IPOs not alternative financing route for startups, says Narayana Murthy

Bengaluru: Startup founders must not see initial public offerings (IPOs) as another route for their next round of funding as they face pressure from venture capitalists to succeed as early as possible, said NR Narayana Murthy, founder of .

“IPOs have been taken as the surrogate for the next round of financing. It is not a good thing (for the ecosystem) as it comes with tremendous responsibility,” the IT industry doyen said at an international conference on startups here on Friday.

When Infosys went public in 1993, its cofounders had “onerous” responsibility of giving stable returns to shareholders, Murthy said. Such obligations and values no longer exist, and entrepreneurs are in a “jam”, facing pressure from venture capitalists and early backers who either want to maximise the returns or exit the company, he alleged.

“Stock market is like a treadmill,” the 75-year old said while speaking at India Global Innovation Connect, a two-day conference being held in Bengaluru. “Investors always expect the earnings or stock price to keep going up. Having an IPO is not fun. The billion-dollar net worth is all illusory. Think of the poorest retail investor before deciding on an IPO as you have the responsibility to redeem your pledge (by giving them returns),” he said.

Also, most startups have overestimated the market size, with no proper market research companies backing with accurate data, Murthy claimed. This results in stagnated revenues while costs keep inching up, and that disadvantage has added to the woes of the startup industry, he added.

It is similar to multinational corporations setting foot in India in the mid-1990s thinking that there were 200 million middle-class population to cater to, but most failed to sustain, Murthy added.

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He urged entrepreneurs to follow the PSPD (predictability-sustainability-profitability-derisking) model that he credited for the early success of Infosys. It is predictability of revenues, sustainability of business through cold calls and timely delivery, profitability through cost control and prudently incurring expenses, and derisking, or not being dependent on one product, market or customer.

Also, it is best for entrepreneurs to disclose the bad news “early and proactively” to all stakeholders and exchanges and have a succession plan of professionals with similar values in place, with not all founders vacating office at the same time, Murthy said.

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