‘Investment becomes a loan’: Zerodha’s Nithin Kamath highlights the perils of valuations outpacing fundamentals

An investment can start looking like a loan when money is raised at high valuations without a proper focus on business fundamentals, said Zerodha’s Founder Nithin Kamath. In a long thread posted on social networking platform, Twitter, the entrepreneur wrote, “A liquidation preference allows investors to recover their investment before anyone else. This is how all startups raise money. Nobody thinks of it as a loan, but it is similar.”

He then went on to share that he recently met a unicorn founder who had raised around $100 million but was feeling disoriented now. “I recently met someone who has raised $100's million at unicorn valuations but now realizes that the opportunity size isn't large or growing fast enough to justify the valuations for years to come. It's a great business, but the founder wants to do something else.”   The investor also said that when valuations outpace business fundamentals, that’s when things start going astray for the founder and his team members. “Reality strikes when everyone realizes that the valuations have outpaced the business fundamentals. That is, if all the investment has to be returned, there will likely be no upside left for the founders & teams. This is when interest in running the business can drop.”   He also pointed out that the metrics which were glorified during the bull run are hurting now.    He is referring to scenarios in the start-up ecosystem which have been unraveling since the last one year. While earlier “growth-at-all-costs” was the mindset of most of the founders and investors, a larger emphasis is now being placed on business fundamentals, especially profitability.    Kamath concluded by saying that this “winter” is teaching investors that businesses in India have to be built differently. 

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