Nithin Kamath, the Founder and CEO of Zerodha, has expressed his views on the growing corporate governance concerns in Indian startups, emphasizing that both founders and venture capitalists (VCs) are equally responsible for these issues. In a series of tweets, Kamath highlighted the root causes and potential consequences of the prevailing situation.
Kamath stated that the corporate governance problems faced by Indian startups are likely to worsen over time. While founders often face blame, Kamath believes that the VC ecosystem should share the responsibility. According to him, the main cause of these issues is the overestimation of the Indian market’s size by both founders and VCs.
While acknowledging that India is a fast-growing economy with the potential to become an economic superpower in the future, Kamath noted that the current reality does not match these aspirations. He argued that the revenue potential of the target market needs to increase significantly in order to justify the valuations of Indian startups. This sentiment was conveyed in one of Kamath’s tweets.
Kamath further expressed concern that many VCs may have miscalculated the Indian market opportunity and oversold it to their limited partners (LPs). He explained that achieving large exits within the typical 7-year fund lifecycle, during which founders are expected to produce exits, is challenging in a comparatively small market like India with limited merger and acquisition (M&A) opportunities.
According to Kamath, building a robust business in India takes time, and there are only a few examples of companies achieving this within a span of fewer than ten years. He suggested that India’s fund lifecycles should be extended beyond the current 7-year timeframe to better align with the realities of business growth in the country.
Kamath also raised concerns about the narratives presented by founders to secure funding. He noted that founders often have to sell a story that aligns with the expectations of VCs, which can lead to unrealistic projections and delusions. He called for VCs to play a role in correcting these misconceptions rather than fueling them.
In support of his argument, Kamath shared examples of startup pitch decks that presented inflated numbers, such as claims that 30-50 crore (300-500 million) Indians would be investing by 2027, despite the fact that the number of Indians filing income tax returns was around 6 crore (60 million) at the time. He criticized the lack of critical questioning and scrutiny before funding such ventures.
Summing up the root cause of the issue, Kamath stated, “Believing in a total addressable market (TAM) that isn’t there yet and then burning out by chasing it.” He cautioned that the governance issues that will likely emerge in the future are more likely to involve falsification of information to support exaggerated narratives for capital raising, rather than typical fraud.
Kamath stressed that India needs a steady and continuous flow of capital, rather than sporadic investments, in order to become an economic superpower. If businesses are built or invested in with unrealistic expectations, it can create false narratives and hinder the smooth flow of capital, reducing the likelihood of achieving India’s economic aspirations.