For anyone investing in IPOs or tracking startup stocks, Zerodha co-founder Nithin Kamath has offered a striking explanation for why many venture-backed firms prefer losses over profits — and how India’s tax structure may be quietly driving that behaviour.In a detailed post on X, Kamath pointed out that taking money out of a business through dividends attracts an effective tax rate of 52% — a combination of 25% corporate tax and 35.5% personal income tax. By contrast, capital gains on share sales are taxed at just 14.95% (including cess).That gap, Kamath said, explains why venture capital investors often favour growth spending and valuation gains over profitability. “If you’re an investor (especially a VC), the math is simple,” he wrote. “Reduce corporate tax by showing minimal profits or losses, spend on acquiring users, build a growth narrative, and then sell shares at a higher valuation while paying much lower tax.”According to Kamath, this spending-heavy model doesn’t just boost valuations — it also makes competition harder for smaller or disciplined players who avoid losses. “To be clear, we’re not discussing R&D spending here, which is very low in India (0.7% of GDP),” he noted, adding that the cycle of spending and scaling creates a kind of “tax arbitrage” game.Every startup that’s seven or eight years old faces pressure from investors to offer an exit, Kamath said. With few mergers or acquisitions in India, the IPO route becomes the only real way out. “Once you run a business this way, it’s extremely difficult to switch,” he wrote.Kamath also questioned whether this policy setup — likely intended to promote spending and investment — has gone too far. “It’s creating businesses that aren’t very resilient. One prolonged market downturn, and many of these unprofitable companies would struggle to survive,” he warned.He added that unprofitable growth often gets valued at 10–15 times revenue, while steady profitable firms get 3–5 times. “VCs aren’t just saving on tax; they’re creating a 3x higher exit valuation,” Kamath said.