Founders should defend captable, says Zerodha’s Nithin Kamath

In his 11th year as a bootstrapped founder building retail brokerage firm Zerodha, Nithin Kamath equates founders diluting too much of their shareholding to shorting the stocks of their own companies, especially when India is on a journey to being an economic superpower.

Nithin is careful to preface his argument with the disclaimer that it might work out differently based on the sector. However he is against founders chasing money for the sake of it or acquiring new users by handing out cashbacks and freebies, he said, speaking to Shradha Sharma of YourStory at the company’s flagship event TechSparks 2021.

“Had we taken the route of taking external money, we would have been compelled to take the venture capital route which pushes you for higher growth and higher valuation,” said Nithin.

He added that if he were to build Zerodha today, he would not have been able to do so without raising external capital.

However, while speaking about not raising funds and being profitable, Nithin pointed out that “in the whole freedom versus money, freedom is more valuable than money.”

With the Indian startup ecosystem having raised recording funding of $23 billion in the first nine months of this year, and 33 startups joining the coveted unicorns’ list, Nithin’s concerns around excessive equity dilutions by startups to raise money for “blitzscaling” tie in with the broader ecosystem’s vexation that there’s an overvaluation bubble of sorts, waiting to burst.

Cautionary tale on valuation

To be fair, investech and wealthtech platforms are having their moment in the sun with wealth management platform Growwbeing valued at $3 billion in its recent round of funding. Zerodha, in its ESOP (employee stock ownership plan) buyback event in May this year valued the company at $2 billion.

“Many IPO decks are now talking about business they will be getting in 10 years, but something seems off here,” Nithin told Shradha. He added that in India, easily available money is focused on a handful of sectors picked by the venture capital industry.

His advice to founders is to build sustainable and resilient businesses, instead of chasing valuations. While competition in the space heats up, Nithin said that he has made peace with the fact that five years down the line, Zerodha might not even exist.

“There has to be more wealth creation in public markets than private markets. I hope more startups come to the market, especially the ones who need money,” said the youngest billionaire in India who played down his “billionaire” tag calling it just paper-valuation.

Growing, and compounding money has been a central theme spurred by the pandemic, quipped Nithin, adding that people consuming more digital technology has largely been the driving force behind the glut in retail investors.

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Money markets and greed

Zerodha opened 50,000 new accounts last week and the number of customers has snow-balled from 2 million in January 2020 to 7.5 million this year. These are mostly 20 to 30 year olds, many of them first-time investors looking to ride the buoyancy in the markets, said Nithin.

But he cautions against looking at capital market investment as means for making easy money.

“The reason we signed on so many people is because of greed and FOMO (fear of missing out). If NIFTY falls by 10-15 percent, this will come down,” said Nithin.

As for building a retail brokerage firm that derives its revenue from active customers, Nithin said it’s hard to keep one’s head above the water because even though 100 investors join, as many leave.

“The problem with the trading community is that mortality is very high and not everyone makes money. Of the 100, only one survives..so how do you continue to get new traders to generate revenue for you,” said Nithin.

How Zerodha is able to tackle that head-on though is by educating retail investors against the pitfalls of risky behaviour.

“We have the undivided attention of the customer while they are purchasing a stock for the short span of a few seconds — our Nudge videos come in then,” Nithin said, adding that with the market education and the videos, the purchase of penny-stocks has come down by nearly 70 percent over the last year.

Another favourite of the retail investor, cryptocurrency, has been on Nithin’s radar of late. He said that while SEBI does not allow unregulated products to be offered by regulated companies like Zerodha, a regulatory grey area for a high potential sector like cryptocurrency has him worried.

“Crypto is not a currency but an asset like mutual funds or gold, which we should be able to offer if regulation allows it. If it continues to remain in the grey area, we lose out on this,” he added.

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