Infosys founder, NR Narayana Murthy said startup founders should not look at initial public offerings (IPOs) as another route for their next round of funding as they face pressure from venture capitalists.
“IPOs has been taken as a surrogate for the next round of funding. It is not a good thing (for the ecosystem) as it comes with tremendous responsibility,” he said at an international conference on startups.
He also said that when Infosys went public in 1993, its co-founders had a huge responsibility to deliver steady returns to shareholders. Such obligations and values no longer exist, and entrepreneurs are in a “jam”, facing pressure from venture capitalists and early backers who want to either maximize returns or exit the company, according to The Economic Times.
“The stock market is like a treadmill, investors always expect earnings or the share price to go up. Having an IPO is not fun. Billions of dollars in net worth is all deceptive. Think of the poorest retail investor before deciding on an IPO as you have the responsibility to redeem your pledge (by giving them returns),” Murthy said while speaking at the India Global Innovation Connect, a two-day conference held in Bengaluru.
He claimed that most startups underestimated the size of the market, with no proper market research backing companies with accurate data. This results in stagnant revenue while costs keep rising, and that loss has compounded the startup industry’s woes.
Murthy said this is similar to the multinational corporations that stepped into India in the mid-1990s, thinking it was to cater to a population of 200 million middle class, but most failed to sustain it.
Murthy urged adherence to the PSPD (Forecast-Stability-Profitability-Derisking) model, which he attributes to Infosys’ early success. It is predictability of revenue, sustainability of business through cold calls and on-time delivery, profitability through cost control and judiciously spent expenses, and risk taking, or not being dependent on one product, market or customer.
Furthermore, it is best for entrepreneurs to “early and proactively” disclose bad news to all stakeholders and exchanges and have a succession plan of professionals with similar values, not all founders vacating offices at the same time, Murthy said.