"They acquire, acquire, acquire while we build, build, build"- The acquiring v/s building battle

Sridhar Vembu had taken upon a herculean task when he started up Zoho back in 1996 and is doing a might good job of it. Zoho is a network for businesses currently used by over 7 million professionals and takes SalesForce headon in terms of competition. The company has been built by Vembu from the States but the development team is in India. Almost a David v/s Goliath story, what catches ones eye is the attitude of Vembu and his clarity in terms of ideas. In a rather expressive post post the SalesForce acquisition of Exact Target, Vembu puts out an interesting question on acquisition v/s building and also a company's philosophy-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.

Read more on the blog. Now, the question is not if acquisition is bad or good but more about the philosophy of the company. On paper, it can be made out to look very simple- If a company has money, it goes out and acquires a company it considers to be a threat. The acquisition can be for the talent or the competition or to make a stronger proposition. In most cases, it is a combination of the three. But there are obviously deeper dynamics to an acquisition because compatibility is something you'd be able to gauge once the acquisition happens.

VIjay Anand of The Startup Centre says, "I don't think the allusion is towards saying that acquiring is bad, but fundamentally the raison d'etre of a company is to provide value - if you have a large workforce that cant deliver that via your products, that you pay a high price to buy and sell another company's product is where the debate seems to be."

In this particular case, Vembu expresses surprise at the move by the competition but if that is what SalesForce believes in and thinks the right way to go forward with it, so be it. Zoho has surely shown the world that a great company can come from outside the valley and that one can build a world class product with a very small team with no known names but this outburst comes as a bit of a surprise.

SalesForce has spent close to $3.5 billion and made it clear that it prefers to acquire rather than build the capabilities within while Zoho goes the other way. This might stem also from the capacity or the financial clout to acquire but it sets the ground to see how the two strategies shape up in the longer run.