If startups rush to create valuation, they will hurt themselves: KV Kamath

Startups chasing valuations without becoming cash-flow positive, or at least having it in their line of sight, are bound to hurt themselves, National Bank for Infrastructure Development Chairman KV Kamath said at an event in Mumbai on Saturday.  

On the dichotomy of value and valuation, the veteran banker said, “Startups should focus on becoming either cash-flow positive, or have it in their line of sight, then you take to the public market.” Otherwise, it’s a risk not just for the startup, but it could also create an environment of distrust, he added at IvyCap Ventures’ IvyCap Day 2022. 

Saying that the fintech space will see the most disruption happen, the veteran banker advised founders to exercise patience in chasing valuations. “Value creation in your platform you have done. If you are impatient to create valuation, you will hurt yourself.” 

There are plenty of opportunities for fintech players as the incumbent banks still do not have modern technologies, he said.  “But if a startup tries to leapfrog into the valuation game, it will get crushed because the market will see that you’re still not in a positive state. Now you need money, you will not get that money, whatever shoots of opportunities you have to grow, gets crushed. The idea you have and that you are a disruptor is a given. Have a little bit of patience.” 

The former BRICS Bank chief also suggested proactively looking for partnerships with the incumbents, instead of waiting for them to approach first.  “Both parties need each other. Incumbents, particularly in financial services have huge regulatory shelters. If you say I’m going to steam roll large incumbent banks, it may or may not happen. The regulator will say you abide by the discipline of the banking or insurance sector which can be harsh for a startup because you are used to doing things in a nimble and agile way.” 

 “Value, you have certainly created, you have to monetise that value into valuation and first get to be cash-flow positive,” he said. The other side also has to look for partnerships. There is no other choice, he added.

He also suggested entering the sector from areas which are currently weak where entry barriers are low, giving the example of online broking platform Zerodha.  Calling the platform a disruptor and an example of a good business model, he said similar disruptions will also happen in the asset management business. “There are opportunities everywhere. These are entire businesses, but a part of the business is where there is a further opportunity and great value addition.” 

Kamath was also quick to add that his words apply not just to financial services, but may apply to other areas as well. “Where you have it much easier is in areas where you have no regulatory oversight. In those areas, you are the competitor and at the boundary, you can do what you want to do which the incumbent cannot do and can proceed at a great speed.”