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Founders and VCs are Equally Responsible for Corporate Governance Issues in Indian Startups: Nithin Kamath In a series of tweets, Kamath discussed his views on the ongoing corporate governance issues among Indian startups.

By Sujata Sangwan

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According to Nithin Kamath, Founder and CEO of Zerodha, corporate governance issues that are emerging in Indian startups will only get worse over time.

"While founders will be blamed, the venture capital (VC) ecosystem is equally to blame," Kamath said, adding, "The root cause of this is the overestimation of the size of Indian markets by founders and VCs."

"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," Kamath stated in one of his tweets.

As per Kamath, the majority of VCs have miscalculated this and may have oversold the India opportunity to their limited partners (LPs). Large exits within 7 years, the lifecycle of a fund within which founders are required to produce exits, are hard in a "small market like ours" with few M&A (mergers and acquisitions) opportunities, he claimed.

Kamath said that creating a robust business in India takes time and that there aren't many examples of anyone doing it in less than ten years. "How can anyone build a good business if VC funds have 7-year lifecycles and push startups for exits within 7 years? Perhaps India's fund lifecycles should be longer," he speculated.

According to Kamath, given what the VC industry is selling to their limited partners (LPs), the founders have to sell a story that syncs to raise funding. "I've seen so many startups get funding whose pitch decks were practically delusional. "VCs should help correct this in an ideal world, not fuel the delusion," he stated.

"For example, I've decks where startups claim 30-50 crore Indians will be investing by 2027, and they can capture over 10% of that. This is when we had around 6 crore Indians filing income tax returns. Someone should have asked what they were smoking instead of funding them," Kamath shared.

"If I were to sum up what I believe to be the root cause of the issue in a single sentence, it would be this: "Believing in a TAM (total addressable market) that isn't there yet and then burning out by chasing it," he continued.

According to him, the most of the governance issues that will surface in the near future won't likely be typical fraud but rather the falsification of information to support the narratives that founders have exaggerated in order to raise capital. "We get what we're seeing if the incentive is to consistently oversell. Therefore, the VC ecosystem that fueled it is also to blame in addition to the founder."

Kamath believed that India needs continuous capital, not spurts, to be an economic superpower. "If people build or invest in businesses with the wrong expectations, which can create false narratives and slow capital flow, we reduce the likelihood that will occur."

Sujata Sangwan

Former Sr. Correspondent

Sujata is an engineering graduate and has done her Post Graduation in Human Resource Management. She has a deep interest in startups, venture capitalists & technology. 
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