India has the third largest startup ecosystem in the world with several disruptive models, unique ideas and unicorn companies. However, did you know that nearly 80-90% of Indian startups fail within the first 5 years of their inception? This is despite the fact that several of these startups had novel ideas, some were receiving big investments and touted as high-potential startups, some were backed by the who’s who of the corporate world, yet they failed and were forced to shut down.
From 2016 to 2018, the highest numbers of startup failures have been in the e-commerce, fintech, consumer services and food tech sectors. These very same sectors were also the highest recipients of investments and attention during this time period.
Does this mean that not every startup with a great idea or large investment flows survives? Here are a few reasons seen as one of the major contributors to startup failures.
#1 Lack of innovation and uniqueness:
This is considered by many including top investors, angels, VCs and successful entrepreneurs as one of the biggest reasons for the high startup failure rate in the country. The number of patents that startups own/have filed for reiterate this fact [Not clear]– in the time period 2015-18, only 7% of all patents filed by Indian companies belonged to startups.
The lack of innovation and uniqueness for these failed startups permeated from one or many of the following weaknesses:
The lack of innovation and uniqueness only meant that the startups could not scale up and/or find sufficient investments. Investors and VCs believe that India is a follower market on certain fronts and that Indian startups need to leverage deep tech, top-notch tech talent and their creative problem-solving skills to solve for India and capitalize on the several available opportunities.
#2 Copycat and/or weak business and revenue models:
The business and revenue models of the startup are critical in deciding its economic and commercial viability. One of the biggest mistakes that startups end up making is focusing too much on the solution and less on the business and revenue models. Inefficient and weak business and revenue models led to improper resource allocation, incorrect pricing, high cost to customer, low lifetime value to customer and so on.
#3 Pre-mature expansion/ scaling up:
Premature scaling up/ expansion is a silent killer for many startups. This is because several of the failed startups considered the short-term spikes in key metrics including profitability as a sign that they were ready for expansion even though they were not performing as efficiently in reality (as suggested by their business models). As a result, they made the mistake of scaling up/ expanding their operations and burning a lot of their revenues and investments in hiring and marketing. Their underlying inefficiencies were typically invisible until they were on the brink of failure and shutdown.
#4 Lack of market understanding:
For startups to thrive and flourish, they must have a clear understanding of the market they operate in and problems and opportunity gaps that exist in that market. For instance, streaming platforms providing local content in India thrive today owing to the availability of low-priced mobile data and increasing smartphone user base among the masses. If such platforms were launched 10 years ago, they might have simply shut shop. This means a deep understanding of market conditions and timing are crucial for success.
The other related factor is that startups are unwilling to pivot at the right time because they are in love with their products and solutions rather than being customer-centric and market-oriented.
#5 Lack of talent and competency:
Another major factor contributing to startup failure has been their lack of talent and their overall competency being poor. This is either because they were not able to attract the right talent owing to their frugal resources and inability to pay higher remuneration or that the founding team did not realize in time that they were lacking on certain competencies and skills and that they must hire the right talent. In the latter case, the founding teams often wasted over 12-24 months and their limited resources in making mistakes and grasping the basics. By the time they realized that they needed specialists, it was too late.
Having teams that do not have the right temperament, skills and competencies drain the startup’s resources through poor decisions and implementation failures and yields poor ROI on the salary bill.
#6 Lack of funding and/or follow-on funding:
Several startups were forced to shut shop owing to their inability to raise sufficient investments or follow-on funding. This has been the case especially with startups in industries such as logistics and supply chain, social impact, clean energy, etc. where the industry itself is poorly funded or investors focus narrowly on certain sub-segments of the industry owing to their lack of awareness of several high-potential grassroots innovations in other areas. Poor funding was also the reason for shutting down of startups in heavily funded spaces such as e-commerce, fintech, foodtech, consumer services, etc. because some players and models received heavy funding while several others did not.
Failure, we believe, is a part of success. Learning from our own mistakes as well as mistakes made by others is crucial to ensure success.