An arbitrage at play, public markets are cheaper than private markets today


Last year, Indian startups have had what can be described as a funding blitzkrieg of sorts, cornering over $30 billion in investments. Even as the flow of capital persists and the sector managed to accommodate some 18 unicorns so far this year, the pace of funding has slowed down considerably. Data sourced from market research firm Venture Intelligence showed that VC (venture capital) investments dipped to $5.9 billion during April-June (data captures investments till June 20) from $11 billion in the January-March quarter.

Nikhil Kamath, co-founder at Zerodha and True Beacon, says that the startup funding ecosystem is going to be difficult, at least for the next couple of years. “Personally, I feel that we have seen somewhat of a bubble over the last few years especially in startup investing. There is an arbitrage at play where public markets are actually significantly cheaper than private markets today,” says Kamath.

Kamath says that the cost of capital has gone up significantly in the West and that in turn will restrict investors from the regions from making risky bets on the Indian market. The local startup ecosystem relies heavily on external funding. “I think the startup funding ecosystem is going to be really difficult, at least for the next couple of years,” says Kamath.

Led by the Kamath brothers Nithin and Nikhil, Zerodha, which handles 15%-18% of all trading volumes in the country, belongs to the rare breed of local profitable startup unicorns. The firm has not raised any external capital. “I think it will be tough time for public markets but it will be increasingly harder for startups. They have gotten so used to having so much excessive cash at hand to garner an audience and grow business... when that cash becomes harder to come by which it invariably will because of the cost of cash going up significantly, the question is if somebody is burning a hundred million dollars this year and they don’t get money for the next three or four years, then what happens?”

Kamath’s advice to aspiring entrepreneurs is that they should pursue growth organically. “If you were to find a customer based on superior product versus basing acquiring a customer on a freebie or a discount which another competitor can easily replicate, might be a better plan for the future,” says Kamath.

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