Ok, why do Indian startups fail?
This question is perhaps the result of some interesting statistics about the Indian startup economy. India has 105 unicorn startups and surprisingly only 23 of them are profitable.
The rest of them are a resource sink drawing in billions in funding from venture capitalists and investment firms around the world. In 2021 alone, Indian startups received $41.4 billion in funding and the year also marked the rise of 42 startups.
But 2022 delivered a sharp blow to the Indian startup economy with losses piling up and huge employee layoffs from reputed companies like Vedantu, Cars 24, Ola, and Unacademy. Fundings declined by 37% YOY, with the vanguards of the Indian startup economy suffering the biggest losses.
And this is the harsh reality of the startup ecosystem in India, less than 10% of Indian startups live to see their 5th anniversary. Most Indian startups fail in the first five years of their inception and it’s important to understand why Indian startups fail. Because the Indian society has over-glorified the success of entrepreneurs and under-reported their failures.
The most important reason why Indian Startups Fail
According to a study conducted by IBM Institute for Business Value– 91% of startups fail within the first five years and the most common reason is – lack of innovation. Innovation is the most important factor in deciding the success or failure of Indian startups.
You can’t just barge in with a product or service that’s already there in the market, slap your nametag on it and expect it to be the best-selling item in the market. What about the brands that have been in the market for multiple years, making incessant efforts, and pouring in a ton of resources to sell that same product?
Why do you think people will buy from you instead of them?
The only reason they would go for your product instead of what’s already out there in the market is that you have something new, something innovative. Your product should have something that the existing products don’t, be it pricing, be it features, be it design, or be it quality. And the only thing that you can do to get any one of these is to innovate.
You can’t possibly hope to build a multi-billion dollar startup without a product that stands out from the rest.
Here’s an example, there was a startup in the late 90s called pet.com that offered pet essentials delivery services. You could order a toy, treat, or food supplies for your pet online and pet.com would deliver it to your doorsteps.
But the startup failed miserably because there was nothing pet.com offered that couldn’t be bought at a conventional pet store. It was just an electronic pet store.
Amazon was a peer startup back then and the one thing that differentiated Amazon from pet.com was that Amazon was offering something that no physical bookstore could possibly hope to offer.
Amazon was offering more than 2.5 million books on its website. A number is impossible to achieve for any physical bookstore on earth, and look how that turned out for Amazon. A trillion-dollar valuation and the tag of one of the most powerful corporates in the world.
No matter which industry your startup belongs to, innovation is at its center. Let’s call it innovation at the center, humans at the edges.
Some additional reasons why Indian startups fail
Although innovation plays a huge role in the success or failure of a startup. It doesn’t guarantee that your startup will succeed. There are a lot of factors that need to be taken care of while building a good startup and we will discuss the crucial ones in detail.
Product Market Fit
A simple factor that most startups fail to include in their detailed business plan. Product market fit is simply the assessment of how good a product or service fits into the market. Or simply is your product needed by the customers? You can sell water in a desert but there’s no point in selling sand in a desert. If your product has no utility or doesn’t solve a problem for the buyer. What good is the product anyways?
It’s important to analyze the market and figure out what exactly the consumer needs, that’s the first step to building a successful venture. You need to look for a gap in the market and then develop a product that fills that gap. Look at Zerodha for instance, one of the most successful unicorns in the country.
They analyzed the brokers in the stock market industry very closely and found out that people have to pay a hefty amount as brokerage while trading and that is surely a problem that everyone needed a solution to. And that’s exactly what Zerodha offered with their online trading and investing platform Kite.
A zero-brokerage stock market solution for anyone who wants to invest their hard-earned money in the stock market. Zerodha is a completely bootstrapped startup and if you wish to dive deeper into its business and revenue model, you can read a detailed primer on that here.
Unceasing Cash burn
With the amount of funding, Indian startups have garnered in recent years, cash burn has been a major issue. Startups now have enough money to run multiple million-dollar marketing campaigns and hire an army of employees. But millions of dollars in the bank account don’t mean that you need to spend all of it on things that you don’t even need right now. Hiring 10 more employees doesn’t mean that you have scaled as a startup.
Scaling is proportional to the number of customers or clients you serve, not the number of employees you have. And most startups today try to boost their growth rate by pouring huge amounts of money into marketing and attracting a lot of new customers all at once. Every other business model is disruptive in today’s fast-paced startup economy.
When startups receive funding, they start burning cash at a rapid pace on things that they don’t actually need and eventually exhaust these funds and then go on to raise more funds through an additional round and add more investors to their portfolio. But when the losses pile up and they have no profits to negate the losses, the investors start building pressure and they are forced to cut expenses by laying off employees and cutting the marketing budget to half, and the pressure is one of the major reasons why Indian startups fail.
Take CRED, for example, the startup came out of the box like a superstar with million-dollar ad campaigns and a disruptive business model and captured a majority in the credit card bill payment industry. But for every INR made it spent 800 INR in expenses. It’s an interesting business model and if you want to know more about CRED, you can read the detailed extract here.
Marketing is important for every venture but it’s not like you need millions of dollars for a good marketing campaign. Anubhav Dubey, the founder of Chai Sutta Bar had no funds to market his venture, but he had creative ideas. He offered free tea and coffee to people on launch day and deliberately choose the location of his store near a girl’s hostel. Now he called all his male friends to the store and looking at the crowd people started gathering around the store. The crowd made people feel that the tea here is surely amazing and people started visiting the shop regularly, some because of the tea, some because of the Girls Hostel.
Lack of Focus
Most startups lose track of what they actually set out to do or simply try to achieve too much as a brand. They lose focus too often. When a startup has multiple products and a limited amount of time to work on each of them, they have to distribute all its resources in chunks to make sure each product gets attention. But there’s a major flaw in this approach. As a brand, you should focus on a core product and try to improve its quality to appoint where no other product or brand in the market can compete with it. That’s what gives you your USP in the market. It’s better to develop a single supreme quality product than to flood the market with numerous average quality products.
Having too much on the plate can be disastrous for a startup because it causes more chaos in an already chaotic environment. Startups unlike big businesses have a lot to figure out in order to scale, and having too many distractions is surely a huge disadvantage that most startups can’t afford. It is one of the biggest reasons why Indian startups fail.
Take Zomato for instance, the brand started with food delivery and then acquired the grocery delivery brand Grofers to launch their 15 min grocery delivery arm Blinkit. Now Zomato was already struggling with generating profits from the food delivery business and they acquired another loss-making venture to add another layer to their problems. And now they are planning to launch inter-city deliveries so that people can enjoy famous local delicacies across India. This a classic example of over-ambition and losing focus. If you wish to know more about Zomato, you can visit the detailed extract here.
You can have the best idea in the world and the perfect product to back that idea. But you’ll have to shut the shop if you don’t figure out the right timing to start your venture. And by the right team, I mean the right opportunity. Every recession ever was followed by an extremely successful business, Amazon after the dot com bubble burst, Airbnb after the Lehman Brothers collapse, and these are not mere coincidences. These ventures identified opportunities during tough times and capitalized on them in order to create a successful business.
Entrepreneurs should have critical observation skills and they have to be able to see through tough market conditions and identify opportunities. Starting a venture at the right time is like getting a headstart in a race. With great timing, all your efforts to grow your business compound, and things truly fall into place.
8 November 2016, was the day demonetization hit India, and all the cash was suddenly back in the banks. And with the government pushing to go cashless, people needed an alternative payment infrastructure and that’s exactly what Paytm gave them. A seamless way to make transactions. And it worked because it was the right time. Imagine if someone tried to start a real-estate venture at the time. People had no cash, and real estate is a cash-rich segment, so you can connect the dots and figure out what would’ve been the result.
Westernizing Indian Consumers
India is a unique market and to scale a venture here in India you need a keen understanding of what the Indian consumer wants. You can’t look at western or European markets and use ideas that worked there. You can’t use a fork to drink your soup, can you? The Indian market has high expectations from the product and if they can’t juice out more than they paid out of the product, they won’t be coming back for more. Your products, strategies, startup business model, and everything should be according to the Indian consumers.
Ashneer Grover, the founder of BharatPe explains the Indian consumers in simple words. According to him “Indian Customers are the most spoilt customers. They want everything at a low price, they want the best product, they want it immediately, and above all else, they want a discount.” So it’s not like you can get away with an International strategy to market and sell products in India.
It’s a different market and you need a different approach. While on the surface most will contain the idea that an Indian consumer is different than a western consumer because at times the Indian consumer tends to behave like a western consumer. But an Indian consumer is always Indian at heart. Madhukar Sabnavis, vice chairman and country head, of discovery and planning, at O&M India once said in an interview:
“We assimilate but also quietly adapt anything to our tastes, often distorting the original. So classic global mixes work to a point, but thereafter one needs to understand the local psyche and do things for their sensitivity to taste success. We don’t become global in mindset as we become global in consumption.”
What makes an Indian Startup successful?
There are 3 key elements of a successful startup-
- Innovation to reduce the barrier to entry for consumers
- Aligning startups vision with the national agenda
- The Customer Acquisition Cost(CAC) is less than the Customer Lifetime Value(CLV)
Let’s revisit these elements in detail to understand how they make Indian Startups successful.
Reduced barrier to entry through Innovation
Innovation at any stage of the product lifecycle has a big impact on pricing. And almost every time it leads to a reduced price and therefore a reduced barrier to entry for the consumers. If startups can come up with innovative ways to produce, market, and sell their products then perhaps they can offer something that is not already there in the market, or even if a similar product is out there, it’s not available at the competitive price you are capable of offering as a startup.
Aligning your Startup’s vision to the national agenda
India as a nation is developing at a rapid pace and there are a lot of incentives and support for startups that contribute towards a national goal. Take Electric vehicles, for instance, they support the government’s vision of reducing emissions and making India carbon neutral, so even if an EV startup is not capable of surviving on its own, there’s a huge possibility that it will survive because the government wants it to.
But that’s not the only reason your startup should be aligned with the national agenda. History tells us that anybody that has tried to create value for the people of this country and tried to uplift them has been successful and prosperous. Take the blessed house of TATA, for instance, they have given India it’s a first power plant, its first 5-star hotel, its first steel plant, its first automobile company, its first indigenous airline, and a lot of things that truly reshaped India as a nation. And that’s how they became one of the biggest and most trusted conglomerates in the world.
CAC < CLV
CAC or Customer Acquisition Cost is simply the amount you spend to get a customer. So suppose you spent Rs 100 to acquire a customer through Facebook ads, then your CAC = Rs 100. And CLV or Customer Lifetime Value is the amount of money you make from the customer during the time they are with you. So if the new customer acquired spends Rs 1000 on your products in the time they are with you, then your CLV = Rs 1000. And as long as your CAC is less than your CLV, you will make profits. Plain and simple.
Startups sound cool, and entrepreneurship sounds cool, but being an entrepreneur or being a part of a startup is a completely different experience. You will face a lot of challenges as an employee at a startup, or as an entrepreneur and you have to make your way through them and make consistent efforts to make things happen. And therefore, it is extremely important to know what works and what doesn’t, so that you can direct your efforts in the right direction.