India still doesn't have a robust market for market estimation and as a result, investors tend to overestimate the market, according to Infosys founder N.R. Narayana Murthy.

"We do not have market research companies that can go deep into the market, go into the trenches and give an estimate of the market opportunity with a very high level of confidence," Murthy says at the Fortune India 40 Under 40 Awards ceremony.

As a result, investors and entrepreneurs have been overestimating the market, rues the Infosys founder. "In 1995, a lot of American and European companies came assuming that the 200 million urban Indians had enough disposable income to buy their products. They were all disappointed," Murthy says, adding the tendency to inflate the market has continued because India does not have good quality market research companies.

On sky-high valuations of some start-ups in India, Murthy says: "In the last five years, a considerable amount of VC money came into India. When the demand for investments in enterprise increases and supply doesn't, then the price goes up. What happened was VCs were looking for good ideas and there were very few of them. Thus, the valuations went up."

The depth of due diligence has also not been as good as one would want, Murthy says. "With the result, a lot of money was given to the founders. They are youngsters. You can't blame them. They also bought into this overestimation. When you think you have to be prepared to handle a huge market, naturally your expenses are also higher. The result was we created huge losses in start-ups. The entrepreneurs were disappointed. The VCs were disappointed. The investors were disappointed because it became to some extent like a Ponzi scheme. A VC who comes in at Series A would want to sell a part of his investment in Series B," he explains.

Finally, a certain set of people are left holding the baby in the end, says Murthy.

Founders want to obtain as much money from VCs as possible as they want to grow well and reach good valuations and there's nothing wrong with that, Murthy adds.

The Infosys founder, however, believes this model has more or less come to an end. "Today, VCs are very careful in investing. Their due diligence is also of very high quality," he says.

"I believe that whatever has happened in the last 5 years has yielded some important lessons for investors and entrepreneurs," he says, adding that big vision should be in targets and achievements, not in spending.

According to Murthy, entrepreneurs today are much smarter and have a bigger vision. New-age entrepreneurs are fighting in the Indian market, which is not easy because the country has still not come to a certain maturity level in appreciating the power of tech in gaining a competitive advantage in the marketplace, the Infosys founder says.

While sharing a life lesson from his mother, Murthy says, "Every entrepreneur must live like a saint, think like a scholar, act like a warrior."

Follow us on Facebook, X, YouTube, Instagram and WhatsApp to never miss an update from Fortune India. To buy a copy, visit Amazon.