Nithin Kamath, the CEO and co-founder of Zerodha, India’s leading stock broker company, has shared his thoughts on corporate governance issues within the Indian startup ecosystem. In a series of tweets, Kamath expressed his concerns, emphasising that these issues will only escalate in the future.
Kamath began by stating that while founders often shoulder the blame for corporate governance problems, the venture capital (VC) ecosystem should also share the responsibility. He argued that the overestimation of the size of the Indian markets by both founders and VCs is the root cause of these issues.
https://twitter.com/nithin0dha/status/1674417311535751175?s=48&t=SSlGFGOZvT_z62Z1TrxjxQ
The entrepreneur then turned his attention to India’s potential as a global economic superpower. Recognising the country’s status as the fastest-growing economy in the world, Kamath stressed that to reach this milestone, the target market size by revenue must increase significantly. He highlighted the need for justifying the valuations of startups within the Indian ecosystem.
In India, where M&A (mergers and acquisitions) opportunities are limited, achieving large exits within the typical 7-year lifespan of a venture capital fund becomes challenging. Kamath acknowledged this hurdle, emphasising that building a resilient business in India requires time and patience. He questioned how anyone could establish a successful enterprise if VC funds push for early exits within this tight timeframe, suggesting that fund lifecycles for India should be longer.
Continuing his analysis, Kamath shed light on the relationship between the VC ecosystem and their limited partners (LPs). He criticised the prevalent practice of founders having to sell an excessively optimistic story to raise funds. He highlighted the existence of startup pitch decks that border on delusion, claiming unrealistic numbers of 30–50 crore Indian investors by 2027 and projecting capturing a significant market share.
Kamath drew attention to the stark contrast between these projections and the actual number of Indians filing income tax returns, which stands at around 6 crore.
Kamath identified one root cause of the problem as the belief in a Total Addressable Market (TAM) that is not yet attainable, leading to burnout from chasing unattainable goals. According to him, the governance issues currently emerging, as well as those in the future, are unlikely to be traditional fraud but rather misreporting to justify the exaggerated narratives that founders have presented to secure capital.
The Zerodha CEO concluded by warning that investing in or building businesses based on incorrect expectations undermines India’s chances of becoming an economic superpower. He emphasised the importance of discussions and expectations within the startup ecosystem to ensure continuous and sustainable capital flow, which is crucial for India’s economic growth.
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