Economic crisis in start-ups and tech could continue for 2-3 years, says Zoho CEO

Given the timeline followed by previous economic bubble bursts, the present downturn in the Indian tech and start-up ecosystem could take two or three years to normalize, said Zoho co-founder and CEO, Sridhar Vembu. “The burst that follows a bubble is usually proportional to the bubble size, and that is what worries me,” said Vembu in a chat with CNBC-TV18.

“Previous bubble bursts have taken two to three years to normalize — the global financial crisis saw things stay subdued till 2012, before the situation slowly began improving in 2013-14,” he added, “I expect present economic circumstances to continue for two or three years before things improve.

Ironically, Vembu’s bleak projections come at a time when Zoho announces a revenue milestone of its own. The Chennai-based SAAS company has hit a billion dollars in revenue — a “bittersweet” moment for its founder given the recent layoffs in Indian start-ups. “Our achievement is on account of our investments in R&D, customer acquisition and our focus on revenue and profits,” he said.

While the US and EU markets have contributed 42 percent and 30 percent to Zoho’s latest revenue figures, India has contributed to 10 percent of these numbers but at an astounding growth rate of 77 percent. “At current pace, India could be our #2 market in four years and our top market in the next ten years,” Vembu said.

Zoho has announced that it plans to double investments in AI and blockchain, reporting that its overall investments in R&D are three times its marketing spend. The company is also focusing on setting up data centres, privacy technology, spam detection software, and over a hundred PoPs (points of presence) to “speed up audio-visual delivery and data localization”. The company has received 25 patents in the last three years and has 11 more in the pipeline.

Vembu said Zoho’s future investments in AI will continue at a growth that mirrors its own growth rate, but said it was hard to project one at the moment: “It’s difficult to forecast growth rates today — growth rates have dropped for all companies across the board, including ours.” Recently, a PWC study held that the funding in the Indian-startup ecosystem fell to a two-year low ($2.7 billion across 205 deals) in the September quarter this year. One start-up tracker has reported over 15,300 employees have been laid off at 44 Indian start-ups.

Even at Zoho, amid the revenue milestone, Vembu admits that the money has been hard to come by, in recent times. For instance, although the company’s unified SAAS platform for its CRM apps, Zoho One, has seen 60,000 of Zoho’s 600,000 businesses get on board, the money being spent by these companies has been on the decline. “Customers are unwilling to pull the trigger on bigger deals but are settling for smaller ones,” he said.

In keeping with the bubble-burst in Indian start-ups, Vembu maintains that divergence from basics — unit economics, a path to profitability and low cash burn — may have done Indian start-ups in.

“Even as recently as two years ago, companies were willing to lose money without having a clear path to profitability.” Given the ongoing winter for start-up funding, Vembu said the outlook will depend on the Fed’s policies: “Plenty of venture capital is floating around, but investments will depend on Federal Reserve policies — if dollar interest rates remain high, investments in asset classes like venture capital will be unfavourable for investors.”

The companies that will survive the winter, though, are the ones that design basic capabilities. “Zoho is investing in medical technology, robotics, semiconductor chips, 4G and 5G technology, sensors and electric vehicles,” said Vembu, “I will keep putting my money in these places.”