Kamath said Indian startups are facing corporate governance challenges primarily due to the overestimation of the Indian market's size by founders as well as VC firms
The Zerodha CEO said that venture capitalists should play a role in rectifying high valuation narratives rather than fuelling them
The comments come at a time when multiple Indian startups – from BYJU’S to Broker Network and from Zilingo to BharatPe – have faced investors’ ire over corporate governance lapses
At a time when multiple Indian startups have been in the news for corporate governance lapses, Zerodha cofounder and CEO Nithin Kamath said that the venture capital (VC) ecosystem is as much to blame for these issues as the founders.
Sharing his insights through a Twitter thread, Kamath said Indian startups are facing corporate governance challenges primarily due to the overestimation of the Indian market’s size by founders as well as VC firms.
“While India is a fast-growing economy that will hopefully be an economic superpower in the future, it isn’t that today. The size of the target market (TAM) by revenue needs to increase significantly to justify the valuations of the startup ecosystem in the country,” stated Kamath in one of his tweets.
Kamath’s remarks come at a time when Indian edtech giant BYJU’S is facing scrutiny for its delayed financial reporting for FY22 and an ongoing dispute with lenders over its $1.2 billion term loan B (TLB).
Drawing from his experience as the founder of Zerodha and an investor in fintech startups through his fund Rainmatter Capital, Kamath highlighted that most venture capitalists have miscalculated the Indian market’s size and may be overselling the India opportunity to their limited partners (LPs).
Moreover, Kamath suggested that the fund lifecycle, within which founders are expected to provide exits to venture capitalists, needs to be extended beyond the typical seven years in India. He cited the smaller size of the Indian market and the limited mergers and acquisitions (M&A) opportunities as the reason behind this recommendation.
“In a small market like ours with limited M&A opportunities, large exits within 7 years (the lifecycle of a fund within which founders are expected to give exits) are hard,” tweeted Kamath.
He further expressed his concern about startups with ‘almost delusional’ pitch decks securing funding, emphasising that venture capitalists should play a role in rectifying such narratives rather than fuelling them.
Addressing the root cause of the problem, Kamath highlighted the danger of believing in a TAM that does not currently exist and the subsequent cash burn resulting from chasing unrealistic targets.
Looking ahead, Kamath predicted that most corporate governance issues in the future would stem from misreporting rather than traditional fraud as founders are likely to attempt justifying the stories they have oversold to attract capital.
Scandals Galore In Indian Startup Ecosystem
The comments come at a time when a number of cases of alleged misconduct, financial irregularities and incorrect financial reporting have come to the fore over the last year or so.
Earlier this month, Inc42 exclusively reported about the implosion of Rahul Yadav’s Broker Network and the allegations of syphoning off of funds by the founder. Days after this, healthtech startup Mojocare’s founders were alleged to have fudged numbers.
The story of Mojocare was eerily similar to GoMechanic. The automobile after-sale service startup’s cofounder Amit Bhasin publicly admitted to fudging numbers. Besides, Zilingo and BharatPe have also been in the eye of the storm for similar reasons.
All these cases have also raised concerns about investors losing their confidence in the Indian startup ecosystem.