The entire startup picture in India has seen significant growth in recent years, with many new companies emerging and attracting a large amount of money through venture capital funding. However, with this rate of growth, there have been more cases and concerns about how these startups are governed. The founders are frequently blamed for these issues, but VCs are also equally held accountable.
One of the main root causes identified is the founders’ and VCs’ exaggeration of the size of the Indian markets. Many believe that the potential customer base and demand for their products or services is much larger than it is. This overestimation leads to unrealistic growth and expansion expectations, which can jeopardize good governance practices.
Most VCs overestimated the growth potential of Indian startups and convinced others (Limited Partners) to invest money in these startups. Investors typically expect to get back their investment within seven years. In India, the number of startups that merge with or are acquired by bigger companies is very small.
Consider broking: many startups make big claims about the number of people in India who will invest in markets. Few claim that by 2027, 30 to 50 crore Indians will have invested. The issue is that only about 6 crore Indians actually file income tax returns. So it doesn’t make sense for startups to claim they will attract so many investors when there aren’t that many people with the means to do so.
Probably the easiest way to explain the issue and its root cause is that many startups believe the total addressable market is large and continue pushing extremely hard to reach those customers but end up burning out in the process.
Many of the governance issues we’re seeing now and will likely see in the future are not about outright fraud, but rather about founders misrepresenting things to make their stories sound better and attract more investment.
This discussion is important, as Nithin mentioned in his tweet, since for India to become an economic superpower, it needs a steady and continuous flow of investment, not just occasional bursts.
What do you think? do share your opinions.