Perverse Incentives, Like Valuations, Make Founders Do Stupid Things: Omnivore’s Mark Kahn

Indian startups are going through some of the most precarious times, and the four ‘horsemen’ aggravating their miseries are funding drought, regulatory headwinds, corporate misgovernance, and broken investor sentiments.

At a time when there is a lot of mistrust brewing in the world’s third-largest startup ecosystem, with an increasing number of misgovernance cases coming to light over the last year or so, a raging debate on “whose fault is it anyway?” has sparked between investors and founders.

Recently, Nithin Kamath, the CEO of Zerodha, took to social media to state that VCs and investors cannot wash their hands of the current challenges of corporate governance and they are equally at fault, along with founders. At the core of the issue is “the overestimation of the size of Indian markets” by both, he added.

In response to Kamath’s post, the managing partner of VC firm India Quotient, Anand Lunia, stated that even the founders, whose companies have been accused of wrongdoings in the recent past, were no Robin Hood.

“So VCs overestimated – free markets will take care. Wrong incentives too. But the crooks are no Robinhoods; ‘VC-on-a-high’ does not mean a license to steal. This is not India. A whole generation will be lost if we normalise this,” Lunia tweeted.

Meanwhile, Inc42 spoke with Mark Kahn of Omnivore, an agritech-focussed VC fund, to get his perspective on the overall scheme of things.

We were told that if they (founders) think that there is an escape after creating a mess and running their companies into trouble, they may be highly mistaken.

“The founders and CEOs of startups cannot simply bail themselves out when their companies run into troubles,” said VC firm Omnivore’s managing partner Mark Kahn.

Founded in 2011 by Mark Kahn and Jinesh Shah, Mumbai-headquartered Omnivore funds Indian startups in agritech and food systems. The VC firm has backed more than 40 startups, including DeHaat, Arya, Stellapps, Reshamandi, Ecozen, Aquaconnect and Pixxel.

The Investor Paradox

Speaking with Inc42, Kahn said unless investors have a controlling stake in the company, they wouldn’t know what is happening behind the closed doors of the CEO or founders’ office.

“Even if you set up the best board, have the best auditing practices in place, along with top auditors, only founders can give a clear picture into the company’s performance,” Kahn said.

So, does this make way for doing things as per founders’ whims and fancies, without the fear of being caught or brought to justice?

Not exactly!

This is because, in the recent past, founders have come out in the open, admitting their mistakes, thereby proving Kahn’s point that they ‘cannot simply bail themselves out…’

Moving on, responding to our question about how the instances of financial misreporting often go unnoticed by auditors and later come as a shock to many, Kahn said that auditors seem to have learned their lessons now and are expected to deploy more stringent auditing practices and employ more caution going forward.

Meanwhile, the Omnivore managing partner has a piece of advice for Indian founders — ‘Entrepreneurs today need to build products that people love’. This will help their ventures achieve good unit economics and positive cash flow.

“Build for your bottom line, build a good company, and don’t chase valuations. If you do this, things will be fine,” he asserted.

To our question on what has led to so many corporate governance issues in Indian startups since last year, Kahn said it is the result of running businesses stupidly.

“Unfortunately, a lot of people decided to chase valuation at all costs and run their businesses stupidly. In some cases, I don’t think it’s a corporate governance problem. It is the perverse incentives, like fancy valuations, which drive founders to do incredibly stupid things to their companies,” he added.

Is There Some Respite On The Cards?

Of course!

Reminiscing how Indian startups went through a brief slump in 2015 when funding had paused, Kahn said that the current downturn is also a phase and shall pass too.

According to Kahn, a former economist, the current downturn in the investment cycle across the startup ecosystem is simply a price correction, and we may see more of it this year before finally witnessing an uptick in investments next year.

“Economies boom and then wane. You cannot go forever without having a contraction and you cannot have a boom cycle without a collapse. This is how economies have grown for hundreds of years,” the venture capitalist said.

Omnivore’s India Playbook

As opposed to seed stage and pre-seed stage funding, the agritech-focussed fund has widened its focus and wants to invest in Series A stage startups. With a corpus of $150 Mn, Kahn hopes to fund at least six deals a year through Omnivore’s third fund, the Omnivore Agritech & Climate Sustainability Fund, which was launched in April 2022.

The Mumbai-headquartered venture fund announced the first close of the third fund at $150 Mn on June 28, 2023.

“Over the next few years, we plan to build a portfolio of nearly 25 companies or so. We will continue to be a seed stage investor, however, we also have the flexibility to lead Series A rounds. That is the benefit of the extra firepower,” Kahn said.

Kahn said that the third fund will primarily focus on agritech startups, along with ventures working in areas like climate science, nutrition science, and rural fintech.

“Although agritech startups did not grow at a breakneck speed like many other new-age tech companies, they have not been impacted much by the current market volatility or investment slowdown. Think of agritech startups as an elephant marching forward,” Kahn concluded, explaining his India focus.

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