For every successful startup in India, there are 50 failed ones! The survey report from the Institute for Business Value and Oxford Economics indicates that about 90% of the startups fail within the very 5 years of their inception. So, why do startups fail in India?
Before we understand that, let’s see What is meant by a startup and how it functions?
A Startup, as per the Indian government, is, ‘An entity that is less than seven years young, has an annual turnover of fewer than 250 million rupees, and is headquartered in India’.
Startups in India – The Growth Spurt
- Substantial viability in the domestic and international markets, growth of B2B organizations and the rise of new-generation entrepreneurs in tier-II and tier-III cities over the years, has widened the space for the progress of startups in India for quite some time now.
- A recent report suggests that there has been a seven-fold increase in the number of startups i.e. from about 7000 to 50, 000 over a decade (2008 to 2018).
- The entrepreneurial energy moving towards the first-generation entrepreneurs, Explosion of the internet and Sector-based innovation has fueled the market of startups as it continues to spawn new trends in IT, Artificial Intelligence, Internet of Things, Finance, Healthcare, Biotechnology, Education, Agriculture, etc.
- As India progressively moves towards the startup ecosystem, a decade of Indian entrepreneurship in the technology and internet space has proven that the startup story in India is shifting its paradigm from the ‘consumer-driven ventures’ towards the ‘technology and product innovation’.
Startup Ecosystem – Factors and Elements
- According to the NASSCOM, India is among the four most vibrant startup ecosystems in the world, the other three being the US, Europe, and China. It has distinctive suitability to build products and solutions for the large part of the world.
- A startup ecosystem consists of people, startups in different stages and the various types of organizations. All of these factors interact as a system to create new startup ventures.
- While the elements of startup ecosystem are formed of ideas, inventions, research, entrepreneurs, investors, advisors, etc.; the organizations and activities concerned with the startups are made up of- startup competitions, investors network, coworking spaces, startup incubators, universities, venture capital companies, etc.
Startup Funding – The various stages
Every startup irrespective of their nature and size of operations, require sufficient finances to transform its innovative ideas, services, and products into reality. The startups need to raise funds for their businesses in various stages –
- This is the very first investment done at the preliminary stage of the setup. The funds are either obtained from the founder’s savings or raised from the people from within the network of friends, family or acquaintances.
- Alternatively, certain firms help with early growth investments.
- Seed capital can also be received as a loan in exchange for common stock.
- The fund is used for building prototypes, market research, and product development purposes.
“Pradhan Mantri Mudra Yojana”
Pradhan Mantri Mudra Yojana was launched by the government in April 2015 in collaboration with regulated banks and NBFCs. The initiative aims at providing Startup India loan to non-corporate and non-farm MSMEs (Micro, Small and Medium Enterprises) in their initial or growth stage.
“Startup India Scheme: 2020”
The Startup India Scheme is an initiative to promote various startups by assisting the new-gen entrepreneurs of the country, generating employment and spurting the economic state of India. The scheme serves as a pillar of support for the budding entrepreneurs by providing them startup loans and tax benefits.
Image source- startuptalky.com
- Owing to the limitations of the seed capital, it is often necessary for an entrepreneur to tap into investments from VC firms or a single wealthy investor.
- Money is received from the ‘Angel investor’ as a loan which is convertible to preferred stock.
- This stage showcases an efficient prototype, a solid plan to create a market and eventually enters the market.
Venture Capital Financing:
- This comes into picture when the organization’s final products or services hit the market. Irrespective of the profitability, every business considers this particular stage that starts from Pre-series A, going through Series A, B, and C, etc.
- The various VC rounds reflect the different valuations of the company.
- These rounds might involve ‘strategic investors’ who offer marketing and technology assistance at this stage.
- The stage involves project execution and product evolution and the funding is secured through displaying market traction and scalability.
IPO (Initial Public Offering):
- When a startup decides to raise funds through selling its stocks, shares to the public including institutional investors, it is known as IPO (Initial Public Offering).
- It is commonly referred to as ‘going public’ as it offers to the general public to invest in the company by buying its shares.
- The IPO’s opening stock price is set with the help of investment bankers and while the founders have no obligation to disclose their financial statements to the general public, they must submit the information regards to financial statements, the purpose of raising funds, etc. to the SEBI.
- This stage typically helps with the growth and diversifying of the business.
Indian Startups – The struggle and the slow death
Despite having the third-largest startup ecosystem in the world, support of government schemes like Startup India initiative, blessed with abundant unique ideas and several business models, backup of big investments, and high-potential for viability; many startups can hardly manage to escape the valley of death.
Some of the struggles of Indian startups are:
- Hiring and managing a team
- Dealing with customers
- Developing a marketing strategy
- Obtaining a significant amount of working capital
- A huge gap between the solution providers and the end-users
The sectors like e-commerce, Fintech, consumer services, and food-tech services received the highest investments and attention during the last few years, and yet, these sectors have seen the greatest number of failures during the period.
Is it because of the lack of innovation in the customer’s needs?
Or is it because the startups fail to attract funds as the investors often fail to see value in those businesses?
Let us take a look at the top reasons for the failure of Indian startups.
Top reasons for the slow death of Indian startups
- Lack of Innovation around the customer’s needs – Inability to invent a product that caters to the needs of the customer.
- Negative cash flow and mismatch of expenditure and income – delay in payments, absence of adequate working capital, continuous search for funds and thereby losing the investor’s trust eventually.
- Business expansion without suitable gross margin – Consistent selling of products at low-price, and no long-term plans to cover the profit margins or acquire the market.
- Lack of talent and competency – Unable to attract a team of highly efficient, talented, dedicated and enthusiastic people who would aim to execute the company’s goal and mission. Poor overall competency of the manpower and implementation failures.
- Inability to raise sufficient investment and follow-on funding – Lack of necessary funding especially in certain sectors, and the failure to maintain the inflow of several rounds of funding (follow-on funding) required for continuous business flow.
Failed Startups in India
PepperTap – An online shopping platform
Started in the year 2014, the company shut down only in a couple of years mainly because of their ‘lack of preparation’, ‘mismatch of expenditure and income,’ and ‘unplanned business expansion’. They gave heavy discounts to the customers to cater to their mindset of online shopping while the costs they incurred were higher than the profits made.
LoanMeet – Short-term loans to retailers
The Bengaluru-based startup was established to provide short-term loans to the retailers to purchase inventories. Although it managed to compete with Capital Float and Loan Frame, the company was shut down in 2019 because it failed to generate the ‘follow-on funding’.
Shotang – An online solution for manufacturers, distributors, and retailers.
The business aimed at bringing the manufacturers, distributors, and retailers on a single platform to transact and discover their business online. Mobile and Apparel were the prime products focused. Fierce competition from Flipkart and Amazon and lack of maintaining sufficient rounds of funding led to its shutdown.
Thumb rules to escape the valley of death
- Be prepared for the failure- It is inevitable
Whether a business runs on money or emotions, it is bound to face failure sooner or later. A passion to build, rebuild, sustain and retain goes a long way. Make specific goals, measure them, take calculated risks, get out of comfort zones, and treat failures as short-term setbacks.
- Solving the profit puzzle
Profitability is self-sustaining or EBITDA positive (Earnings Before Income, Taxes, Depreciation, Amortization) and it allows the company to potentially continue to grow without any outside investment.
Attaining the stage of profitability is possible through the identification of key steps like –
- ‘Generating targeted demand’ by distinguishing target customers and creating efficient customer retention initiatives.
- Creating ‘Strategic supply’ by spotting the right suppliers/sellers and creating value for them.
- ‘Optimized supply chain’ through ‘timely yet cost-efficient’ delivery of product/service to the customers. This is achievable with the help of a tech-led supply chain.
- Create a detailed plan of action and approach
Spontaneous and readymade plans no longer work in the current scenario. Entrepreneurs should know whom to target, when to target and how to target.
- Be prepared for the rules that are not set yet
Get to the root causes of the problems and find out newer solutions. Innovations and experiments must be guiding principles. Extensive marketing research and assessing one’s strengths and weaknesses and acting accordingly to avoid loss of precious resources and time.
- The‘20/60/20 Marketing Rule’
Entrepreneurs must ensure to test their plans with 20% of the budget. On successful delivery, spend 60% more on the plan and allocate the remaining 20% towards customer engagement.
Indian startups competing with global startups
With an emerging trend of entrepreneurship and a conducive startup ecosystem, India has the potential to compete with global giants like Google, Amazon, Facebook, etc. Speculations and constant comparisons with the global startups have prepared Indian startups to take risks, move fast, change things and overcome the fear of losing.
Whereas Indian ventures like Flipkart, MakeMyTrip, and CashKaro are giving head-on competition to the global giants, there are still many aspects where the Indian startups need to add certain elements to survive and sustain the global competitiveness –
- Strategic positioning
- Innovative approach
- Break free the traditional norms
- Balance the capital and profit equation
With more professionals willing to give up their 9 to 5 jobs and become entrepreneurs, more startups likely to follow in the times to come, ‘Success builds on success’ and ‘generation of ideas being the key to startups’; the new-gen entrepreneurs would pave their ways to success.
The expanding economy, improved ease of business, tier II and tier III cities diving into the startup space and rising middle class; all these indicators point towards a maturing startup ecosystem in India and it is bound to gain momentum in future.