Zerodha CEO Nithin Kamath has pointed out the root cause of corporate governance issues in Indian startups while blaming the venture capital ecosystem along with the companies’ founders for it.
In a Twitter thread, Kamath wrote, “Corporate governance issues coming to light in Indian startups will only increase with time. While founders will be blamed, the venture capital (VC) ecosystem is equally to blame. The root cause of this is the overestimation of the size of Indian markets by founders and VCs.”
“I think most VCs have miscalculated this & maybe oversold the India opportunity to their investors (LPs). In a small market like ours with limited M&A opportunities, large exits within 7 yrs (the lifecycle of a fund within which founders are expected to give exits) are hard,” he said.
The self-made billionaire cited an example where startups claim 30–50 crore Indians will be investing by 2027, and they can capture more than ten times of it.
“For example, I’ve decks where startups claim 30–50 crore Indians will be investing by 2027, and they can capture 10%+ of that. This is when we had ~6 crore Indians filing income tax returns. Someone should have asked what they were smoking instead of funding them,” Nithin Kamath tweeted.
He said, “If I could use one line to explain what I think is the root cause of the problem: Believing in a TAM that isn’t there yet and then burning out by chasing it.”
Kamath also warned that most of the governance issues coming to the fore now and in the future will likely not be traditional fraud but misreporting things to justify the stories founders have oversold to raise capital.
“If the incentive is to constantly oversell, we get what we’re seeing. So the blame isn’t just on the founder, but also on the VC ecosystem that fueled it,” Nithin Kamath reiterated.
He also highlighted that this discussion is important because India needs continuous capital, not spurts, to be an economic superpower.
“We reduce the odds of that happening if people invest in or build businesses with the wrong expectations, leading to bad narratives, and can slow capital flow.”
Download The Mint News App to get Daily Market Updates.
Updated: 30 Jun 2023, 01:55 PM IST