Murthy advises start-ups not to see IPOs as 'surrogate' for a funding round

Says that isn't a good thing as an IPO comes with great responsibilities; points to pressure from VCs as a reason for IPO move by companies

Initial Public Offerings (IPOs) have somehow been regarded as a surrogate for the next round of financing by companies, N R Narayana Murthy said on Friday.

“I think that's not a good thing because an IPO comes with tremendous responsibilities,” said Murthy during a conversation with business journalist Shereen Bhan,  at the India Global Innovation Connect conference in Bengaluru. “I still remember before we went public, I sat down with Nandan (Nilekani), Kris (Gopalakrishnan) and everybody and said that ‘having an IPO brings (more) responsibilities. There are so many people who have very little money and they have put faith in us. It is very important for us to give them a suitable return. But today that whole thing is gone. You see the entrepreneurs being in a jam, with pressure from VCs and looking at IPO as the next level of next round of financing.”

Murthy is also known as the ‘father of the Indian IT sector. Established in 1981, Infosys pioneered the global delivery model and became the first IT company from India to be listed on NASDAQ in 1999. From a capital of $250, the firm has grown to become a $16.31 billion (FY22 revenues) company with a market capitalization of approximately $104.71 billion.

Now many startup founders and companies in the country are planning to go public.

“We were seven people (co-founders). The day we took one paisa from the eight-person outside, the ball game changed. So you have to operate like the trustees of the outsider's money,” said Murthy. “We raised about Rs 60 lakh from family and friends.  I did about 65 per cent and Nandan (Nilekani) did about 35 per cent. But whenever we went to so-called well-to-do (people), they would say ‘will you guarantee me this return, show me the model etc? On the other end when I went to my sisters, and friends, who were not that well educated and informed, they would say ‘are you certain that you will not spend this money recklessly’. I would say we will treat it better than our own money. It was the lower-middle class, friends, and relatives who contributed this money. So the day, before we went public I sat down with all my colleagues and said ‘folks, we cannot sleep well until we redeem (our) pledge to these people.”

He said having an IPO is not fun, and saying that one is worth many billions of dollars is all illusory. “I've seen so many people who went up and came down,” said Murthy. “Think of the poorest retail investor before you decide to go for an IPO.”

Murthy also said there is an overestimation of the market size. He said probably the country does not have good market research companies that can give an accurate estimate of the market opportunity.

“Invariably your costs go (up) but your revenues don't go up, therefore, you make losses,” said Murthy, while addressing an audience of startup founders, investors, business executives and industry leaders.

Murthy’s comments come at a time when falling valuations, slowing funding rounds and faltering investor sentiment have prompted many start-ups to lay off employees in a bid to conserve cash. His comments also come at a time when, when top investors such as Sequoia and SoftBank have raised concerns about profitability and may make lesser investments.

Sequoia is one of the most active investors in India and has backed top unicorns such as Byju’s, Oyo, Ola, Zomato, Meesho, Car24, Unacademy, BlackBuck, Pine Labs, Freshworks and Razorpay.

Sequoia recently told the founders and CEOs of its companies that the era of being rewarded for hypergrowth at any cost is quickly coming to an end with investors shifting focus on companies that can demonstrate current profitability. It has told them the macro uncertainty around inflation, interest rates, and war, investors are looking for companies that can produce near-term certainty.

Unacademy's co-founder and CEO Gaurav Munjal recently said that the edtech unicorn may see a funding dry spell for at least the next 12-18 months and even last till 24 months and will cut costs to weather the lean period and survive the winter. The firm recently laid off about 600 employees, or about 10 per cent of its workforce, including full-time employees, contractual workers and educators.

When asked for views on improving profitability at a time when one may be heading towards a longish funding winter, Murthy said answering that question is not fair as he operated in the services model and depended on the export market compared to the entrepreneurs in the country. These entrepreneurs are focusing their products or productized models in the domestic market, where the disposable incomes are low and the competition is high.

“But having put in that caveat, let me say that…Our challenge is to focus on how we can improve the value delivered to our customers in whatever we do,” said Murthy. “Please look at a concept called business value addition or consumer value addition. Of course, as leaders, you have to lead in austerity, sacrifice, and by example and hard work.”

Murthy also said that it is always best to disclose bad news about a company early and proactively. He said transparency is not about disclosing good news, but it is about revealing the bad news.

“Let the bad news take the elevator and let the good news take the stairs,” said Murthy.

Murthy also said that he doesn't read management books, as his late friend Rahul Bajaj ( who was the chairman emeritus of the conglomerate Bajaj Group) taught him an important lesson. When Murthy asked him should he have a management Guru,  Bajaj had told him that "your competition is your best management Guru."