Why We Haven't Taken Venture Capital

Many people in the technology industry express surprise that Zoho has never received any outside capital, and has been bootstrapped from the beginning. I get roughly 3 calls from venture capitalists, private equity firms and the like a week, and I find that I have to repeat myself way too often. It gets boring after a while, so may be a post will help!

First, let me state that I don't have any fundamental religious issues with venture capital. I know many VCs personally well, and I respect what they do. I have just come to believe that VCs necessarily have different priorities and different motivations than people who create and operate businesses.

What is the primary difference? Ultimately it comes down to the question of "exit". As a founder, I have no interest in exit or liquidity. I am in business to run a business, not to run away from it. Or as Warren Buffet puts it: Our favorite holding period is forever.

Now that brings up a philosophical point: what is the purpose of a business? Milton Friedman is unambiguous: The Social Responsibility of Business is to Increase its Profits . From the perspective of a financial investor, by which term I mean anyone investing other people's money, Professor Friedman would be absolutely right; profit maximization is the dharma of the financial investor. Indeed, Professor Friedman was mainly talking about publicly traded companies with broadly diversified ownership. But from a broader capitalistic, libertarian perspective, it is not for Professor Friedman or for that matter, the government, to suggest what the motivations and goals of a capitalist - I am using this word in the sense of a person risking his own money - ought to be.

Maximizing profit can be one goal, but who is to say that ought to be the goal of every capitalist? True libertarians like Mises and Hayek acknowledge that the ultimate ends of each person, certainly including men and women who create companies, are no one's business but their own.

Enough philosophy, so what does it mean in practice? As a company, Zoho does many interesting "social experiments" particularly in the field of education, to borrow a phrase from Tony Hsieh of Zappos. You can even say that a good part of the reason we exist is to perform those interesting experiments. It is as much a voyage of discovery as a journey for profit. We believe in paying our own way, so we have a certain internal discipline about our experimentation. We certainly believe those experiments are good for our business, on the whole, and in some unspecified long term horizon. But we cannot be sure, indeed no one can be sure, of the outcome, nor the timeliness of the outcome, which is crucial for a financial investor. The seeds we plant may end up bearing fruit for someone else. We just look at it as building good karma in the world.

Finally, I will mention in passing that there is a Zen paradox about business: too much focus on profit will destroy profit. Now try saying that in a board meeting!


21 Replies to Why We Haven't Taken Venture Capital

  1. Glad to read this. VCs are hard to get along with, often, and users such as myself are happier without them - I feel that there is longer-term security for me, as you build your platform, that the whole kit and caboodle won't be merged away into something else, or that the rug will be pulled out from your feet by someone else.This said, we would be even more assured if we could understand how you plan to stay in business, and be profitable enough to continue to grow!

  2. If you can't bootstrap initially, what does this say about the viability of the business overall? There is a time and a place for taking on board investors, but most businesses will never even get a meeting with a VC. Customers are your greatest source of capital.Keep up the good work Zoho.

  3. Well the problem is - how quickly can you innovate? Zoho is very ambitious and in lot's of app spaces. The concern is that without proper funding, your competitors will consistently outpace your innovation and make you more obsolete. If you look at your forums there are hundreds of feature requests and the answer is always the same "thanks for your input, we are working on that - stay tuned" the dates for these comments are often years ago. With the proper funding you could address much more of the market need.

  4. Paul, we are doing very well in our network management suite! Visit http://webnms.com " rel="nofollow">webnms.com and http://ManageEngine.com " rel="nofollow">ManageEngine.com to check them out. Zoho gets all the glory because of its much broader reach, but network management is still near and dear to us - indeed we use those products to manage our Zoho data center!

  5. Very well said Sridhar and good luck with Zoho. Do you still do Network Management products or have they been relegated in favor of Zoho suite?

  6. Good post. I love companies that are able to maintain control over their destiny by bootstrapping. I always say, if you can do it that way, then do it!I advise a lot of startups that are raising VC, and I frequently have to drill the point into them that if they take outside capital, they are obligated to operate their business in such a manner as to generate sizable a return for their investors. This impacts both day to day decisions (e.g. bigger bets to achieve growth) as well as the long-term goal, which centers on the exit strategy.Thanks again, good stuff.
    Nathan Beckord
    http://www.venturearchetypes.com " rel="nofollow">www.venturearchetypes.com

  7. Agreed, Sridhar. If one can run a business without other people's money, that would be a great approach. At the same time, many entrepreneurs are not lucky enough to bootstrap and survive. In such cases, I don't see any other option than going for angel investors or venture capitalists. It all depends on the situation of each case. Congrats for the great job at Zoho!

  8. "Zoho way" seems to be the right word for making business in a cooler mode and building a long-term community around Zoho, kind of a ZohoSphere breathing somewhere in the Cloud ...

  9. Taking venture capital adds a very valuable resource: The actual advisors. I have my best hopes on Zoho, but it still has a very long way to go before I can use it as my main-stream service (am currently using google apps for domains.)May be if Zoho has some good people advising on product, it will get more useful. VCs can get people like this involved.Again, you can have board or advisors also.. but just a thought.

  10. It is always hard decision to take or not to take VC. I personally think, if the company is doing good, there is no reason to take VC into the business.

  11. Yes. It's a tough decision, but it also shows how passionate you are about your company and it's values and the 'social-experiments'. Good luck.www.longlongago.in
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  12. Thank you for articulating something I have thought for a while. So often it seems like all the attention is on the exit strategy. My passion is about the software and believe that making good software will lead to profitability too.

  13. This is really agreeable article. I talked with Jim Armstrong of Clearstone VC and he mentioned VCs are not looking for Everyday-business. Their interest lies on ROI and exit.

  14. Well said Sridhar! There is the journey and the destination... sometimes they coincide and sometimes you have to choose.May you journey far.

  15. I'm amazed at the variety and creativity of the Zoho suite (very sweet). Thank you for the karma you are producing for everyone.

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