Ok, What is wrong with Indian Startups? Let’s discuss it!
Many point out how ‘Jugaad’ mindset promotes innovation in India’s startup world. However, the bitter truth is that startups are not always flashy or promising and Jugaad is not what makes startups successful.
While we reached a milestone of 100 unicorns last year (2022), around 2000 startups shut down. And this shouldn’t be surprising because a study revealed 90% of Indian startups usually fail within 5 years of their formation.
Yes, 5 years….
It’s the ultimate goal for any startup: to reach the coveted unicorn status. But what happens once that milestone is achieved? Unfortunately, many of these high-flying companies find themselves in a struggle to turn a profit, often burning through cash just to survive in the cut-throat market.
Shockingly, only 15% of unicorn startups are actually profitable! As a result, it’s not uncommon to see headlines of layoffs and sudden pivots in business strategy. So what’s really the issue here?
Why are so many Indian startups struggling to make it in the long run? If you’re passionate about the world of entrepreneurship and curious about the answer to these questions, then keep reading this blog.
Problems With Indian Startups
Over Estimation of Market Size
The dawn of a new year should bring hope and positivity, but for employees of ShareChat, 2023 started with a grim email from their CEO, Ankush Sachdeva. Rather than extending warm wishes, the email announced a mass layoff, with 20% of the workforce being terminated till April 2023.
In the message, Sachdeva explained the reasons behind the difficult decision. He acknowledged that the company had overestimated the market size and that the growth they anticipated did not materialize as expected. Additionally, the global liquidity squeeze proved to be more severe and prolonged than they had predicted, making it even harder to secure the necessary funding to sustain operations.
But the over-estimation of market size is not just a story of ShareChat, it’s a common struggle for startups everywhere.
India’s population of 1.4 billion people may seem like an endless pool of potential customers, but simply having a large population does not guarantee success in the marketplace. In fact, many startups make the mistake of overestimating their potential market, leading to unrealistic growth projections and ultimately, disappointment.
So, why is it so easy to fall into this trap? Let me shed some light on the matter.
Food & Grocery Startups Market Overestimation
Zomato, the food delivery giant, achieved unicorn status in 2021 and raised a whopping $1.3 billion through its IPO. However, just a few months later, the company’s Chief Financial Officer revealed that they would be pulling out of operations in 225 Indian cities. Apparently, Zomato’s performance in these cities was not up to par as they have overestimated their market size.
You might think that Zomato still has a substantial presence in the remaining 1,000 Indian cities, but there’s a catch. The company is not turning a profit in the 800 cities where it continues to operate. In fact, a staggering 60% of Zomato’s revenue comes from just eight of the country’s largest cities. This raises an eyebrow when we consider that Zomato is a unicorn, and yet depends so heavily on a handful of urban locations to generate most of its revenue.
Unfortunately, this is not an isolated problem – many startups face similar challenges when it comes to achieving profitability across a wide geographic spread.
Let me illustrate my point with another example.
You may be familiar with Country Delight, an online grocery delivery service that made waves with its announcement that it was targeting families with an annual household income of INR 7-8 lakh.
According to Country Delight, this particular customer segment is more likely to pay for premium products. But why is that?
The co-founder of the startup explained that Country Delight can only turn a profit in metro cities, which seems odd because 80% of groceries in India are sold in tier-two cities. The reason for this discrepancy is that people in tier-two cities tend to rely on local “Kirana” stores rather than online grocery delivery services.
In fact, there are over 1.1 crore Kirana stores in India, with 80 lahks located in tier-two cities alone. This creates significant competition for online grocery delivery services in these regions.
As a result, companies like Country Delight have focused their efforts on tier-one cities, where they can find customers who are willing to pay a premium for products and who prefer the convenience of online shopping over visiting a Kirana store. This example highlights the challenges that startups face when expanding into new markets and the importance of understanding local market dynamics.
E-commerce Startups Market Overestimation
Let’s examine the e-commerce sector, which I feel is even more convoluted than the food and grocery delivery startups.
Meesho, a well-known company, claims to provide the best price on every product with their famous tagline “Meesho–Sahi-sahi lagaya hai!”
Meesho originally operated on a social commerce business model. In this model, women from small towns and cities acted as resellers who first buys products from Meesho and then use communication platforms like WhatsApp and Facebook to sell them in their communities.
This business model is known as B2B2C, where resellers purchase products from Meesho and then sell them to others, earning a profit in the process. Meesho even branded itself as India’s #1 Reseller’s Brand.
However, Meesho soon faced some significant problems:
The first one is many of its customers were one-time buyers, and the average order value was around INR 200, which limited its profit potential. To address this issue, Meesho revamped its business model from B2B2C to B2C, similar to Amazon and Flipkart, which involves selling products directly to consumers.
India has 30 crore households, but only 1 crore households contribute to 50% of all consumption.
Moreover, these households are located in the top 6 Indian cities, while the next 4 crore households are found in the top 80-100 cities. The next 4 crore households are price-sensitive and carefully consider their spending. They only part with their money when they see great value in a deal.
This is where most Indian startups and e-commerce businesses struggle, despite having the advantage of a vast population. It’s like swimming in an ocean while being thirsty.
Another significant problem that Meesho and other e-commerce companies face is a high return rate, particularly in the online fashion industry, where the return rate is nearly 50%. This means that 50% of people return the products they purchase, contributing to the high return rate.
In summary, Meesho faced two significant challenges: first, only 1 crore households usually purchase products from the company, and second, the next 4 crore households purchase only when the company offers attractive discounts and contribute to a high return rate.
What is the major consequence of overestimating the market?
The major consequence of overestimating the market is companies end up receiving considerable investment, but they can’t generate adequate profit and hence they have depended upon heavy cash burn and layoffs to survive the market.
Consider Teachmint, an ed-tech company valued at INR 4,000 crores. Sounds impressive, right?
But what if I told you their 2022 revenue was only INR 80 lakhs? Despite the significant investment, Teachmint struggled to turn a profit or even generate considerable revenue. Unfortunately, many companies make the same mistake of overestimating the market and end up having to shut down their operations.
Zomato is a prime example, having to terminate its services in cities where revenue fell short of expectations. It’s a harsh reality of the business world, where even high valuations can’t guarantee success.
Now moving ahead let’s discuss some other problems with Indian startups.
Indian startups face a multitude of challenges and technical reasons often contribute to their underperformance. Let’s understand the case with an example.
Big Basket, an online grocery delivery company launched in 2011, and was acquired by the Tata Group in 2021. Big Basket introduced “slotted delivery” concept allowing customers to choose delivery time slots, providing the company with greater organizational freedom to manage low-cost and high-volume delivery.
However, the pandemic brought about a change in the market with the emergence of companies like Swiggy Instamart, Blinkit, Dunzo, and Zepto, which promised delivery within 30 minutes of ordering, eliminating the need for pre-selected delivery slots.
As a result, Big Basket’s current delivery model couldn’t survive the rapid change resulting in market share dropping from 50% to 30%.
Barrier To Entry
In the world of business, creating barriers to entry can be the key to establishing dominance in an industry. Just like the case of Big Basket, whose successful implementation of “slotted delivery” gave them a competitive edge until newer companies offering faster delivery emerged. To prevent such competition, companies need to create barriers that make it difficult for newcomers to enter the market.
For instance, Reliance’s business in the oil refinery sector is protected by high entry costs and government regulations, which keep new competitors at bay.
Asian Paints is another example of a company that established dominance by creating a barrier to entry. They invested in technology early on, purchasing India’s first private computer in 1970.
By using this technology to track their products, Asian Paints has accumulated a database of 50 years’ worth of data on the color, size, and quantity of paint purchased across India. This data allows them to predict product performance accurately and spend only 3% on distribution costs compared to the industry average of 30%.
A new entrant in the market would have to spend significantly to acquire customer data and develop a predictive model, putting them at a disadvantage against Asian Paints.
LTV/ CAC Ratio
Meet Suresh, an avid user of a grocery delivery app. Suresh fills up his cart with dairy products and other necessities, and applies a coupon code that instantly reduces his bill by 20%.
But as soon as the discount offer expires, Suresh switches back to shopping at his local Kirana store.
Now, a grocery startup will lose a potential customer & a common challenge faced by many Indian grocery startups. They need to spend a significant amount on marketing and promotional activities to attract customers, but customers tend to abandon the app once the discount offers are withdrawn.
The cost incurred by a company to acquire a single customer is called Customer Acquisition Cost (CAC). Marketing can be beneficial for a business, but only if it generates enough revenue from the acquired customers. The amount of money received from a particular customer is known as the Lifetime Value (LTV) of that customer.
The ideal LTV should be three times the CAC. However, for most Indian grocery startups, this ratio is only 1.5.
Let’s take a look at Physicswallah, a profitable Indian ed-tech startup. The company has achieved this feat by keeping its marketing costs low. In FY21, while BYJU’s spent a whopping INR 2,500 crore on marketing, Physicswallah spent less than INR 1 crore.
This is mainly due to the founder Alakh Pandey’s immense popularity on YouTube. As a result, Physicswallah didn’t have to spend a lot of money on marketing and promoted itself organically.
This is why the company can generate a profit. Besides this, Indian startups face other challenges as well.
In recent times, the global economy has been witnessing a downturn, which has impacted Indian startups. In the past, American investors were willing to invest billions of dollars in Indian startups because of low-interest rates.
However, due to the surge in interest rates in the US, investors are now hesitant to take risks. Consequently, they are looking for high-return investments in the US, rather than investing in Indian startups, which are perceived as risky. As a result, startups in India are facing challenges in securing funding. This year, startup funding in India hit a nine-year low. Investors are now urging startups to generate profits to become self-sufficient.
Despite these challenges, the Indian startup sector isn’t all doom and gloom.
Let’s Talk about Positives
The Indian startup ecosystem has undoubtedly made significant progress, as evidenced by several startups sponsoring the IPL, a scenario that was not always the case.
There have also been success stories, such as Zetwerk, which generates massive profits by assisting other businesses in manufacturing a wide range of products, from steep pipes to aircraft engine components, through bootstrapping.
Zerodha is another triumph story that has made crores in profit without relying on foreign investment, benefiting both founders and employees.
In addition, startups have created more job opportunities, with the number of startup jobs in the Indian economy increasing, not only in tier-1 cities but also in tier-2 and tier-3 cities. Nearly 50% of startups were established in tier-2 and tier-3 cities, according to government data.
Furthermore, Indian firms have created products that foreign firms have not, such as Paytm’s soundbox; it’s pure Indian innovation and is a real problem solver.
Nonetheless, we must keep in mind that not every person in India can serve as a consumer for online grocery businesses. However, as the income of this group of people increases, they will enter the country’s middle-class economy, allowing startups valued at crores to generate the revenue they promise.
Perhaps that’ll allow Zomato to deliver Biryani in my small town as well.