Zerodha’s Nithin Kamath says getting investors on board is like getting married

Zerodha founder and investor Nithin Kamath said high valuations are detrimental and that they are mostly a function of overstating the size of the opportunity. He added that getting investors on the board is akin to getting married and that setting wrong expectations to get investors onboard leads to disappointments and conflicts. 

Kamath wrote in a LinkedIn post, “We celebrate valuations, but the more I speak to founders, the more I’m convinced high valuations are detrimental. Higher valuations are mostly a result of overstating the size of the opportunity. Of course, there are outliers, but they are the exception, not the rule.” 

He added, “Getting investors on board is like getting married: setting wrong expectations before the marriage leads to disappointments and conflicts and doesn’t usually end well.”

The Zerodha boss also said that it is disheartening to see businesses that would have otherwise done well struggle since they raised money at unrealistic valuations forcing entrepreneurs to spend more, hire more, and take random bets. Kamath further underscored that in case assumptions about the total addressable market (TAM) of their business don’t materialise and growing fast enough to justify valuation seems impossible, founders end up losing interest. 

He mentioned, “Higher valuations force you to spend more, hire more and take random bets. Founders end up losing interest if the assumptions about the total addressable market (TAM) don’t materialise, and growing fast enough to justify the valuations isn’t possible.”

Furthermore, Kamath stated that unreasonable TAM assumptions are a larger problem in India since revenue opportunity is limited to the top 2 crore Indians or around 1.5 per cent of India compared to lending which is crowded. Towards the end, he said lower valuations and raising what is needed will help founders focus and work towards building a successful and sustainable business. 

“Unreasonable TAM assumptions are a larger problem in India because the revenue opportunity other than lending is limited to the top 2 crore Indians (~1.5 per cent of India). And lending is crowded. So yeah, lower valuations and raising only what is required counterintuitively, I think, will help founders focus and increase the odds of building a successful sustainable business,” Kamath signed off. 

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