Interview with Zscaler Founder and CEO Jay Chaudhry

[MUSIC] >> In 2018, you got one product, Z-scaler, Internet Access. Oh, then private access screen, then digital experience screen. They all became Z-scaler for zero trusted users. Then we built it for cloud workloads, branches, IoT devices, the platform as an expanding. So we can know, lack of, market. I don't worry about competition. Our competition is all legacy stuff. My competition is generally inertia. [MUSIC] That was Jay Shadry, founder and CEO of the Cloud Security Company Z-scaler. I'm Motley Full Producer, Matt Greer. Now Motley Full CEO, Tom Gardner recently talked with Shadry about entrepreneurship, AI, and the business of Z-scaler. Tom was joined by a team of fools, including our Chief Investment Officer, our Chief Technology Officer, and our Head of Cybersecurity. Enjoy. >> Well, hello to all of our Motley Full members. We're so happy to be able to spend this time together talking about a wonderful company in the public markets that served as well as investors thus far. And that is Z-scaler, a cloud security company that protects people in applications without using traditional firewalls or VPNs. So Z-scaler's applications sit between an individual user and the internet, or a company's application to make sure every connection is safe in a zero-trust exchange. Company has a market capitalization of about $39 billion today, which is around seven times higher than when it came public about seven years ago. And we know those numbers pretty well because at Motley Full and Hidden Gems, we first recommended Z-scaler back in 2018, around $38 and $38 to share. We've made more than 50 recommendations of Z-scaler over those seven years. We have never sold a share, which is not unusual for us at the Motley Full. We really like to focus on the long-term business performance and invest accordingly. But those returns since coming public are about 30% a year. And that's a market beating fantastically. So we get the pleasure of spending the next hour with the company's founder and CEO, Jay Schaudry, who has spent time with Fools in the past. And Jay, I wanted to start with a surprise question. What was the first moment in your life when you realized you wanted to start a company? I know that you have started, I believe, five companies. So you can talk about also when you decided to start Z-scaler. But the origin of entrepreneurship for you, where did it come from? Many people plan entrepreneurship. They have a journey, they have a plan. For me, I may call it, I'm an accidental entrepreneur. Having been born and raised in a tiny village in the photo of the Himalayas in Northern India, without electricity, without water. So I had no idea what companies and entrepreneurship is. But I was always a hard-working, good student. Got into engineering and came to the US to do my masters. So I thought I'll be a software engineer for most of my life. Like most engineers. The first time I got into entrepreneurship was sitting in Atlanta, reading about this company called Netscape that had just gone public around 95, 96 time frame. And reading about this young chap, Mark, and Dreson and Sehwah. This young guy is starting a company that's going to chain the world where you could access information using a standard browser no special software. That should be very powerful. Because it's wonderful. But then I said, if that happens, everyone connects the internet. Which means someone has to worry about security, cyber security. And that may be an opportunity and then talking to my wife, I was saying, if this young guy could do a startup, why shouldn't I do a startup? Was the first time idea coming out of nowhere. And it just built upon it. And that's all I moved away from being a business leader in a corporate world, corporate America to be a startup guy. And you started your first company then, but you have a list of successful businesses. You started before beginning Zscaler, maybe just a quick walking tour of those. And then why when you arrived at Zscaler, did you say this one, I believe you said this one is forever? That's right. So the first company was Secure IT. And for that company, I failed to raise VC funding because I had no experience in any startup world. And since I got passionate about it, so my wife and I talked, we put a life saving the line to get the company started to make it more exciting. And my wife quit her job. So there's no turning back, burned the bridges behind. Was the notion that the company took off. We were very focused, we were very good at what we're doing. So the business took off that company got acquired in less than two years. And everything went so well. And I said, wow, startups are supposed to be hard. This was easy, this must be a fluke. So let's do it again. And also, you know, you want a bigger challenge in life. And then we said, this time we do not need to talk to any VC. In fact, I said we could only put so much money in one startup. So we should do multiple startups. But do them like raising or having kids, you stagger than one or two years apart. So we ended up starting three companies, one E procurement ASB using a river software. That has precursor to SaaS, single tenant application software provider. An email security company called Cypher Trust. And a wireless security company called Air Defense. Good luck, good timing, great teams. They all became successful and eventually got acquired by large companies. That took me to 2007, 2008 timeframe. At this stage, I had no interest in doing one more startup and selling it. I want to do something big, something lasting. And that's what I was looking for. What could be the long-term opportunity? Where we could build the business. And that's where the ideas of Z-skiller came in. Sometimes I get told, gee, how did you come up with that idea? Must be some very creative thing. Not really. It was fairly common sense. If you think about 2007, 2008, internet was a big source of information. And I've been using Salesforce and NetSuite since year 2001, when each of them was under $10 million in annual sales. But I had used them. I thought SaaS is the way to go. SaaS should take off. And then AWS had just launched infrastructure as a service, compute as a service, storage as a service, which made so much sense. Because why not do compute as a service? And then Apple had just launched iPhone with a big screen. And I said, if we all become mobile and applications are everywhere, where all are you going to keep on building these modes with firewalls? It'll be a crazy idea. So let's think outside the box, let's kind of flip the security thing on its head and not do firewall and build something totally different. Like a switchboard, a policy engine, where everyone's untrusted. The network is merely the transport. You don't do network security. Those were some of the ideas we thought of. And that's all Z-skiller was born. Hey there, Space Fans. If Space News excites you, you'll feel right at home here. I'm Rod Pyle and in this week in Space, Tark Malik and I bring you the latest news from our solar system and beyond. Missions, discoveries, rockets, the big winds, and the occasional stumble. You know, we love this stuff. And if you love space, you're going to have a great time with us. So come along at twit.tv/twist. For somebody who's not deeply knowledgeable about cyber security, can you just explain that shift from firewall? Explain what a firewall is, explain VPN and YZ-skillers view was unique and innovative. Absolutely. So the final way of security is generally called castle and moat security. If you need to protect your castle, what do you do? You build a moat around it. So bad guys can't come in and then there's one place to get in. And that's the moat has a special door and they check you before they let you in. And once you're in, you're supposed to be a trusted good party. Okay, now that model worked fine for the traditional world of computers. Here's your data center and here are some devices sitting there and you have a network connecting them. And you want to make sure that if you connect the internet, the moat is a firewall. It's like a door. It's like a gate keeping the data center safe. And then you had to move to 50 offices. No, you're connecting your data center to 50 offices. It's almost like you had a big castle, then you have 50 small castles. Then you connect the big castle to 50 small castles to tunnels. Okay, but once somebody gets inside the castle, they can reach everywhere. That's the problem of the network security firewall security model. You're in, you can cause lots of havoc. Now what firewalls try to do was, oh, if you're worried about that, why don't I create more walls? I've wall here, wall here, wall here, wall here. I'll sell you lots of firewalls. It creates a big problem, maintenance, all that kind of stuff. That's the model I was familiar with. In my first startup security IT, I was actually designing, architecting, selling, supporting firewalls. And I'd seen all the limitations of it. That's why I wanted to bring disruptive idea. Also, you know, I'm a big fan of reading about technological changes. I always believe that technology incrementally changes all the time. But every decade or every two decades, there's a step function change. That's what drives innovation. That's what drives business productivity. Give you a couple of examples. They used to be analog world, which did pretty good. Then we had to shift to digital world, digital technology, much better, much cleaner. In the world of software, we used to have application in our data center, from vendors like Seaball systems and the like. Then came Salesforce. It says, why do you have to keep on worrying about buying servers, deploying all the stuff? Connect to me like a utility service and use it. So those are step function changes. When I looked at the world of IT, I said applications are changing. But nothing has changed the world of cybersecurity. Same old 30 year old firewall technology. We need to do things differently. Let's not trust anyone. At the end of the day, users need to access applications. How do they make sure the right person can have access to right applications? So I thought of a simple metaphor. An old school phone switchboard. Years ago, if you want to talk to John, you called a switchboard and said, please connect me to John. You are connected. You had a great conversation. Then you said, oh, I want to talk to the president of the U.S. The switchboard said, sorry. You're not allowed to go away. It's really connecting the right party to right party. Such a simple, elegant architecture. Unlike simplicity and innovations. The way I also thought was, the service should be simple. We all used to love DVD players. You recall those DVD players? They were wonderful. And then Netflix came around and say, move over. You simply click on a button. You get what you want. That's the kind of service I envision for ZSKIT. Jumping ahead to today's challenges. These days, everything is in tech is like 99% AI. Some of the stuff that a CTO keeps me up is one article specific regarding Anthropic where they had an AI-orchestrated cyber attack that they thwarted. So the new innovative techniques, AI is amazing for innovation. It's helped the Motley Fool tremendously. It helps so many companies that we're looking at. But it also creates brand new threats that did not exist a year ago. How does that plan to some of the things ZSKIT is doing these days? So I have often said AI is wonderful. AI is powerful. AI is dangerous. It's almost like any new technology. A knife in the kitchen is a wonderful tool unless it's abused. So here are some of the bad things AI can do. That makes it very hard for companies to protect themselves. When an attacker attacks, they find a target. It's like a bank robber has to find which of the five and branches do I want to break in. So they can break in without getting caught. In the cyber world, they find our public IP, my firewall, my VPN, my application portal. It used to take weeks for hackers to find some of those cyber targets for your company. Now you can submit the query to chat GPT. And it can give you a beautiful, tabular format of all the firewalls with vulnerabilities in them. Makes it so much easier. And then often people will do phishing emails. And those emails sometimes could be typos, missing spellings coming from Nigeria or wherever. Not chat GPT can do beautiful phishing email with the writing style of your CFO and coming from your CFO. That's hard. Makes it hard. Three. Once the bad guys get on your corporate network using stolen credential with VPN or something like that, now you can use automation of AI. And AI automation can allow you to find mission critical applications. And encrypt them or do whatever needs to be done and ask for an answer. Then throw a pick attack you talked about. It's essentially hijacking an agent. Agents are somewhat like people. People have been the weakest link. I believe in future agents will be much weaker link. Because the code can be changed, things can be hijacked. And no, agent on your network has access to all kind of applications they can try to do bad things. And the zero-trust architecture we pioneered at C skill actually plays an important role. The zero-trust architecture, as I described the switch word says, everything is an island, everything is untrusted. You come to a chat post, you get connected to the right party. If enterprises embrace zero-trust architecture, these hijacked agents or users whose credentials have been stolen, they won't be able to get past maybe a given application beyond that. So it's fundamentally very powerful architecture to safely embrace AI security. So we end there are other aspects of it. But starting with a zero-trust where agents are only trusted for a given amount of time to do certain tasks and no more is the right way to do these things. I think I'm going to turn philosophical here. But perhaps also because of your remarkable life story, not even dreaming that you would be a software engineer in your early childhood years or maybe even having access to that technology, if you'd have electricity and running water in the early years of your life. I guess I'm going to ask a philosophical question about what you think will happen with employment. We don't have a crystal ball, but almost reaching outside of Z-scalers business for a moment and just thinking what does the next generation do for jobs or what does mid-career employee who is in advancing their skills with AI tooling rapidly enough. What does that future look like for you? Yeah. If you think about the past, we learned from the past, every time new technology came, the people who felt like lots of jobs will go away. When spreadsheets came and on, people thought that man, all these accounting people will have no future. It's all wrong. I do believe AI is going to create lots and lots of new jobs, but every time technology has come, it needed better skills for people to do a better job or to have a better job. So my advice to people will be embrace AI, learn skillset because it's going to create a whole range of new jobs. While everyone is fascinated by AI technology, it's still non-deterministic. It's probabilistic. There are many, many jobs where non-deterministic is not good enough for many areas. So somebody needs to validate all that stuff has to be done. So I am always an optimist. I think technology is always creating new opportunities. I think AI will create new opportunities, but people who are really learning better, doing a better job will do better. So I encourage people to say, embrace AI, learn about it, and that's going to create a better future for them. Hi, Leo LePort here, and on Mac break weekly, I sit down with Alex Lindsay, Jason Snell, and Annie Annaco every week to talk through everything happening in the Apple world. News, opinions, plenty of insider perspective. We keep it sharp, thoughtful, yeah, fun. If you love Apple, you'll feel right at home. Subscribe and download at twitch.tv/mbw. Number one risk a consumer at home has is fishing. With fishing, they steal your credentials, so they can go and steal your money from your bank. That's probably the biggest risk for an average consumer. So one should be mindful of what they're clicking in and what not. It's hard on the mobile phone. It's hard to even see that you are out. So good to have some level of software protection for fishing, and a number of these software available to make sure you end point is safe. That's the number one thing you do. Number two, I think being a little bit savvy to look for some of the thing that look silly out there and not fall for them, but just using a little common sense goes a long way. But it's a lot easier than some of the stuff we deal with at enterprise. At enterprises, things are highly targeted. Nation states are coming after you. Consumers aren't really targeted at those big things, but they are target of fishing, so they can go and get your money, and fishing is the most common thing for them. One of the things that I, when talking to investors and our members is the Mali Fool, try to have members see, I'll express it two ways. One, that I believe mathematically, the truth is that if the average investor doubled their average holding period, they would get better returns. Even if they'll have some losers in their portfolio, but simply by the act of doubling their holding period, it'll line them more with the business obviously. It's more tax advantage than there are many other reasons to do so. But when I look at what you've created at Zscaler, and obviously the company came public in 2018, and I mentioned it sub seven times in the seven years, when I run my numbers on the business, and I know you can't comment on this, I believe Zscaler could deliver 15% a year for the next 10 years. I think it'd be one of those defining companies for this era, and I'm wondering how you think about time horizon. You know, there are institutions coming and talking to you on quarterly reports about your operating margins. There's the pressure to be ready to report every 90 days. You obviously mastered that in seven years, but I think many investors would be interested to hear what is the time horizon of the CEO, and how do you think stakeholders of the company, whether they're employees, customers, shareholders, how should they think about their partnership with a Zscaler to align them to the interests and the activities and the decision-making process of the CEO? So first of all, I look at the opportunity, starting with, is the whole biggest market and whole series of demand? Is this product needed? Is it vitamins or is it a pain killer? Okay. It's pretty obvious that cyber is needed badly. There's no such thing as, hmm, I can live without it. So that's number one thing for a market segment. Number two, is the market begginal for is the market small? The market has growing at a pretty rapid pace. It's being disrupted. You can't even look at the segments you looked at five years ago. So when the market is massive and growing, it's a great opportunity. Then the third thing you look at is, does the company offer a compelling solution, which has barrier to entry? With on global cloud bigger, with 55 some billion users, old 45% of fortune-firing companies as a customer, we have proven track record. One of the things I'm very proud of, outside typical financial numbers, is on NPS. Net promoter score has been sitting between 75 and 85 most of the time. That's remarkable. An NPS of a typical SaaS company generally sits in 3035 range. So that's being happy smart customers. I'll give you a beautiful stat. About nine months ago, one weekend, I was sitting at home looking at some of my travels and I said, "Oh, I met the CISO and he told me he's bought Z-skiller the third time at his third company and I got curious. I looked at my data and looked at large companies who I generally meet with. 285 of the CXOs had bought Z-skiller two times, company A, then they went to company B. 84 had bought it three times. 45 had bought it four times and they keep on coming, they like us. So having a large customer base with a fast-moored advantage that we did is good for us. And then you look at and say the evolving product said, "We have evolved and investor used to say, in 2018, oh, you got one product, Z-skiller, interim access. Oh, then private access came. Then digital experience came. They all became Z-skiller for you, zero trusted users. Then we built it for cloud workloads, branches, IoT, IoT devices, the platform as they're expanding. So we get no lack of market. We're changing the world. So we start with people who are progressive with art leaders. Then others are coming along. So I think we have plenty of potential opportunities to grow. My role model has been service now. I've been working with service now, one of the board members of service at Z-skiller was the president of Global Sales, David Schneider. He has been a mentor and board member just like they have done a great job. We have a very big platform and it's growing. So I think we have plenty of opportunities for the long run to keep on growing this business. And to me personally, Z-skiller is not just a business. It's a mission. I mean, when you think about some of the biggest, the big companies depend upon Z-skiller so they can keep on doing the business. Wow, the feeling of satisfaction, the feeling of accomplishment is fantastic. And then people say, Jay, when are you retiring? So what do you mean retiring? Man, I'm having so much fun. We're in the early stage. We have a lot to achieve. And let's go. Thank you for sharing your story and your thoughts and your solutions and your view to the future. We enjoyed it so much and we look forward to talking again in the future. So I'm in team. Thank you so much. I really enjoy that conversation. Thank you so much, Jay. As always, people on the program may have interest in the stocks they talk about. And the Motley Fool may have formal recommendations for or against. So don't buy yourself stock space solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool money team, I'm Matt Greer. Thanks for listening and we will see you tomorrow.