Kamath shared his thoughts on the ongoing corporate governance issues in Indian startups in a series of tweets.
“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 said in one of his tweets.
The Zerodha founder’s comments come in the backdrop of troubles at Indian edtech giant Byju’s, which is under fire for delays in reporting its financials for FY22, as well as its ongoing fight with the lenders of its $1.2 billion Term B Loan.
Kamath, who also invests in fintech startups through his fund Rainmatter Capital, said that most VCs miscalculate the size of the Indian market and end up overselling the India opportunity to their limited partners (LPs).
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He also added that funding cycles in India should be longer than the usual seven years, in which founders are expected to give exits to venture capitals, given the small size of the Indian market and limited M&A opportunities.
“In a small market like ours with limited M&A opportunities, large exits within 7 yrs (the lifecycle of a fund within which founders are expected to give exits) are hard,” Kamath tweeted.
Kamath said he has seen startups with “almost delusional” decks getting funded, and that the VCs should ideally help correct this and not “fuel the delusion.”
“For example, I’ve decks where startups claim 30–50 crore Indians will be investing by 2027, and they can capture 10%+ of that. This is when we had ~6 crore Indians filing income tax returns.”
“If I could use one line to explain what I think is the root cause of the problem: Believing in a TAM that isn’t there yet and then burning out by chasing it,” Kamath added.
According to the Zerodha CEO, most corporate governance issues in the future will likely not be traditional fraud, but misreporting things to justify the stories founders have oversold to raise capital.