The Compelling Reason for Zoho to Not Launch IPO

Sridhar Vembu’s Zoho Corporation has worn many a different hats since it was formed in 1996. Until 2009, the company was known as AdventNet Inc and provided network management software. Gradually, it stepped into the now-hot Indian SaaS space, which would shape what Zoho’s future would look like. 

Businesses then were increasingly moving to the internet to rent software for running their operations instead of purchasing licences for expensive software. The company’s youngest division, Zoho.com offered online software ranging from email to office productivity tools to customer relationship management (CRM) software, and reportedly remains the company’s fastest-growing segment. 

In a 2011 media interview, Vembu narrated a story about how a venture capitalist approached their booth at a trade show and cautioned the young company that ‘they were thinking too small’. But Vembu was self-assured. He believed he could earn some capital by selling products to companies and keep doing it until they could think bigger. At this point, Zoho Corporation had 600 employees. 

In the past decade, Zoho has expanded its product portfolio. It has fifty applications currently under a single suite offering called Zoho One. This has worked in their favour considering the Chennai-based company touched USD 1 billion in revenue amidst a global economic slowdown that has affected the bulk of tech companies globally. 

Even though much has changed, Vembu has always been adamant about not taking Zoho Corp. public. The reason behind remaining private may seem even more baffling, given Zoho has been profitable every year since it was founded. 

The question has been asked several times, and Vembu’s answer has stayed the same. In a 2016 interview with Forbes India, he responded saying, “Why sacrifice freedom? We’ve done a lot here at Zoho and operate on our own clock – it’s an internal conviction. If you take money, you have to necessarily make some compromises.” 

Unique investments

This ‘freedom’ has given Vembu the scope to invest in projects that normally have a long gestation period and even experiment. There’s Zoho University, the company’s internal training programme, which was born out of Vembu’s conviction that a ‘large pool of people were often overlooked by traditional methods of recruitment.’ Approximately 15 percent of the company’s hires are from Zoho University. Then there’s Zoho’s head office in Chennai which houses Zoho Schools which also gives students a stipend to attend classes. 

Vembu’s philosophy has often been repeated verbatim by the company’s senior and middle-level management. In August this year, Sridhar Iyengar, MD of Zoho Europe wrote a blog about the drawbacks of going public. Aside from current market volatility and general economic downturn, Iyengar spoke about other factors that companies normally overlook in exchange for the capital windfall and publicity that an IPO could potentially bring. 

More money in R&D not marketing

Iyengar also explained how public companies immediately turn risk-averse to placate investors. Illustrating the example of the biotech industry, he explained how scrutiny over R&D decisions could severely affect investor confidence and market valuation. This held back biotech firms from going public (in the past year, only five out of 102 biotech firms were trading above their debut price). 

This was a legitimised fear as Zoho spends three times its marketing expenditure on R&D and has obtained 25 patents in the last three years. When Zoho reached the USD 1 billion-revenue mark, Vembu attributed much of the company’s success to its strong R&D capabilities and hinted they would continue to pour money here. “Our R&D focus in the coming years is to further unify our technology stack so that we are able to elevate the user experience,” he said.

Zoho’s independence has also helped Vembu to retain interest in boosting rural businesses which could have otherwise raised investors’ eyebrows. In May, a Kerala-based startup Genrobotics which was developing robots for sewer cleaning received a Rs. 20 crore investment from Zoho Corp. (Genrobotics had developed Bandicoot, the world’s first robotic scavenger which helps clean sewers and manholes under the Kerala Startup Mission).

Freshworks IPO fiasco

The ongoing Freshworks fiasco seems especially stinging in this context. Founded by two former Zoho employees Girish Mathrubootham and Shan Krishnasamy, Freshworks was engaged in a two-year-old legal battle with Zoho under allegations that Freshworks had wrongfully used confidential information from Zoho. The lawsuit was settled last year in December.

Last year in September, Freshworks became the first Indian SaaS firm to go public on the US stock exchange with a stellar debut of USD 43.5 per share on Nasdaq 21 percent more than the company’s listing price of USD 36 per share pushing its market cap to USD 12.3 billion. As Freshworks became the poster child for Indian tech IPOs, Zoho came under increased pressure for not going public. 

Just a month ago, Freshworks came under fire for misleading investors during its IPO. The California-headquartered startup has also been charged with ‘violations of federal securities laws.’ While Freshworks listed its shares at a premium of 21 percent, the stock has lost almost 75 percent of its value this year with Freshworks shares (‘FRSH’) currently trading at USD 12.32.