Startups fail when they set wrong expectations, chase valuations: Nithin Kamath

Nithin Kamath, the founder and chief executive of India's largest discount brokerage, said that misjudging the market size and opportunity, then setting wrong expectations and chasing valuations are probably the biggest reasons why startups fail.

Sustainability is more important than valuation, Kamath tweeted. "Not every business is VC'able or can be valued at $10mil, $100mil, or $1bil," he said.

These comments come at a time when several startups have laid off staff due to scarce capital. This week alone, edtech platform Vedantu and online used car selling startup CARS24 announced job cuts.

Kamath began his long Twitter thread saying the Indian market for business-to-consumer (B2C) tech businesses in terms of users who can generate revenue is maybe 15 crore maximum.

"I get puzzled whenever someone says India has 140cr people & only 9cr demat accounts (6% of the population), & this can grow to 40 crores (25% as in developed nations) over the next few years. Almost everyone building an investing app seems to be sold or selling this idea," he said. "India has 9 crore demats, but they aren't unique. The unique count is ~6 crore. But active demats with holdings above Rs 10k is less than 3 crore. This is in line with the ~3.4 crore unique MF investors—despite the MF Sahi hai and other campaigns."

"The other question for fintechs focusing on investments is how large can the audience that hasn't already invested be? Remember, we've had a bull market, mega ads, freebies, WFH, IPOs, low interest rates, & social media frenzy? If this hasn't got people in, what else can?," Kamath asked.

There are maybe around 20 crore users on UPI and user growth seems to be plateauing but among UPI users, the majority (90%) of transactions are again from less than 10 crore Indians, Kamath said, adding that this seems similar to the assumptions of potential users who can invest or spend based on income tax return and capital markets data.

Kamath, however, pointed out that there is incremental wealth created, but that is only within maybe the top 2 crore Indians. "Easy to miss the fact from our bubbles," he said.

To solve this, the focus should be to do whatever it takes to enable entrepreneurs to build resilient businesses at home so that they create wealth, share it with employees, shareholders, and invest it back in the economy, he added.

Kamath said it is crazy how everyone starting a business today wants to be called a startup, and talk is mostly about overselling market size and valuations, but not about sustainability. "I hope this gets corrected in this global reset. We need resilient businesses for India to do well," he said.

Meanwhile, marquee Silicon Valley startup accelerator Y Combinator has advised its portfolio startups to "plan for the worst". The storied investor advised its founders to cut costs and extend their runways within the next 30 days. If the company's existing investors or new investors are willing to give it more money right now even on the same terms as the firm's last round, the founders should strongly consider taking it, it said.