EP 128: Jay Chaudhry (CEO, Zscaler) On Picking The Best Markets, Risking Everything, & Scaling to $30B

0:05Welcome to the Logan Bartlett Show. On this episode, what you're going to hear is a conversation I have with founder and CEO of Zscaler, Jay Shadri. Jay and I talk about a number of different things, including building Zscaler into a$30 billion business and the opportunity he took to build a disruptive technology company, capturing the trends of the move to the cloud and going all in on that. We also talk about Jay's initial founding of his first company, which included him putting his entire life savings and him and his wife quitting their jobs to start the business, which ultimately proved really successful and allowed him to self-fund Zscaler for a number of years.

0:41We also talk about the value of family and how Jay has been able to keep his kids grounded despite his immense success with Zscaler, as well as his prior endeavors. You'll hear that conversation with Jay now. Well, thanks for doing this. Thank you. Yeah. San Jose. These are HQ for Zscaler here as we sit. So how many people are local to California for you? In this office, somewhere in the 600 to 700 people. And total employees is 7 ,500 to 8 ,000 somewhere there. Yeah. Yeah. Depending on the day. Well, normally I don't like to, I'll jump around a little bit, but I think your background and story is so interesting.

1:26So this is your fourth company? Fifth. Fifth company, excuse me. And maybe give for a little bit of background for people, maybe give a quick snapshot of upbringing. And I think it's an impressive story of coming to the United States. Well, it's a story of America. It's wonderful. Only in this country, you can do whatever you want to do. And that's true. I wonder sometime about my life, born and raised in a tiny village in the hotel of the Himalayas in northern India. I reflect on it. Electricity after I finished my eighth grade. And water when? After 10th grade. So eighth grade electricity, 10th grade water.

2:15And you got your, what, camera, the first time a camera came around was when? First picture? Oh, high school group picture. I mean, it's like a crazy, like, to be here now starting a$30 billion plus technology company and that to be your child. It's kind of crazy. It's unbelievable. I look back. My sister and I will fight over who is going to clean the kerosene lamp because we would study in that lamp. In school, at the start of the day, the teacher will send some students to go to the village well and fetch water. so the rest of the students could drink for the rest of the day. You look at those things.

2:56I'm sure your kids feel like walking uphill both ways, you know, in the snow, sort of the old adage of parents telling their kids how hard they had it. But you had to walk a fair ways to get to school, actually. Yeah, yeah. And my kids have been back. I take them. You showed them. The proof. No, this aren't just dad's adages. But also to kind of help them appreciate life. Totally. What it takes, because America sometimes seems like a bubble. And your first flight was to the U.S.? The flight was U.S. And what year was that? 1980, when I did my bachelor's in IIT, B.H.U., and came here to do my master's.

3:37And what was the draw of coming to the States? Was it just education? Yeah, IITs are some of the best schools in India. And somehow, everyone thought that the best place to get a master's degree in engineering was America. So actually, probably more than half of IIT students will come to America to do master's. And that's what I wanted to do as well. So take me from there to, I guess, starting your first business. Yeah. You know, a lot of these things that happened to me was not part of the plan. Because I didn't know IITs existed. I just stumbled across them. I didn't know that I could be a great engineer.

4:29Just that I heard that medical and engineering are two great professions. Since I didn't want to deal with blood, engineering was a good thing. And even picking up the discipline of engineering was kind of accidental. They asked me to fill, which choice do you want? And I looked at the list and said, electronics engineering sounds cool, because electronics have to deal with television and radar type of stuff. But once I got to my IIT, then I knew a lot, because it was the best of best students. And so I probably had a bigger shock to come from my village to my IIT in India than coming from IIT to the U.S.

5:11So I came here for a typical thing. Let's go and do master's in the U.S. And once I did that at University of Cincinnati, and I selected them because they offered me a tuition scholarship. Without that, there's no way I could do anything. And I started doing software development, just like most of the Indian students would do. And it's funny how I moved to the business world. Once I graduated, this company where I had done summer internship, they offered me a job. It was a very small software startup. And I wrote these software systems. And one day, our sales engineer called in sick. And my boss said, you wrote the software.

5:56why can't you do a demo? I never done a demo to a customer. I never talked to a customer. So, well, opportunity presented, and I did a good demo. And as I drove home that night, I said, wow, that was a lot more fun than writing code all day long. That was the spark. Let's say, should I change my career and move into sales and marketing? And I thought about it, thought that I felt better. I read a little bit more about sales, marketing, customers for the first time in my life. The pull was there. And then I called IBM office in Cincinnati itself. And they said, oh, you come from engineering background.

6:43We are competing with HP and digital equipment. So we need people with technical background. They hired me in sales. So perhaps if I had not gone from engineering to IBM, I may not have started any of these companies. IBM was the best sales training ground. Having done that, I moved to marketing at NCR because I realized at IBM that I had a flair for creating good message, good presentation. and I would do it for my customers. Then other sales reps from IBM would say, could you present this to my customers? And they'd say, ah. I started having fun creating messages, finding the message. And that's why I went to NCR.

7:29There was good learning ground, international marketing and the like. Went to NCR, there was a bigger jump where I ran sales and marketing for the software products division. So it was good exposure to large companies. And that took you to Atlanta? No. Headquarters was Philadelphia Bluebell, right outside Philadelphia. So that was there. And that's where I saw bigger companies. But I also saw that at a VP level, some of these large companies are so internally focused. And I was always focused on customers, customers. And then I came across the CEO of this small company called IQ Software in Atlanta.

8:14and who liked my ideas and suggestions and worked on me for six months to have me quit Unisys and join his company as the number two man in Atlanta. So now I had a broader exposure beyond sales and marketing, some of the other areas. And I worked there for a couple of years. This was 94 or 5 timeframe. Yeah, I joined them probably in late 93, early 94. And the company did quite well, actually. Even outside Silicon Valley, I joined that company at$10 per share. And when I quit after two years, it was$22 per share. So some of the savings of that company actually helped me start my companies. But that's where I got into startup, literally by accident.

9:04And I guess as you look back, I mean, it's such a crazy journey from the electricity in the water to IIT to Cincinnati. Maddie. And as you paint the story, it sounds elements of luck. And I'm sure if you, I'm sure you're being modest in that, but as you reflect on it, are there, are there lessons that you would impart to people that are listening and thinking about their career or how to create the opportunity for luck, things that you feel like you did uniquely well? So the biggest thing I had was I love to learn and read. So I was good in figuring things out, reading, figuring out. For example, in IBM, funny story, I joined sales.

9:51I thought sales will be easy. You talk to customers, I realized that sales isn't easy. Getting those purchase orders, selling takes a lot more. So I want to, I was comparative all in all. I want to get ahead. I want to be number one. That desire somehow was there all the time. And I also realized that you don't get ahead unless you work hard. That was somehow instilled in me. In IBM, I found that in sales, man, I was struggling for some time. And other salespeople who were born and raised here, they had lots of buddies drinking beer buddies and watching football games and baseball. I wasn't into those things.

10:34And I felt, hmm, how do I get ahead? So I thought through and I said, if I am good technically at solutions, I start spending my Saturdays for three, four hours every Saturday to learn everything about IBM Solution. In six months, I knew IBM Solution is better than most of the people in my office. So it is a lot of work, but I really loved being out there, learning, figuring out. Then opportunities presented themselves. then I essentially jumped on them with both feet to make sure I take. And there's an element of, I guess, I mean, going all in in that, right? If you're going to do it, I'm going to learn the solution all the way to its end and state and all of that.

11:21I guess, I mean, that brings to your first venture as well. You quite literally went all in on that, maybe for people that don't know. Can you tell the story of the original financing? Yeah, so far I was on a corporate path in this company, IQ Software, a small public company. But I was number two man, doing pretty well. But I love to read everything. And I was reading about intranet. The World Wide Web had just evolved. and reading with Netscape, Mark Andreessen, and Mozilla browser, the more I read about it, the more I fell in love with it, the logic was, wow, for the first time you could access information without having a special software on your PC, just a browser.

12:15So, again, this is your logical thinking without a lot of IDC or Gartner data behind it. If it is so easy to access information in this model, this technology should take off. If it does, then every company will start setting up their websites. Then they'll start connecting to the internet, which is like a cyber highway. That means bad guys can also start coming in. That means cybersecurity should become an important area. So that's what took me the line of cybersecurity. I had no background in cybersecurity before. But it's an interesting framework of how to think that through, where I think eventually we'll get to your existing very successful business.

13:02But you kind of took something and extended it to its fullest conclusion. And then what are the derivative considerations that hang off of that? Because I guess in technology, as you know far better than I, just doing the incremental thing, competitors are going to copy or be able to keep up. And so you almost need to go all in to the end state. And maybe in a different area. And maybe in a different area. Right. Where the big guys aren't. Yes. Lots of companies want to build web servers and all that kind of stuff. Because that was one derivative. Okay, the internet's going to happen. Let's build the websites.

13:41And a lot of people were going in doing that. But I think technology that's main, mainstream, if every big guy is coming in, you have a hard time. But if you start in a given area that's a little bit different, establish yourself, and there's enough runway for you to become big. And there's disruptive technology. You have a far better shot of being successful. Too many entrepreneurs like to say, I have better technology, but it's incrementally better. If it's incrementally 10, 20, 30 % better, they're going to come and catch up with you. So this is where I think I have been looking for disruptive trends all along.

14:26And to me, disruptive is disruptive technology. I'll give you examples, right? security was probably the first pure play security services company. Which is your first business? My first business. Before that, this used to be a services company. I'll do a little network here, this here, this here. I honed on and said, if cyber is a big issue, could be a big issue, let's do nothing but become the heart surgeons of cyber security services deployment. How do you design, architect, sell, deploy, and support firewalls was the starting point. And the VCs were exactly clamoring to back you in Atlanta.

15:07So you had to put in basically your entire life savings. So a lot of credit goes to your wife for participating in this endeavor. Without her, it won't get happened. Yes. In fact, she also quit her job, too. So you guys are all, like, literally all in. Life savings, both employments. Yeah, and it was logical, because if Shannon quit her job, I would have hired someone for finance and all this stuff. Sure. Hiring her, we don't have to spend money. So it worked, but the goal was there wasn't much expertise out there. I talked to Checkpoint Software at that time. In 96, Checkpoint Software had done, if I recall it right, about$25 million total in sales.

15:57Okay. Okay. And so then I went in as a partner with them to deploy firewalls, all that kind of stuff out there. And our business took off because we're so focused in this area. And the other lesson I think people can learn is there were half a dozen firewall companies out there. And other guys will come and say, Mr. Customer, which firewall do you like? I carry all of them. And I would go in and say, we have looked at all. This is the best firewall, and we are the best in deploying it. We know it better than anybody else and work with us. And since we did that, Checkpoint will send all the leads to us because Checkpoint knew that this company was only focused around it.

16:45So having some level of focus, tight partnerships. It's interesting. I've heard phrasing that like startups, you need to force a choice and not a comparison. Like if you're comparing things, it's too incremental. You need to have someone make an independent decision on something. And so you got to be the best at doing that thing. Exactly. People didn't want to do it. Yeah. Funny story. One day, this was, I think, Home Depot in Atlanta. I was offering some of the services. We were doing deployment, pen tests, and the like. And we were charging at that time over$2 ,000 per day. And this guy said, hey, even IBM doesn't charge that.

17:27They are worth$1 ,000 a day. And I said, look, if you want a hard specialist, you come to us. If you want a journalist, you go to IBM. Okay. It's a choice. That's what we do. It's forcing the decision. So I think those decisions are important. And I always try not to do incremental technologies. So I want to skip ahead to Zscaler here in a second, but I guess I'd be remiss. You had exit options along the way for secure IT. At one point, someone came to you, and I read the story, and they were maybe a little arrogant in how they presented the option. Yes. They said, if you don't sell me, we'll wipe you out.

18:11Okay. And it was tough. It was a tough decision. Now, sure, I mean, I like to say I don't have a lot of attachment to money. And I really don't. And luckily, my wife doesn't even. So we just happened to coming from that mindset. Okay. But then someone said, hey, here's an offer. Take it I'll leave it. And I didn't know any bankers, anybody out there to figure out what to do. And when I kind of depended on my gut, a lot of decisions got made. And sometimes I think they're good decisions. You need only certain amount of information, too many people. The deeper you go, the more analysis paralysis you go, the more you slow down, this, this.

19:01you need some amount of information, then you make a call, you move forward with it, you may have to course correct. And what was that framework at that moment in time that did you just feel, hey, this, I mean, minus the guy kind of being a jerk, but like, did you just feel that there was more to be had and there would be a fair value in the future? Or was it simply his attitude to you? I was having fun building. You were having fun? I was having fun. I wasn't thinking about selling at all. And then if someone asks, and they're really arrogant and like this, so obviously, you have no intentions, and someone is arrogant, you walk away.

19:41And then ultimately, when you decided to sell, what was like the consideration? Did you stop having fun? No, we were doing actually very well. We literally had gone from$5 million to$16 million. First year, it was$5 million with 20 % pre-tax profits. Wow. Okay. So, and then it was moving very well. So that sale happened to very soon. Okay. The CEO there was a great gentleman. Okay. He actually talked, called me a few times and I said, no. And one day I had a call and he said, hey, you're saying no, but don't you think we should sit and talk and then you should say no? Pretty logical. Yeah. So then I sat down and talked.

20:26And his logic was, so you're trying to build a bigger company? Yes. You're trying to go public? Yes. He said, why don't you go public through me? I just went public. Okay. And they had. And there'll be pooling of interest. You're all shares in this company. And you run it as a service business. He used Disostratin, Sclavos. He was a great guy. And so we did the do you. It was a good thing, actually, because I turned on all other companies out there. Who would call? Okay. And Verizon's deal was done at$26 per share. And I know approximately when I left, it was about 15, 18 months. It was$2.56 after two splits.

21:13So, I mean, my employees had 20 % of the equity. I had their remaining. There's no outsiders. And it was like, wow. You made a lot of millionaires. Lots of minutes, 70 or 80. If I looked at the spreadsheet, there was a going away party they gave to me when I left. And they published these T-shirts. It's so kind of emotional for me, too. The T-shirt said, thank you for securing our future. That's great. That's super cool. Yeah. I went home that night. I looked at the spreadsheet of options they had multiplied by the stock price with 70 of the 80 employees had their options or a million dollars kind of stuff.

21:57So it is extremely, extremely successful. I'm sure that was extremely gratifying. So I'll skip ahead. So you had three other businesses you started after that, maybe all at once or within a short period of time. Staggered. Staggered. Right. And good success along the way. But then I guess I'm curious when you get to Zscaler, going all in on technology, I heard that Mark Benioff was an inspiration and you wanted to build something that was super enduring. And so I guess I'm curious, how did you land on the idea of what Zscalers become? And you also picked up and you moved the business here. So can you take me through how you thought about what your next act was going to be?

22:39So just a little summary, three companies happened because I made so much money, I thought, I can only put so much in one company. Let's do multiple and stagger them. And thinking that the young will need more time, the others will need less time like kids. But that's not true in business. OK. So I realized that there's a lot of work needed. And you can't just say, this is go, hire a CEO, this will run on its own. So even though all three worked out quite well, it's wonderful. I did realize that it's not a good thing to do multiple projects. So when I came to Zscaler, I said, I won't do anything else, not even invest nothing, no boards.

23:24I want to put 200 % focus in Zscaler. So it was the opposite of doing multiple. Now, a starting idea was pretty simple. I thought about it over actually a fair amount of time. It wasn't that one day, suddenly the idea clicked. Okay. I was in cybersecurity. I was in internet all along. I was so familiar with what's internet. I was familiar with the risks of internet and all that kind of stuff. The idea this time was, how do you build something that's lasting long? So I want to pick a bigger thing. Previously, I was looking for narrow and deep. Here, I want to go wide. Which narrow and deep in cyber is a decent way of selling companies.

24:08A lot of businesses sell for$200 million these days. and it's good to be narrow and deep. The chances of success with narrow and deep go higher. Yeah. You have fewer competitors. Don't raise a lot of money. There's a lot of good buyers out there. And that's essentially what I did my previous company. This I want to change because there's no fun in doing it one more time the same way. Yeah. So what was the, I mean, I'm curious, the motivation itself was, was it building something that lasted and went public? Yeah. climbing the next big, big mountain to something like Salesforce. So my first slide was, can we build the Salesforce of cloud security?

24:51Okay. So it was security focused. And the Salesforce of cloud security in your mind was something that endured and encompassed a bunch of different considerations? Salesforce was successful. It had done quite well. It had gone to a new space. It wasn't trying to do Siebel better. It was disrupted cloud-native multi-tenant technology. So when I looked at it, I said, so the notion was if application moved to cloud, because even in 2007-8 when I was working on it, internet was the biggest source of applications. I have been using Salesforce and NetSuite since year 2001, when each of them was under$10 million annual sales.

25:33So I loved SaaS. I believe that more and more applications will become SaaS. And in 2007, AWS had just launched this compute and storage as a service. And Apple had announced their iPhone. So I could see mobility and applications all over. The simple notion was any new technology starts, it starts as a cottage industry. And eventually it has to become as a professionally managed service. In my simple mind, compute as a service, just like water as a service, electricity as a service, it should be done that way. I looked at it as this trend will take some time, but it has to go that way. And getting inspiration from Salesforce, what they had done, why shouldn't security be sold as a service?

26:23Applications are everywhere. We are everywhere. So two notions we reimagined. One was, why should we build private networks when internet is evolving? It's almost like, why would you build private roads as a big, large company when a nation has already built highways? So in my world, I want to make sure internet is your corporate network. Two was, if applications are everywhere, users are everywhere, where are you going to put your firewalls? Where is the mallet? None. So we're going to think outside. We won't build a firewall. Everyone is untrusted. We are an exchange, a switchboard, a policy engine connecting things to things.

27:06And so for people that don't, traditionally, you sort of had the concept of a moat. What's inside the castle is secure, and what's outside the castle is bad. Now we're moving to a world of, you know, everything could be good, could be bad. Your employees are down the street. They're in India. They're in Atlanta, whatever it is. and you don't, what do you do in the world where you're not sure what to trust? And applications are out there. Salesforce is not in your data center or Dell. So everything is untrusted. We became the policy engine that says, I will connect user A to application B after I check identity and a few other policy constraints.

27:46That was really literally outside the box thinking. and for that, since the notion was, I want to do something big and I'll put whatever amount of money it takes and we'll focus on innovating new technologies. And I found this great team that had built NetScaler, Load Balancer. Sure. This team knew how to handle packets at high speed, sitting in line, figuring out what needs to be done. And that's what actually brought me here. Oh, interesting. If the core team is here, I need to be here as well. I mean, even going back to the secure IT days, it's a similar thing of taking something to its conclusion and assuming what it could be if this is the path that it's on.

28:40I find this in the venture world a fair amount of like some of the best investments we make are tiny markets. They just happen to be tiny markets that are on the path of being huge markets. Facebook was Harvard's little social network. And then it just happened to be something that extended along the way. And I think you need to really build conviction around those things. One of the things I do is I do a fair amount of color research, but not library research reading articles. At Zscaler, before I started the company, I actually met with scores and scores of customers sharing the ideas. And most of them said, not really.

29:25Just because it was so fundamentally different? Fundamentally different. They all agreed they need to do this. They won't agree that it needs to be done in the cloud. Would I let my security go to the cloud? So most of the validation was negative. But the notion that things should become a utility service felt so powerful. And I said, if we really build this serious technology, it should happen. I was ready to really make this big bet. And presumably you found some people that validated the idea. Was it that they were so effusive in their validation that you knew other people would come along or you knew you could build a big enough business around the people that really believed it and inevitably some other people would join you?