Not good for entrepreneurs to see IPOs as ‘surrogate’ for financing: Narayana Murthy

Software icon N R Narayana Murthy on Friday said IPOs have been taken as a “surrogate” for new rounds of financing by entrepreneurs, and this approach is not a good thing.

The co-founder of IT major Infosys was speaking at the ‘India Global Innovation Connect’, a global conference on startups. “IPOs have somehow been taken as a surrogate for the next round of financing. I think that’s not a good thing, because an IPO comes with tremendous responsibility,” Murthy said.

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Speaking about the discussion he and another co-founder of Infosys had before going for the IT major’s Initial Public Offering (IPO), he said, “IPO brings onerous responsibility…as so many people with very little money would put faith in us and put in their meagre disposable income, it is important to give them a suitable return.” The event was organised by Smadja & Smadja, a Switzerland-based strategic advisory firm, in partnership with Karnataka Digital Economy Mission (KDEM), Catamaran Ventures and Tata Digital.

Murthy is the Founder and Chairman of Catamaran Ventures. Pointing out that in India we have not done a good job of estimating the market size, he said, “We have traditionally or by habit rather overestimated the markets…we have overestimated the market size, also we probably don’t have good market research companies that can give us an accurate estimate of the market opportunity.”

The IT industry veteran said he has tremendous admiration for today’s entrepreneurs. “I personally think that today’s entrepreneurs are much smarter than I was.” He said there are three ingredients for success as an entrepreneur — access to customer or market access, access to talent, and availability of venture capital funds. Noting that market and talent access were easy for him and his team when they started at Infosys, Murthy said, “….there was hardly any job in India at that time, but today it is so difficult to first get to the market as there is so much competition from so many smart entrepreneurs. It is so difficult to get access to talent. I find this to be the main difference.”

“Also, VC money is easily available today…in our time, there was no VC or bank loan. Today, there is a lot of money chasing these ideas, and VCs also have a job to do,” he said, adding that there is a certain pressure on entrepreneurs to succeed as early as possible. Entrepreneurs today are in a “jam” with pressure from VCs, they are looking at IPO as the next round of financing, and unable to estimate the market size, Murthy said, adding, “So invariably your costs go (up), but your revenues don’t go up, therefore (you) make losses, and market capitalisation comes down.”

Murthy also told entrepreneurs that as leaders they will have to lead the way in austerity, sacrifice, lead by example in innovation, hardwork and discipline, as he highlighted the concept of business value addition or consumer value addition.