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!