Governance issue at startups, blame is not just on the founder but the VC ecosystem as well?

Corporate governance issues coming to light in Indian startups will only increase with time. While founders will be blamed, the venture capital (VC) ecosystem is equally to blame.

The root cause of this is the overestimation of the size of Indian markets by founders and VCs.

While India is a fast-growing economy that will hopefully be an economic superpower in the future, it isn't that today. The size of the target market (TAM) by revenue needs to increase significantly to justify the valuations of the startup ecosystem in the country.

I think most VCs have miscalculated this & maybe oversold the India opportunity to their investors (LPs). In a small market like ours with limited M&A opportunities, large exits within 7 yrs (the lifecycle of a fund within which founders are expected to give exits) are hard.

Building a resilient business in India takes time. I can't think of many who have done it in <10 years. If VC funds have 7-year lifecycles and push startups for exits within 7 years, how can anyone build a good business? Maybe the fund lifecycles for India should be longer.

Given what the VC ecosystem is selling to their limited partners (LPs), the founders have to sell a story that syncs to raise funds. I have seen so many startups funded whose decks were almost delusional. In an ideal world, VCs should help correct this, not fuel the delusion.

For example, I've decks where startups claim 30–50 crore Indians will be investing by 2027, and they can capture 10%+ of that.

This is when we had ~6 crore Indians filing income tax returns. Someone should have asked what they were smoking instead of funding them.

Illusory truth effect

"The tendency to believe false information to be correct after repeated exposure."

If I could use one line to explain what I think is the root cause of the problem: Believing in a TAM that isn't there yet and then burning out by chasing it.

Most of the governance issues coming to the fore now and in the future will likely not be traditional fraud but misreporting things to justify the stories founders have oversold to raise capital.

There is no excuse for this, but as Charlie Munger says: "Show me the incentive, and I'll show you the outcome."

If the incentive is to constantly oversell, we get what we're seeing. So the blame isn't just on the founder, but also on the VC ecosystem that fueled it.

This discussion is important because India needs continuous capital, not spurts, to be an economic superpower.

We reduce the odds of that happening if people invest in or build businesses with the wrong expectations, leading to bad narratives, that can then slow capital flow.