Not much opportunity to build many $100-million companies as we are still a poor country: Zerodha CEO Nithin Kamath

Zerodha co-founder and CEO Nithin Kamath

Nithin Kamath, the founder and chief executive officer (CEO) of online stockbroker Zerodha, has never shied away from speaking his mind. Vocal on issues confronting the startup world, Kamath is an active member of Twitterverse.

Known to be conservative and realistic about his business, Kamath has maintained that it is important for Indians to enter the stock market with the right expectations. Zerodha is currently working on a feature that can nudge customers every time they are about to make a wrong investment decision.

Kamath does not believe that there is an opportunity to build many businesses valued at $100 million in India because spending ability is still low in the country. In an interview to Moneycontrol, Kamath said founders who spent the most on acquiring customers who may not stay with their companies or on high employee costs may find it difficult to weather the funding slowdown. “I’d rather make Rs 1,000 from a customer over five years, versus making Rs 1,000 over three months and losing the customer,” he said. Edited excerpts:

You have said that Zerodha’s revenue and profit will not grow by a lot in FY23. Do you think anything could change that view? 

For sure, this year is lower from last year because we're already 1.5 to 2 months in and, revenue- wise down by 20-25 percent already. That's because generally markets are down...logins are down by 25-30 percent. Tech stocks are down 80-90 percent in the US, that is not a correction anymore, fundamentally something has changed. Usually, India lags in terms of the impact from the US.

A lot of our audience comes from the crowd which is benefiting from all the VC (venture capital) investments coming into the country like software employees, startup crowd, etc. Now if they are impacted, automatically we will be impacted.

When Coinbase’s valuation is down to $11 billion, how do you (in India) justify a certain valuation? That question is already being asked. When Coinbase was at its peak, startups could say we will be 10 or 20 percent of Coinbase. There is no more that story to tell. So it is going to be tough to raise funds because most of these companies and startups aren't profitable. So there is going to be some impact of that.

What sort of an impact is the current scenario having on hiring and the salary expectations that were inflated in the past year? Is a correction already happening in salaries? 

I think it will take months before corrections happen but what I meant to say is I don't think there's an opportunity to build many $100 million valuation businesses in India because we are still a poor country, to be honest. There cannot be 1,000 companies with a $100 million valuation because that would mean them having at least $10 million revenue. In this whole funding (boom) what has happened is almost everyone seemed to be raising money as they will become a $100-500 million business with tens of millions of dollars in revenue, which is almost impossible.

If you have to count startups with over $10 million revenue, there are probably just a handful. But all the founders were selling the story that somehow they do, and that's why they were forced to raise money at higher valuations. The problem with raising money at high valuations is that once you've set the wrong expectations to your investors, then you have to do whatever to meet those expectations.

That seems good in the short term but if you take a longer timeframe, it is very bad for the ecosystem. You end up creating a lot of non-resilient and unsustainable businesses. I mean, assuming this funding winter goes on for three years, 70 percent of our companies will be done because most have less than three years of runway. So we don't want that as a country.

While it's really hard for companies that are more than $100 million to raise funds, there is still a lot of capital available for seed and pre-seed rounds because a lot of large VCs who never used to write small checks are now doing it. They are looking at it as play money almost–if I do 10, maybe I will get one investment where I get to do a larger round.

The other thing that should happen in India, like in the US, the total addressable market should increase in terms of revenue but that will happen over time.

But is there a slowdown in the high churn that we were seeing among startup employees? 

The thing is we have not been in the mix since we have hired very few people in the last few years. But what I know from startups we are investing is that it is slowing and you're not having employees acting as mercenaries.

Which segments among startups do you think will be the most affected by the slowdown in investments? 

I think across the board. There are good companies, of course, but I think across the board people were almost splurging. Even if you look at Coinbase, the big issue was that they went from 2,000 employees to 6,000. A lot of these employees were paid almost like business owners. Also, those who were spending too much money to acquire customers who may or may not be of use.

Sometimes I wonder, what is the real user base in this country? What is India's market size in terms of who can consume fintech? We have to assume it's a subset of UPI (unified payments interface). Eliminating merchants, there may be 20-30 crore unique UPI users. Maybe 50 percent of those can consume fintech. So, you have to assume that India is not more than a 10-15 crore user base market. So, it is going to be tough because money has been raised as if the market is 40-50 crore.

But funds have also been raised with an expectation that it will be a 40-50 crore user base market. Do you think yours is a conservative view or you think it will be difficult to change the Indian consumer? 

See, if you want to lend, I think there is a large market but the risk in India with lending is also quite high. Yeah, I have to be more bullish about the world but somehow, I feel more pessimistic about it. I could be conflicted because of my worldviews around this. But I think what's also happened is that some of the VCs have oversold to their Limited Partners (LPs), the way startups sold to VCs.

What do you have to say about the user base numbers of fintechs which are growing rapidly, including that of your competitors? 

We don’t comment on competition but generally across fintechs the question to ask is who is a user? Because across fintechs, if you give enough freebies you will find a user but do you consider that person as a user? I am not sure. Is a mobile app download a user? I don’t think so.

But in broking it’s a little regulated. NSE recently issued a circular saying that giving incentives, running referral schemes and using influencers to promote the business is not in line with the guidelines issued by exchanges.

A lot of investors entered the stock markets in the last two years and they have mostly seen only the good side of markets. So how will the current down-cycle impact the sentiment of new and especially younger investors?  

I think it's a good learning experience. When there are drawdowns and mistakes they will learn from it and then maybe temper down their expectations because a lot of people came to the market with the wrong expectations in the last two years. We need people to come into the market with the right expectations, then they're going to stick around.

The same is playing out on in cryptocurrencies, plus we had a bigger crash with Luna on that front. 

Over the last two years, crypto got mis-sold by a lot of people, saying it will never go down. I think a correction like this will make sure people know that crypto is something that can go down. People need to know that at the end the crypto is an extremely risky asset class and if someone’s participating, they need to do it knowing that it will go to zero. That means they're allowed to allocate only a small portion of the capital because the most fundamental thing in investing is ‘higher the risk, lower the allocation.’ You cannot be putting all your savings into a risky asset.