Zerodha’s Nithin Kamath on the hard lessons for startups this funding winter

Zerodha’s Nithin Kamath says the more money founders raise, the harder it is for them and their teams to see equity upside.

Taking to Twitter, the CEO and co-founder of India’s leading broking firm said the number of founders and leaders, especially at late-stage startups quitting will only increase, making it harder for businesses to survive this funding winter.

“This is because of liquidation preferences and the disconnect between valuations and business fundamentals. 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 said.

“Liquidation preferences are fine as long as valuations are growing and every new round the investments get marked up, and all investors see notional gains,” Kamath added.

According to Kamath, when growth plateaus, or new fundraise at higher valuation of startups becomes tough, the investment becomes like a loan.

Nithin Kamath prides himself in building Zerodha from scratch with little or no outside investment from the venture capitalists. The company, which has disrupted Indian broking business like no other, is completely bootstrapped.Fantastic businesses solving real-life problems risk not surviving due to core teams quitting because of a realization of a lack of upside, Nithin Kamath said, pointing out the irony of same metrics being glorified during the bull run.

Kamath, who is known for his educational tweets on stock market and business related learnings, said this winter might teach investors that businesses must be built differently in India, where M&As and IPOs to overcome liquidation preference issues aren’t easy.

“Raising a lot of money at high valuations isn’t always good. It may be for the investors to mark up the investment and improve their fund’s performance. But not for founders and teams, whose equity will keep losing value due to liquidation preference with every new round,” he said.