VC investment is often like a Ponzi scheme: NRN

 MUMBAI: Venture capital investment is often like a Ponzi scheme, Infosys founder NR Narayana Murthy said at the Nasscom Technology & Leadership Forum (NTLF) on Thursday. "I'm in Series B, I go to Series C, where I sell my shares to others at a profit, but it's the Series Z fellow who is left carrying a tin box," he said.

He said he's not a critique of the younger people (the startup founders), but the older people - the VCs who propounded the theory that what is important is only the topline and not the bottomline. "Mature VCs, boards of directors and advisors have to be open and honest in saying things as it is,” Murthy said, with reference to the severe funding squeeze on startups and the layoffs the sector is witnessing. Murthy was in conversation with Snapdeal founder Kunal Bahl.

Murthy returned to the Nasscom stage after a decade to a rousing reception from the audience.

Murthy said he believes in deferred gratification, a philosophy Infosys embraced. “VCs who provide money to entrepreneurs, boards of directors have to tell the youngsters to accept deferred gratification, to realise that sacrifice in the short and medium terms will give them a much greater return in the long run.”

He said Infosys co-founders flew economy class even internationally till it touched $1 billion in revenue and about $251 million of net income after tax.

“Some of the external directors said you're carrying it too far and you guys are getting older," he said.

Murthy said he believes the price to earnings ratio (P/E) and growth rates should be equal. P/E ratio is the ratio of a company's share price to the company's earnings per share. “If you grow at the rate of 20%, then your P/E should be 20. I belong to the old school of thought; the savants and wise men and women of the VC industry should think about this issue and they are much smarter than I’m,” he said.

Asked about the challenges in the current environment and how the IT industry should respond to it, Murthy said business is all about cycles. “The reality is most Indian software companies are growing very well. And when there is a downturn in the industry, there will be a focus on better value for money. When there is a downturn in the developed world, the prospects for Indian software companies will be better.”