Zerodha Co-Founder Warns High Valuations Can Hurt Startups Amid Funding Winter

Zerodha co-founder Nithin Kamath has warned that the disconnect between startup valuations and business fundamentals, combined with liquidation preferences, is making it harder for late-stage startups to survive in the current funding winter.

What Happened? Kamath who often likes to share his learnings and analysis on Twitter, noted on Tuesday that liquidation preferences allow investors to recover their investment before anyone else, which can hurt founders and teams’ equity.

Kamath argues that liquidation preferences are fine as long as valuations are growing. However, when growth plateaus, the investment becomes like a loan — which can lead to the realization that valuations have outpaced business fundamentals, leaving no upside for founders and teams.

The entrepreneur believes that this situation could lead to a rise in the number of founders and leaders quitting, which, in turn, can put pressure on startups’ ability to survive.

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Kamath warns that investors must pay more attention to business fundamentals, not just valuations.

“Raising a lot of money at high valuations isn’t always good,” notes the Zerodha CEO. “It may be for investors to mark up the investment and improve their fund’s performance, but not for founders and teams,” he adds.

Kamath, who’s been a part of the Indian startup ecosystem since 2010, mentions that liquidation preference trade-offs apply to investors as well, with new investors having the highest preference.

He concludes by saying that startups need to be built on sound business principles rather than just raising money at high valuations.

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Posted In: NewsFinancingStartupsNithin KamathZerodha