Start-ups in India and Why Majority Fail: Some Mistakes That They Commit

In June 2016, Grofers India Pvt. Ltd, the grocery delivery start-up funded by Softbank Corp. and Tiger Global Management, laid off 10% of its workforce, even as it revoked 67 job offers to students who were scheduled to join the start-up in July, citing adverse market conditions. With this,Grofers joined a long list of start-ups that have downsized themselves because of slower-than-expected growth and a funding crunch, including Zomato, LocalOye, HelpChat, Runnr and Commonfloor.1 Six Months earlier Grofers had shut delivery operations in nine cities because of low acceptance of its services in these areas.2

India, third among the global startup ecosystems in the world,has three to four startups being born every day, with nearly five billion dollars of funding in the year 2015 according to Nasscom. With a 100 percent growth in number of private equity, venture capitalists, angel investors along with 125 percent growth in funding over 2014, the Indian start-up ecosystem has risen to the next level, also being noticed as the youngest start-up nation in the world with 72 percent of its founders being less than 35 years of age.3 One however can’t ignore the extremely high failure rate amongst the present day start-ups. On an average, 97% of start-ups fail, about 1% get acquired, another 1% become paper unicorns and only the final per cent actually become sustainable digital-first enterprises.4 This calls for a profound contemplation on the possible reasons for such a trend. It is important to analyze the common mistakes made by the Start-Up founders and their Investors.

The foremost cause of failure is an ‘Unsustainable Business Model’ where the idea could never have worked in the first place no matter how much capital, raw material or skills have put in it. A model consisting of a negative cost to revenue equation will always incur losses no matter what the funding is and hence, an entrepreneur who is also a rational human being would have to shut it down in order to limit the losses. Lack of realistic thinking by the entrepreneurs lead them to such a crisis and this is simply because they make mistakes in addressing the depth of problem space, forgetting the space between an ideal and a real solution.‘Poor unit economics’ of the business model further contribute to this negative equation. This could be elaborated with an understanding of the Indian market scenario where the customer retention by any particular brand is very low due to the dispensable nature of products and services. The Indian market is full of substitute goods which can be used in place of each other and hence, a slightest of variation in the quality or price or any other determining factor of demand leads to a change in demand for the product or service.

For a business model consisting of a product or a service with a low transactional value like the “Grofers”, which incur high inventory cost along with high transportation costs as they rely on picking up goods from the retail stores (inventory cost is incurred) and then transport the item to the customer’s location (retail transportation cost is incurred) in addition to the discounts and returns, the effective margin narrows down to a very small value and in most cases negative thus turning out to be a major reason for the failure of the startups. Also, the competition it faces from the kirana stores who have a much better understanding of the business, their customers and the relationship with them in accordance with their own delivery brings out questions about the origin of the startup in order to solve a problem that doesn’t probably require any solving. The irony is that the entrepreneurs here are fighting a competitor whose cost structure has never been examined with most of the kirana stores are not even paying the taxes nor having any regulatory or compliance cost.5

Poor Unit Economics are usually supplemented by a ‘lack of a long term approach’ in the idea. The pool of entrepreneurs here are in a hurry to win over each other in the present time without planning anything solid for their future which leads to a decline in the growth of the startup. This is clear when the startups have their focus on increasing their customers, while ignoring the business viability for a long time whereas they fail to understand that a long term approach would allow them to set a timetable and certain steps in order to achieve the goals. This can only be neutralized by having proper mentorship and guidance for laying out the steps to success. On the contrary, improper guidance and mentorship is the case with most of the founders in India. They usually ignore the venture capitalists’ mentorship in the pursuit of “self proclaimed success” and eventually end up being confused with lots of questions in mind and no one to answer them. A proper mentor shall hold a mirror to the business, ask the entrepreneur tough questions, push the bar higher in accordance with sharing all his experience and expertise and motivate the entrepreneur in order to bring about some positives in the startup.6

The next vital factor which plays a role in deciding the fate of the startup is ‘the team’. It is well known that a good team can do wonders with an ordinary idea whereas ego clashes or differences within a team can even force a shut down to an exceptional idea.7 Trust within the team members and complete dedication towards the work help in achieving greater heights for the startup whereas problems within the team can wreak havoc. Even though the founder’s individual characteristics are important but what is more important is his/her person’s ability to bring a bigger and more experienced team with him/her. Thus, a sole founder for a startup is not a right choice and building up of an effective team should be of prime concern where each team member proves to be an asset and helps the startup grow.8

Even if a startup gets its team, has the right approach towards the idea, has proper funding, a wrong time release can still adversely affect it.If the release of the product/service is too early, the consumers may write it off as not good enough and getting them back may be difficult if their first impression was negative. And if the release is too late, the entrepreneur may have missed his/her window of opportunity in the market.9 Lastly, after figuring out all the other stuffs and launching the product/ service the main focus should lie on the demand and supply of the product in accordance with the competition it is facing from its competitors.10

Having said all this, it is important to understand that majority of Start-Ups failing is a natural phenomenon in any nascent Start-Up Ecosystem. Thus, it is important to have a policy regime that encourages risk-taking and that doesn’t punish failure. Nevertheless, entrepreneurs must be willing to introspect on their mistakes and strive for continuous improvement with frugality, innovation and discipline as the guiding principles.

This piece is third in the series of articles published at the conclusion of a policy review project on PM Modi’s Start-up India Plan undertaken by Praneeth Rao, Vaibhav Goyal, Agrima Singh and Simrat Singh.

References:

  1. http://www.livemint.com/Industry/oxhNrb3nn5NvrYRO2r8JAK/Grofers-revokes-67-job-offers-across-operations.html
  2. http://www.livemint.com/Companies/l4wKnj0rk14zrJSRB0i6pO/Grofers-shuts-down-operations-in-9-cities.html
  3. http://economictimes.indiatimes.com/small-biz/startups/india-ranks-third-in-global-startup-ecosystem-nasscom/articleshow/49341735.cms
  4. http://www.livemint.com/Companies/9MS2eZjmYwcC040ktsu5JP/The-fault-in-our-startups.html
  5. http://www.foundingfuel.com/article/the-fault-in-our-startups/
  6. https://medium.com/the-coffeelicious/indian-startup-ecosystem-something-isn-t-right-97e3f6adf39c#.z3ejlmcqr
  7. https://www.rotman.utoronto.ca/Connect/MediaCentre/NewsReleases/20151028.aspx
  8. http://www.forbes.com/sites/adigaskell/2015/11/04/why-the-wider-team-are-crucial-to-start-up-success/#584c16112074
  9. https://www.cbinsights.com/research-reports/The-20-Reasons-Startups-Fail.pdf

IPAN Research Team

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