Zoho bitterness at the credit crunch...and a solution

I have a lot of sympathy for Sridhar Vembu. CEO of AdventNet, the parent company behind Zoho.
Written by Dennis Howlett, Contributor

I have a lot of sympathy for Sridhar Vembu. CEO of AdventNet, the parent company behind Zoho. His last two posts reflect much of the fear and frustration behind what I am hearing in the startup world. But amid the gloom, Sridhar offers a glimmer of hope. A few snippets. From We're all Japanese now:

...don’t confuse libertarian economics with the “free market capitalism” claptrap coming out of the Wall Street financial complex; when Wall Street gunslingers touted the miracles of “capitalism”, what they really meant was their government-conferred right to borrow easy money from the Federal Reserve, leverage themselves up 20 to 1,  even 40 to 1 while speculating with that easy money, paying themselves tens of billions collectively in bonuses, finally inflicting hundreds of billions, soon to reach trillions, of losses on the taxpayer when those speculations predictably failed . The Wall Street version of financial capitalism has about as much to do with real savings and investment led capitalist wealth creation as alchemy has to do with with chemistry. The alchemy analogy is particularly appropriate: much of the Wall Street “business model” was really transmuting pools of highly risky, toxic mortgages into nearly risk-free “golden” securities.

That's one of the best summations I've read about the mess that is Wall Street today.  About the only thing it misses is the extent to which Wall Street financial engineers managed to swell their pockets by manipulating the tax system. But that's for another blog and another day. As I've said elsewhere, even relatively simple control questions could have surfaced the problem. But they didn't. This is the myopia that develops when money seems to be pouring from the skies. We eventually become blinded by the golden glow of a seemingly never ending stream of funds.

Roll back one post to Sridhar's Surviving the financial crisis:

It seems clear that we are heading into another nuclear winter, this time led by housing and financials. It is going to impact the tech industry, but this time as suppliers not as direct bubble-blowers.  Companies that have a strong balance sheet (we prefer zero debt), and the ability to adapt and flex will survive the wreckage. Customers are hurting, so attractive pricing is a must - there is going to be price deflation in tech. These are the rules we live by at AdventNet & Zoho.

Over the weekend, Jason Calacanis caused something of a stir with his long email newsletter that was posted to Silicon Alley Insider, only to be torn down later (and at Techcrunch) Calacanis predicts that 50-80% of startups will fail in the coming 18 months and that the 'depression' will last years. To his credit Jason offers a menu of sound advice - everything from belt tightening to hiring the best and generating revenue.

It is this last part that is a worry. Many of the startups we've seen in the last 18 months have been headed down the ad supported route. I've never believed that's sustainable except for the very largest sites. The money simply isn't there to go around.

By definition, that means very few survivors, huge cash burn for those that are building mind share but ultimately a two finger salute to the 'build it first, figure out business model later' brigade of VC buccaneers. If you have any doubt then check what the market thinks about Google's near term prospects. (Hint: it's trading at a 52 week low and as I write this, is off some 5.6% from the previous close.)

What about enterprise startups? Zoho is the poster child for bootstrapping, taking on the big boys and still managing to do well. Zoho has the benefit of having lived through a past storm, learning from the lessons such experiences deliver. The same goes for Jason Calacanis (and you wonder why he raised all that money?)

Survival will mean a sharpening of the price pencil. Services that today seem modest at $20per month compared to on-premise pricing will come under pressure. If Zoho can do it, so can you.

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