"We started out in 2010 before the start-up world really kicked in. That was a time when there weren't too many venture capitalists. We were also starting on the back of a financial crisis… it was almost impossible to raise any capital," recounts Nithin Kamath, who later went on to build India's largest tech-powered brokerage firm — in terms of active retail clients — Zerodha, along with co-founder brother Nikhil. Valued at $2 billion today, the start-up has earned itself the rare credit of being a profitable unicorn, with no external funding.

Be it the Kamath Brothers who banked on their astute sense of business to create a formidable play in the trading industry or Paytm's Vijay Shekhar Sharma who cashed in on the unseen opportunities presented by demonetisation to build a fintech behemoth, start-up founders have disrupted the market time and again, and garnered investor backing for a fledgling sector. "When I raised my first round from Sequoia in 2005, our pre-money valuation was $2.5 million. Today, the pre-money valuation of start-ups stands at $10-15 million. The size of the market is changing and start-ups are getting much more traction," says edtech unicorn Emeritus' co-founder and CEO Ashwin Damera.

With over 100 unicorns and more than 75,000 government-recognised players, India's start-up ecosystem is expanding faster than ever. A telecom war unleashed by Mukesh Ambani in 2016 with the launch of Jio ushering in ultra low-cost data at high speeds helped, enabling start-ups to take their services to every nook and corner of the country. The pandemic-led digital push expanded the market further, with investors putting in over $30 billion in start-ups in the past year alone, catapulting valuations and birthing new unicorns, as well as leading to IPOs (Zomato, Paytm and Nykaa). Not surprisingly then, a bunch of start-up founders like Byju Raveendran, helming India's most-valued (unlisted) start-up Byju's, Ola's Bhavish Aggarwal, Zerodha's Nithin and Nikhil Kamath, Swiggy's Sriharsha Majety, Infra.Market's Aaditya Sharda and Souvik Sengupta, Paytm's Vijay Shekhar Sharma have amassed considerable wealth. Even young founders like BharatPe's Shashvat Nakrani have made it to the list. According to data sourced from market research firm Tracxn, Byju Raveendran and family has a net worth of ₹40,909 crore, followed by Bhavish Aggarwal with ₹14,386 crore and the Kamath brothers with ₹14,130 crore.

"India is a land of opportunities. Our biggest advantage is a huge young population that is resilient and dynamic. Today, a number of Indian-origin leaders are leading top Fortune 500 companies. I foresee a future where India will build start-ups for the world," says Nakrani.

The Wealth Creation Mantra

"Valuations mean nothing because they are all on paper. Personal wealth is really the money in the bank. We are constantly trying to increase the net worth of the business which essentially is cash plus assets and that is valuation for us in the true sense," says Zerodha's founder and CEO Nithin Kamath. The company, which handles 15-18% of the trading volumes in the country, has around 10 million customers.

"We have stayed away from investors, and that is what makes us grow as a business. Raising too much money brings obligations," says Nithin. In fact, Zerodha hasn't spent a penny on marketing. "When someone asks me what's your customer acquisition cost, I say ₹200. We charge ₹200 for account opening. So, we make money every time we acquire a customer," he adds. The promoters take out a certain percentage of the profits every year. "The wealth is really what is taken out as remuneration, dividend distribution or as buyback," says Nithin.

For Emeritus' Damera, it is all about creating a positive societal impact. "Since we are in the education space, we are changing lives every day. So, wealth creation for me is not just the dollar or rupee value, but also the lives that we have changed through the education that we do in the business itself," says Damera. He holds 40% stake in the company, which he launched in 2010, a feat seldom heard of in the start-up world where founders are prone to diluting bulk of the shares to raise funds. Emeritus, which ran an offline business for the first six years, remained profitable through the period. "In those six years, we grew from zero to around $7 million in revenue. In 2016, we raised capital because we were going online and we needed to invest in technology. We already had revenue and people so our valuations were higher, while dilution was lower. That's how we have managed our dilution until this point," explains Damera. "I own 40% of the company but most of that includes shares. It is paper wealth. What I have to distribute is what I have taken out as secondary. So, about 5-10% of your overall shareholding is what you have as disposable wealth," he adds.

BharatPe founder Shashvat Nakrani's approach is a bit different. "The process of building a business from scratch with the aim of benefitting/ creating wealth for stakeholders is the real form of wealth creation for start-ups/unlisted companies," he says. The fintech firm processes over 15 crore transactions in payments per month with an annualised TPV (total payments volume) of more than $17 billion and is valued at $2.85 billion. Nakrani's focus is on building a profitable and sustainable business, one that does not rely on external funds. "We are aiming to go public in 18-24 months," he says.

It is, however, Nykaa's Falguni Nayar who stands out in the pack. In a market thronged by the Lakmes and L’Oreals of the world, Nayar made an audacious bid of launching her young beauty venture in 2012, which went on to make a stellar debut on the exchanges in November 2021, listing at a premium of 78% over its issue price of ₹1,125 on the BSE. Nykaa's market capitalisation currently stands upwards of ₹66,394 crore (as on August 16, 2022). The Nayar family holds a little over 50% in the company, and the value of their holding is around ₹35,293 crore.

The combined valuation of India's first 100 unicorns add up to more than $330 billion, or over ₹25 lakh crore, Prime Minister Narendra Modi said in May. "Out of all our unicorns, 44 came up last year... This means that even in this phase of the global pandemic, our start-ups have been creating wealth and value," Modi said.

Wealth Galore, But …

Amid heavy funding spurred by the pandemic-led digital adoption and skyrocketing valuations, the wealth coffers of start-up founders got a boost. But, how much of that is sustainable, especially given that most founders hold very little stake in their companies? Founders, in fact, make money by selling portions of their shares during growth to "late stage" (when companies typically reach a certain scale and valuation), which, analysts say, is not the ideal way to create wealth. "Ownership is permanent. Valuation is temporary. Every time you raise capital, you are giving away a portion of your future wealth," says Anand Lunia, founding partner at India Quotient, a Bengaluru-based investment firm.

"If a company can grow by taking less capital it is real wealth creation. The moment a founder's shareholding goes below 10%, he or she becomes equivalent to a high ESOP employee," says Dipanjan Basu, partner, Fireside Ventures. By the time companies turn unicorns, 75-80% of the shareholding is held by investors.

Also, when founders continue to have a low ownership, they do not remain invested in regular operations. "Zoho is an over 20-year-old company but the founder has been running the firm as he owns all of it. Most start-up founders retire from their companies in 8-10 years," says an analyst who did not wish to be named. Also, unlike in the US, Indian start-ups do not have a corporate structure in place wherein a founder with 5% shareholding can have 50% of the voting rights, adds Zerodha's Nithin.

In this case, Ola's Bhavish Aggarwal is an outlier of sorts. Despite holding a single-digit stake in the ride-hailing start-up, Aggarwal implemented a corporate restructuring plan to ensure that founders have adequate say in the business. Parent company ANI Technologies reportedly amended shareholder terms, strengthening rights of the founders and limiting those of its biggest shareholders, including SoftBank. Aggarwal currently holds 8.7% in the company, while co-founder Ankit Bhati holds 3.9%.

A section of analysts, though, defends stake dilution by founders saying that start-ups being high-growth businesses require huge capital to scale up unlike traditional ones. "Traditional businesses start small, they focus on EBITDA and profitability. They, too, raise private equity but the frequency is less as there is not so much cash burn. The potential for growth is linear but in start-ups, it is exponential," says Nimesh Kampani, co-founder and CEO at private market investment platform Trica.

Allocating Wealth

Start-up founders allocate their wealth in real estate and investment vehicles such as tax-free bonds, triple A-rated mutual funds or sovereign gold bonds depending on individual preferences, but one area that has caught their fancy in recent times is angel investing. A handful of start-up founders, including Emeritus' Damera, have set up family offices to invest in businesses. "Four-five years back, the angel investing ecosystem was nascent in India. Today, early stage and angel investments have evolved into an ecosystem like in the US," says Basu of Fireside Ventures. Angel investing fetches returns, which add to the wealth of the founders. The average rate of return ranges from 30% to 50% on early stage investments globally on an annual IRR (internal rate of return) basis, says Kampani.

"Banks don't lend to start-ups, so venture debt is a beautiful instrument to support them with a one-year runway or so," says Damera of Emeritus. Venture debt funds typically lend capital for shorter durations. "Investors get a warrant in the company, so when start-ups reach a certain scale, the funds can monetise the warrants," explains Shravan Sreenivasula, executive director, investment solutions group, Avendus Wealth Management.

One of the most prolific angel investors supporting the local start-up ecosystem is CRED's Kunal Shah. Shah has made close to 200 angel investments so far, including Razorpay, Spinny, Khatabook, Shiprocket and Unacademy, according to Tracxn data. Of his total net worth of ₹6,004 crore, around ₹129 crore has been realised through the value of his stakes in various investee companies. Ola's Aggarwal has backed close to a dozen companies such as OfBusiness, Chaayos and Tork Motors.

Nitish Mittersain, founder and joint MD at Nazara Technologies, is also focusing on angel investing. "I look for start-ups trying to solve a real problem through tangible methods and clearly defined and measurable KPIs. Positive unit metrics, potential to create moats and a brand are what I look for," he says.

But, not everybody has developed a knack for angel investing. "At a personal level, we have invested all our wealth in building Infra.Market. Our philosophy is to go wider into existing businesses," says co-founder Aaditya Sharda.

Founders who manage to make money through partial secondary exits also prefer building what analysts describe as a "safety pot." Safety pot covers investments made in triple A-rated mutual funds, triple A bonds, gold, tax-free bonds and sovereign gold bonds. "The other segment of start-up founders comprises those who have made meaningful exits, already created a safety pot and want to maximise returns. They look at overall asset allocation, usually a mix of debt and equity," says Sreenivasula. "Valuation is just on paper. One will have to monetise it. Secondary exit is where people can make money. That is the bigger mode of personal wealth creation," he adds.

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