India vs. Silicon Valley: A SaaSy War

9/4/12Follow @sramana

Software as a service (SaaS) probably grew in popularity as quickly as it did thanks to Salesforce.com. The customer relationship management (CRM) giant made the lives of sales professionals much easier, and the platform soon gained traction as a handy tool for non-sales professionals as well. But Salesforce.com wasn’t—and still isn’t—affordable for everybody. Enter Zoho, a bootstrapped, India-based company that offers a hosted CRM solution that competes directly with Salesforce’s offering but at significantly lower price.

With Salesforce, very small companies of five or fewer users can get a 30-day free trial. If they decide to stay, Salesforce charges $5 per user per month. For the complete professional CRM package, it costs $65 per user per month. Zoho, on the other hand, offers its CRM package for free to startups and entrepreneurs with three or fewer users. For the complete professional CRM package, it costs $12 per user per month. Regardless of the size of your company, that represents a huge savings.

What’s most important about Zoho and other India-based companies that go head-to-head with Silicon Valley powerhouses like Salesforce is that there’s no fear that the you-get-what-you-pay-for monster will rear its ugly head. On the contrary, these companies are offering quality products and services at affordable prices. Although the cost of advertising and customer acquisition are the same, the overall cost of doing business is not. Companies with operations in India have lower overhead costs and can pay competitive salaries that are still considerably lower than what a company like Salesforce would have to pay for talented employees.

The phenomenon doesn’t stop with Salesforce and Zoho, obviously. There are other companies in India that compete directly with Silicon Valley companies and do quite well, although they are far from achieving the exact same levels of success. For one thing, some of these Indian companies are newer than their closest competitors. And when you charge less, you, naturally, earn less overall. But again, in India, what seems like a drop in the bucket to a U.S.-based company, is a tidy sum. Let’s take a look at another comparison

Zendesk was founded in October, 2007 in Copenhagen, Denmark. After 8 months of toil by the three founders, the company raised $500,000 in private investments. By 2009, the company had moved to Boston, raised two rounds of funding, and recruited almost 1,000 customers. The Zendesk team decided it was time to move closer to their investors and shifted their operations to San Francisco. And then things started getting interesting. In 2010, Zendesk announced across-the-board price hikes of 300 percent, stirring up a serious customer backlash on social media sites. The company later acknowledged that the move was ill-considered, and rolled back the price increases for existing customers. But in India, one entrepreneur following the controversy on the discussion portal Hacker News took the controversy as a cue to start innovating.

Girish Mathrubootham, the vice president of engineering at the ManageEngine division at Zoho, figured that a cloud help desk solution with the right features, at the right price, might be able to compete against Zendesk. He also felt that existing SaaS help desk software lacked the perfect blend of aesthetics, functionality and wallet-friendliness, and that there was a lot of room to improve the usability of such systems.

Shan Krishnaswamy, the technology architect at ManageEngine, shared Girish’s passion and enthusiasm. He and Girish had built multiple successful on-premises software packages together, including at least four specific help desk solutions. In June 2010, they founded Freshdesk with Girish’s life savings.

After a year of development effort, Freshdesk was launched to the public in June 2011. Within the first 100 days, Freshdesk crossed an impressive milestone of 100 customers.  Since then, the company has won numerous awards and recognitions including the Microsoft BizSpark Startup Challenge. In December, 2011, Freshdesk raised its first round of funding from Accel Partners, firmly establishing its position as a strong competitor for Zendesk.

Let’s look at how Freshdesk and Zendesk—with its four-year head start—compare. It took Freshdesk only 12 months to acquire 1,000 customers;  Zendesk took 19. It took Zendesk eight months to raise $500,000 in seed funding, but it only took Freshdesk four months to raise twice that amount. All told, Freshdesk has raised $6 million compared to Zendesk’s $25.5 million.

Freshdesk enjoys a mix of both worlds with a base in India blended with years of experience working in, and building software for US customers. Over 90 percent of Freshdesk’s employees have directly built, marketed, and sold software to global customers.

As a trend, it is interesting to see how Indian SaaS companies are giving heavily funded Silicon Valley startups a run for their money. Today’s booming environment in Silicon Valley has created a talent war, driving salaries of engineers, product managers, and other talented team members high. In contrast, India (and some other geographies like Latin America, Eastern Europe, East Asia) maintains cost advantages when it comes to talent.

Innovation, consequently, is happening everywhere. The software that the challengers produce is rich in functionality and innovation, not just substantially cheaper. Thus, while they still have to spend similar amounts in terms of customer acquisition investment, the cost structure advantage often results in better products at lower prices.

This is a relatively new phenomenon. I expect, the trend will develop over the next few years, and companies from India, Malaysia, Brazil, Romania and elsewhere will pose a significant challenge for Silicon Valley companies. Of course, a reasonable response is for Valley companies to avail themselves of the cost advantages by also using offshore workforces.

But software prices will be driven down through this competitive dynamic, and in the end, the customers will emerge as the winners.

This story has unfolded through the ages. It will unfold again.

Sramana Mitra is the founder of One Million by One Million (1M/1M), a global virtual incubator that aims to help one million entrepreneurs globally to reach $1 million in revenue and beyond. She is a Silicon Valley entrepreneur and strategy consultant, she writes the blog Sramana Mitra On Strategy, and is author of the Entrepreneur Journeys book series and Vision India 2020. From 2008 to 2010, Mitra was a columnist for Forbes. As an entrepreneur CEO, she ran three companies: DAIS, Intarka, and Uuma. Sramana has a master’s degree in electrical engineering and computer science from the Massachusetts Institute of Technology. Follow @sramana

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  • Sarah Galloway

    is it really that much cheaper now to develop software in India? Many overseas businesses that moved to India to take advantage of the lowers costs are now moving their operations back home. As an aside when Salesforce, Zendesk etc started, SaaS was just getting off the ground, now the value of business model is clear it is relatively easy to raise relatively large sums of money.