Zerodha founder and CEO Nithin Kamath on Thursday said corporate governance issues in Indian startups will increase with time, for which venture capital firms should be equally blamed.
Amid instances of financial lapses by startups, Kamath said the root cause of the problem is the overestimation of the size of Indian markets by startup founders and venture capital (VC) firms.“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.T
he root cause of this is the overestimation of the size of Indian markets by founders and VCs,” he said in a tweet.Kamath highlighted the prevalence of startups receiving funding based on decks that are “somewhat delusional”. Ideally, VCs should play a role in correcting this trend instead of perpetuating unrealistic expectations, he said.
Kamath attributed the root cause of the corporate governance and startup valuation problem to a phenomenon called “illusory truth effect”, where individuals tend to believe false information after repeated exposure.
“In this context, it involves believing in a target market potential that is yet to materialise, leading to exhaustion from futile pursuits,” he said.On the VC fund cycle of seven years, Kamath said building a resilient business in India requires time, and few have managed to achieve this within a span of less than 10 years.
“In a relatively small market like India, with limited merger and acquisition (M&A) prospects, achieving substantial exits within the typical seven-year lifecycle of a VC fund, during which founders are expected to provide exits, becomes challenging,” Kamath said.
“Although India is a rapidly growing economy with the potential to become an economic superpower in the future, it is yet to reach that stage. The revenue potential of the target market needs to witness a significant growth to justify the valuations seen in the country’s startup ecosystem,” Kamath added.
“With VC funds having seven-year lifecycles and exerting pressure on startups for quick exits, it becomes difficult for founders to establish sustainable businesses,” he said, adding that fund life cycles for India should be extended to better align with the market dynamics.
Comments from Kamath assume significance at a time when India’s ed-tech unicorn Byju’s, which was once valued at $22 billion, has seen its valuation drop by major investors owing to certain operational issues.The company witnessed raids from the Enforcement Directorate (ED) on alleged violations of foreign exchange laws.
Along with exits of high-profile board members, Byju’s auditor Deloitte also resigned citing a delay in financial statements and cooperation issues from the management.Besides Byju’s, startups such as GoMechanic, Trell, Zillingo and BharatPe have also been under the radar owing to corporate governance issues.