Sridhar Vembu, founder and CEO of Zoho Corp, says VC money always comes with strings attached
Image: P Ravikumar for Forbes India
Sridhar Vembu, founder and CEO of Zoho Corp, arguably India’s most successful software products company, could see his business become a celebrated unicorn many times over were he to accept outside investors. (While the company has not disclosed its current valuation, a comparison with listed peers suggests it could be worth $3-4 billion.) But he has vowed never to do so. The result is a company unique in many aspects, including the way Zoho hires a significant chunk of its recruits from the socio-economically underprivileged, largely from Vembu’s home state Tamil Nadu.
He has also turned the spotlight on rural parts of the state—even though he lives in California—by setting up a research and development centre in the town of Tenkasi. Software built there has takers in corporate America.
Freedom to operate on its own terms has allowed Zoho, that earns $350-400 million in annual revenues, to reinvent itself at will, many times over, Vembu says. In this email interview with Forbes India, the 49-year-old techpreneur talks about his philosophy and how that has shaped his journey thus far. Edited excerpts:
Q. You are seen as a role model among the new generation of startup founders, and a few of them have even chosen to adopt your philosophy of shunning external funding. What has kept you on that track?
There was only one time I ever looked at a term sheet, and fortunately, I read through the whole thing. I found language that guaranteed an exit or liquidity to the investor in seven years. I asked the VC [venture capitalist] about it, and he told me that was a pretty standard clause and no one would negotiate it. I asked around and found that it was indeed a standard clause. I thought through it and realised that this issue goes back to the question of ‘Who is a venture capitalist?’ because a VC is not really a capitalist in the true sense—‘money broker’ would be a far more accurate term; after all, a real capitalist is not going to collect an annual commission on the money he or she invests...that very idea would be absurd.
Once I made that realisation, it was clear to me that my motivation as a founder would be necessarily different from the motivations of a venture capitalist. I think of a company as an institution, something that would hopefully be around a long time and serve customers, create employment opportunities and take care of communities. For a VC, a company is necessarily a disposable commodity, no matter how much undying love it professes.
Once you have that long-term orientation, bootstrapping is not that difficult. It would be useful to think of starting at Year 5 rather than at Year 0 and treat the first five years as if you are earning the seed round of capital necessary for the business.
At the very least, it builds internal [fiscal and otherwise] discipline and mental fortitude and you end up learning a lot by doing it this way; it could even make you very valuable and sought after for the venture capitalists, if you ever choose to go down that path!
Q. Were there times, after Zoho had grown, when you revisited the idea of external funding? If so, why did you decide to continue as a self-funded business?
For the simple reason that VC money always comes with strings attached… always. I was once courted by a leading VC firm and invited to a meet-up of the CEOs of their portfolio companies. A couple of the CEOs present there expressed surprise on seeing me there and assumed Zoho had raised money. I told them I was invited to be shown why I should raise money. A couple of them took me aside and conspiratorially whispered: “Don’t take the money, if you don’t need it, we envy you!”
It goes back to our long-term orientation. I am a big admirer of private German companies, the Mittelstand [small- and medium-sized companies in the country]. Many of these companies have gone on for hundred-plus years while being leaders in their respective industries, ranging from machine tools to advanced glass making. They export their products world-wide and are also the economic anchors of their towns and cities, providing high-paying jobs and investing in their communities. We in India need to learn from Germany.
“ Bootstrapped companies can find small niches that venture-backed companies won’t be interested in.
(This story appears in the 18 August, 2017 issue of Forbes India. To visit our Archives, click here.)