Everyone loves an Indian startup success story. Not too many know that 2,404 failed last year.
Have you ever wondered why Indian startups tend to fail? The statistics on the Indian startup economy are certainly surprising. While India boasts 115 unicorn startups, only 17 of them are profitable – That’s not even 15%. The rest are just sucking up resources, drawing in billions of dollars in funding from Venture Capitalists (VCs) and investment firms around the World.
Reality:
The Department for Promotion of Industry and Internal Trade (DPIIT) has recognized over 77,000 start-ups across 656 districts in India, putting the country on the global start-up map. Despite this recognition, only a few companies in the food and grocery delivery, mobility, and entertainment niches are well-known. Nevertheless, these start-ups have made a significant impact by creating 7.46 lakh jobs, as stated by Union Minister Mr. Piyush Goyal.
Reality Check:
In 2022, the Indian startup economy experienced a significant reduction in funding, dropping from US$ 41.4 Bn in 2021 to US$ 24 Bn in 2022. This decline has caused a severe blow to the industry, with leading companies such as Vedantu, Cars 24, Ola, and Unacademy laying off a significant number of employees. The year-over-year funding trend has been decreasing, with the vanguards of the sector bearing the brunt of these losses. Unfortunately, less than 10% of Indian startups survive to see their 5th anniversary, with most failing within the first five years of their inception.
It is essential to comprehend the reasons behind the failure of Indian startups, as Indian society tends to glorify the success of entrepreneurs and underplay their failures.
1.Inadequate product fit
The primary reason for startup failures is creating products that have no demand or practical value.The founders don't consider whether their product fulfills customers' needs and positively impacts their daily lives - Does it save time, enhance their mood, or simplify their tasks?
💡Take Zerodha, for example – one of the most prosperous unicorns in the country. By carefully analyzing the stock market industry, Zerodha discovered that individuals were paying exorbitant brokerage fees while trading. This was a problem that demanded a solution. So, Zerodha developed Kite, an online trading and investment platform that provided a zero-brokerage stock market solution to anyone who wanted to invest their hard-earned money. It's worth noting that Zerodha is a completely self-funded startup. If you're interested in learning more about its business and revenue model, check out this comprehensive primer.
2.Uneasing Cash Burn
Indian startups face the challenge of excessive cash burn due to overspending on marketing campaigns and hiring more employees than necessary. This trend neglects the critical aspect of scaling - which is the number of customers served and not the number of employees hired.
💡Take the example of CRED, which launched with million-dollar ad campaigns and a disruptive business model, quickly capturing a significant portion of the credit card bill payment industry. However, for every INR generated, it spent 800 INR in expenses, leading to unsustainable losses.
💡Conversely, marketing is critical for startups, although it does not have to be prohibitively expensive. For instance, Anubhav Dubey, founder of Chai Sutta Bar, had no funds to market his venture but employed creative ideas. He offered free tea and coffee to people on launch day, deliberately choosing a location near a girl's hostel. Soon, a large crowd gathered, and people began visiting the shop regularly, some because of the tea and some because of the proximity to the girl's hostel.
3.Poor Hiring
The quality of a startup's workforce is critical to its success and financial well-being. Inexperienced leaders who struggle to develop a cohesive team can damage a fledgling company's reputation even before it has taken off.
💡According to a study, 60% of poor hires will have a negative impact on the performance of other team members, while 39% of businesses report decreased productivity due to bad hiring decisions.
4.Lack of Focus
Startups should focus on one core product and ensure its quality is unmatched by any other brand on the market. This approach gives the company a unique selling point (USP) and helps avoid a lack of focus or trying to accomplish too much at once, which can be detrimental.
💡Zomato is an example of a company that lost focus. They started with food delivery, acquired the grocery delivery brand Grofers to launch Blinkit, their 15-minute grocery delivery arm. Zomato was already struggling to generate profits from their food delivery business, and acquiring another loss-making venture only added to their problems. Now, they have also started operating inter-city deliveries, which is a clear example of over-ambition.
5.Bad Timing
Having a brilliant idea and a perfect product is not enough to ensure success in business. Timing is critical, and entrepreneurs must be able to identify the right opportunity to launch their ventures.
💡Every economic downturn presents opportunities for those who can recognize them - Amazon after the dot-com bubble burst, Airbnb after the Lehman Brothers collapse, and many more. These companies identified gaps in the market and capitalized on them, leading to their success.
💡For instance, when demonetization hit India on November 8, 2016, Paytm capitalized on the situation by providing a seamless alternative payment infrastructure. With the government pushing for a cashless society, people needed a convenient way to make transactions, and Paytm delivered. If someone had tried to start a real estate venture at that time, it would have likely failed due to the lack of cash in circulation.
6.Westernizing Indian Consumers
Scaling a business in India requires a deep understanding of the Indian consumer. It's insufficient to replicate successful strategies from European or Western markets. Just as one wouldn't use a fork to drink soup, one can't expect the same approach to work across different cultures. Indian consumers have high expectations, and products must deliver value that exceeds their cost.
💡Ashneer Grover, founder of BharatPe, offers a simple explanation for Indian consumers:
"They want everything at a low price, they want the best product, they want it immediately, and above all else, they want a discount."
The Indian market is unique, and a one-size-fits-all approach won't work. The founders fail to cater to the specific needs of Indian consumers and instead, they focus more on relying on international strategies.
Bottom Line
Starting a successful startup requires extensive research and preparation. With 11 out of 12 startups failing, it's clear that a lot of factors need to be taken into account for a business to succeed and stand out in the market. It's important to set goals, conduct research, focus, remain optimistic and always believe in yourself.
What's your view? Let's discuss!
