that the company posted a total profit after tax of INR 1,917.7 Cr, a 139.4% jump from the previous fiscal.

Zoho, which continues to remain bootstrapped and intends to be a private company for the foreseeable future, crossed the INR 5,000 Cr mark in revenue from operations in FY21. However, the company is yet to file its financial statements for FY22, ending March 2022.

One of the keys to success in India has been the dedicated marketing strategy for each business segment, Praval Singh, Zoho’s VP of marketing added.

R&D comes into play even when it comes to tackling the inherent differences in marketing vertical SaaS products (CRM or HR software) and horizontal platforms such as Zoho One. The focus on deep vertical integration across products means larger companies can use individual vertical products that have hooks to existing legacy software.

“At the same time, we can offer a horizontal platform for smaller companies that want a one-size-fits-all solution. We are able to target niches and offer them the most affordable products in their class. For SMBs in India, we have a dedicated MSME team, which works directly with these businesses,” Zoho’s Praval Singh told Inc42.

Vembu added that to boost SaaS adoption in India, the company is not only looking to improve speed of data processing with GPU-based servers but is also focussing on data storage localisation with two PoPs or servers located in India and 12 others around the world. The company will add 100 more servers in India and other regions over the next five years as part of its R&D outlay.

“We are also working on adding Indian language support for our AI and blockchain technology for universal validation. Our focus will be on technologies that businesses–regardless of their size and location–will be able to use securely,” Vembu said in a statement.

Competing With Big Tech

In the wake of Intuit-owned Quickbooks’ exit from the Indian market, Zoho has managed to make inroads in the SMB space for accounting software. Quickbooks will not be available in India after April 2023, and Vembu said Zoho is already positioning itself to grab market share.

The CEO brings the focus back to R&D, built around data, data processing and data storage. In his opinion, small and medium businesses are also becoming wary of big tech players using their proprietary data to become competitors or swallow their business.

He believes that the R&D investments in India have not only grown adoption, but also the potential for cross-selling and upselling to existing customers, which is key to sustaining profits.

“We are able to compete with the best in the world due to our focus on R&D. This translates into better customer experience and in most markets, we are the biggest challengers to existing giants, whether it’s Salesforce for CRM, Google and Microsoft for collaboration and workspace management,” Vembu added.