India comes right after the US and the UK as the largest start-up base in the world. However, a recent study, Entrepreneurial India, by the IBM Institute for Business Value and Oxford Economics said that 90% of Indian start-ups fail within the first five years. Lack of innovation is cited as the most common reason for their debacle.
Some of the long-time entrepreneurs this reporter talked to said their failure was due to excessive dependence on funding from investors and venture capitalists (an investor who either provides capital to a start-up, or supports small companies that do not have access to equity markets, for massive return on their investments), many of whom “chicken out when the bets go wrong”.
“A lot of investors and venture capitalists invest heavily in start-ups when they feel that the product/service being offered is promising. They tell you to go big on funds and not worry about anything else. But as the company fails to draw in profits, the major VCs, particularly the foreign ones, pull themselves out of the whole thing. My first start-up, which was a marketplace for business owners to order things needed for their daily operations, failed because of the initial funding boost. As first time entrepreneurs, we believed that funding was the only concern because everybody around was talking about that only,” a start-up entrepreneur, who is now working on his second venture, told this newspaper.
Legal advisors this newspaper talked to said that while funding proves to be a great milestone for any start-up, it is of no use if the idea is not well-received in the market.
With respect to the founder-investor relationship, a few entrepreneurs are of the view that too much of funding by the investor, binds the founder to the investor, hence pressuring the former to bow down to the demands of the latter.
“Start-ups do not have the physical network to ensure a quality delivery of goods to different parts of India. The ideas adopted by first time entrepreneurs are unviable and outside the reach of implementation. Merely having an online presence doesn’t guarantee that their services will sell, and this is what most of them fail to realise—99% of start-ups are bound to fail this way.”
“It’s a catch-22 situation. Investors will fund you, but then get over your head to get things done their way. Your vision diverts, your idea becomes a commodity, and the original idea gets lost somewhere. That handsome funding is a definite measure of success is a highly misguided concept,” said Vishal Sethi, founder of retail-based Boxania, his third venture in the start-up industry.
RUN OF THE MILL IDEAS
Entrepreneurs assert that angel investors (an investor who invests in start-ups and small companies, and is usually from the entrepreneurs’ family or friend circle) and VCs do not make informed and sustainable decisions. Rishabh Lawania, founder of Xeler8, a marketing intelligence platform recently acquired by a Chinese venture capitalist firm, told The Sunday Guardian that the lack of maturity amongst investors dooms the start-up.
Talking about a grocery delivery service in Gurugram, Lawania pointed out to the infeasibility of the venture that spent lakhs of rupees to cater to a population of a few thousands. Legal advisor Vijay Pal Dalmia reiterated the sentiment by citing the example of Grofers, a grocery-delivery service that closed shutters in nine cities in 2016 due to low acceptance of their services.
“Start-ups do not have the physical network to ensure a quality delivery of goods to different parts of India. The ideas adopted by first time entrepreneurs are unviable and outside the reach of implementation. Merely having an online presence doesn’t guarantee that their services will sell, and this is what most of them fail to realise—99% of start-ups are bound to fail this way,” Dalmia said. It is well known that some of the successful Indian start-ups (and their rivals) like Flipkart, Amazon, Ola, Uber and Airbnb thrive not because they exist as mobile apps and websites, but because their services sell.
However, Lawania noted that now things are steadily improving as a lot of early stage VCs are now mastering the art of diligence and taking more informed decisions.
Secondly, replication of existing models from the West, without a proper understanding of the Indian market, will not be successful. India’s start-up ecosystem, experts say, need top-notch technical talent and a mindset that takes into consideration the idea’s long term benefits rather than simply venturing into areas that are considered “hot”.
Unlike South Korea and Israel, which invest more than 4% of their GDP on research and development (R&D) of new products and technologies, the figure in India stands at 1%. Initiatives like Make in India and Start-up India have stimulated growth of start-ups with a range of initiatives like setting up of research parks and providing grants, yet, lack of successful innovation is getting in the way of building sustainable start-ups, experts noted. According to a survey called Contributors and Detractors: Ranking Countries’ Impact on Global Innovation, conducted by a US-based think tank, the Information Technology and Innovation Foundation (ITIF), ranks India near the bottom of a list of 56 countries on global innovation, and puts country’s poor performance in developing human capital as a reason for low rankings.
Dalmia also observes that entrepreneurs need to have a proper industry experience before they jump onto starting their own ventures, and should have the patience to allow the product to grow through the gestation period to develop a sustainable brand.