Why Do 9 In 10 Startups Fail in India?

An undeniable fact is that, over time, human lives are becoming increasingly convenient. Shopping has become a household norm; services can be ordered with a click, and the products we use now are innovative and automated.  

However, what fundamentally drives this progress? The answer lies in the motivation behind the creation of every small startup. People have several difficulties in their daily lives. From the lack of timely cab services to the requirement for simple transaction facilities. 
 

The inspiration driving many small startups we see is to address such problems. But still the startups fail? Let us look at the reasons why 9 in 10 startups still fail.

Current Startup Scenario In India

Though many small startups have grown to be household names in India, it seems that the idea of coming out of the sheep herd and working on a potential idea is still a distant option today. 

India has done tremendously well in the past years in regard to startups. The number of successful startups every year has been on the rise in the past decade. This has also contributed well towards the GDP of the nation listing India as the fifth largest economy of the world.
 

India has done super well in the world's startup landscape. It has become the nation with the third highest number of startups globally. Also, in the past few years, Indian startups have witnessed an extraordinary amount of funding, most coming from fintech, med-tech, and ed-tech companies. 
 

According to Government data, the number of startups in India has increased by 15X in the past few years. The number of investors has also seen a tremendous increase of 9X. An unicorn is a startup with a minimum valuation of $1 billion. 
 

Here is a list of the number of unicorns each year (2011-2023).

source

Thus, there are 111 unicorns in India with a total valuation of $350 billion (approx). Along with these big players, there are numerous smaller but effective startups built with great innovation and ideas. There are more than 1 lakh registered startups in India, with Bangalore being the hotspot, from where many startups hail. Apart from personal success, these startups have also created many direct jobs in the country.

Source
 

However, considering our country's vast population, these numbers are still minimal. On the other hand, China, with merely the same population as ours, is producing numbers that are way bigger than ours and is also growing at a rapid pace. 

As we continue this blog, we'll try to learn more about failed startups, with an emphasis on why startups fail in India.

What Does A Startup Mean And What It Takes To Be An Entrepreneur?

We hear about startups at least once a day nowadays. It's always in the news. So, What is a startup? Let's know it better. 

A startup is a new venture focused on starting a business with innovative ideas across various fields. But how is this different from any regular business like an electrical shop? A startup, though, is a business that has to have many other characteristics to it. Some of them are:

• Scalability: A startup must be scalable. Growth is directly proportional to scalability. Your product or service must reach a larger audience, and there are many factors associated with it, like business model and creating demand.
• Innovation:  One of the prime things that sets startups apart is their innovative nature. A startup should likely challenge the orthodox way of doing things conveniently and appealingly for consumers. Startups that are focused on unique ideas that are highly scalable and in demand have high potential and are very likely to succeed.
• Funding: Growth comes at a price. In any market, it is tough for a startup to grow by itself. Funding allows a startup to use the financial help and guidance of experienced individuals and organizations. Funding works by exchanging equity (a percentage of ownership) for money and guidance. For this to happen, entrepreneurs must pitch their startup ideas to investors.

The success of a startup is mostly dependent on the entrepreneur, and thus, some investors also often invest in the entrepreneur rather than the product.

Successful Startup Rate In India

In India, the startup success rate stands at 10%, significantly lower than the global average of 33%. However, this rate has been seen to increase for individuals with prior experience with successful startups and is also dependent on the industry.

Below is a depiction of the total number of startups in India compared to other countries:

Source

Businesses in the fields of financing, export, distribution, and large-scale manufacturing are likely to be more successful in India for various reasons:
 

• The Indian market seeks credit-based payments. The lack of cash in the market can be utilized in various ways to generate revenue. Lending money in the form of credit for a particular service that ordinary people need daily is a good idea to start.
• Buying a commodity in Indian currency (Rupees) and exporting it in dollars can always be an easy option for profitability.
• Having or Building access and connections to a no. of markets and other distributors plays a vital role in earning from distribution startups.
• Investing in large-scale manufacturing can create great wholesale ability, which can be scaled using marketing.

India has a youth population share of 27.2%. This massive number will surely contribute to the country's startup ecosystem. Thus, the startup success rate in India is likely to increase with the increasing popularity of the startup culture among the nation's youth.

Failed Startups Statistics In India

Not every story is a success story. 

Though India has been a rising nation in terms of startups, the number of failed startups is also on the rise. Only a few of the startups in India make it big. On the one hand, young Indians in their 20s and 30s are becoming billionaires, transforming their startups into unicorn businesses; on the contrary, a significantly higher number of failed startups are taking place. To have a better look at this, let us look at how many startups fail in India:

• The failed startups rate in India is 90%.

Source

This disappointing stat explains the actual scenario of failed startups in India as it is still lagging in being a proper nurturing hub for mainly small startups.
 

• While the chance at success for previously successful entrepreneurs is close to 30%, this number is much lower for the significant portion of first-time entrepreneurs, at just 18%.
• The success rate at venture capital funding is 27% for male and just 17% for female entrepreneurs.
• The failed startups rate is highest in the Information Technology industry with a significant 63%.
• Below are different industries along with their failed startups rates:
  • Information Technology (63%)
  • Transportation Industry (55%)
  • Construction Industry (53%)
  • Services (45%)
  • Education Industry (44%)
  • Finance (42%)
  • Real estate (42%)
     

Source

The percentage of failed startups in the past years have been significant. The ratio of successful venture capital funding between male and female entrepreneurs is 6:10. That means for every ten successful VC pitches by males, there are only six females. Let us understand it better using the following figure:
 

Source

This shows the male vs female VC funding rate. While 27% of males exit VC funding successfully, the number reduces to 17% in the case of female entrepreneurs. 
 

With the boom of cryptocurrencies in recent years, many fintech startups are based on trading crypto. However, the reason for failed startups is also the explosion in the number of such companies in a very short period of time. Crypto-based failed startups are prevalent at a staggering 95%.

Some Big-Time Startups That Eventually Failed

It is not always the small startups that fail in India. Many times successful and established startups to get a share of failure. Let us talk about some of the failed startups:

1. Koinex: During the cryptocurrency boom, many startups started as an online platform for trading and holding cryptocurrencies. One of many such companies was Koinex. Within a short span of their launch, they recorded $246 million in trade and almost 45000 new users in a day. The thing that didn't work for them was the timing of their launch. It was started way back in 2017, just a year before when Govt. banned banks dealing with crypto exchanges. Though they took the matter to the Supreme Court, it was of no result. And finally, they had to shut their doors and conclude themselves as one of such many failed startups.
    
2. PepperTap: This online grocery store was one of the failed startups that was launched in 2014 only to function for two years and closed in 2016. Though it raised a massive $50 million, this led to the company offering disproportional discount rates and offers to increase customers and grow money for the investors. But that didn't happen; the costs the company needed to bear were too high compared to the profit it made. 
    
3. Stayzilla: Another example of a failed startup that is based on online homestay booking. It was founded in early 2005 and closed in 2017. It was an Airbnb business that spanned across several cities in India. It also received a funding amount of $33.5 million, which made the company significantly bigger. But with the advent of new competitors, the downfall began. On one hand, as other companies often offered discounts, Stayzilla couldn't. Their cost of operations was too high which made them lose money every year.
    
4. Zoomo: Zoomo was an online platform for buying second-hand cars. Unlike other companies like OLX, it inspected and listed cars for others to buy. It was founded in 2014 and ceased operations in 2016. It was well funded with almost $10 million. However, the prices they set on their cars were not justified, so only 10 out of 100 cars were sold, which was not sustainable.

Reasons Why There Are Failed Startups

The success of a startup is not only dependent on an individual but also has many factors associated with it. Most startups begin with the idea of solving a problem or making lives easier. Thus, it also must receive support in all aspects from the community and Govt. for it to be successful. 

In India, the startup ecosystem is lagging in many aspects. A significant number of venture-based startups are shutting operations with the same speed with which they were formed. The reasons behind this should be closely studied and analyzed. Thus, let us try to understand the reason why startups fail in India.

• Government Regulations

The Indian Government has done well in popularizing the concept of startup among the youth. It has even announced that 16 January every year is "National Startup Day." 

Schemes like Flagship Startup India project, SIP-EIT, and Stand-Up India are helping nurture the startup ecosystem of the country. However, many startups face problems while doing business in India. 

Foremost, the high tax system in India forces many small startups to change their business models to generate more revenue and be sustainable. This leads to compromises in other aspects of their products or services, such as quality, insurance, workforce, etc., which in turn affects their businesses. 

For big startups, registering their businesses in other countries like UAE and Singapore seems a better option to avoid taxes. 

Below, we look into a few examples of startups that are affected by Government laws:

During the initial crypto boom, many companies that provided platforms for trading crypto were banned by the Government to resume operations.

Due to high tax rules and regulations, startups like Byjus and Groww had to register their companies out of India. Various MSMEs have failed to cope with the tax regulations.
 

• Lack of Dynamic Nature

One key factor behind the success of any startup is its dynamic nature. It must be able to adapt to the changing market. A startup's flexibility contributes largely to tough times and growth opportunities. Some of the examples of failed startups that weren't flexible enough with their policies are:

SnapDeal: One of the fierce competitors in the Indian e-commerce market, SnapDeal is nowhere to be seen now. One of the prime reasons behind this is that the company spent huge amounts of money on advertising even when it was not doing well. Its rigid idea of rebranding failed miserably.

Zoomo: As talked about earlier, the company was doing well with a great funding round in their pocket. However, while their competitors, like OLX, were using a preferable C2C model, they were still using the approach of selling their company-listed cars, which proved to be worse for them.
 

• 
  Building on Discounts and Offers

Offers and discounts are two crucial tools that various startups use to climb to success and earn revenue. Many companies that obtain VC funds try to earn revenue mainly by using this strategy. While doing so, many times, the quality of the product or service is compromised. Thus, when the prices are reverted to normal, a decline in revenue is seen as customers then opt for other options. The image of such companies is solely based on discounts and offers, thus losing the trust and credibility of their customers. 

• Lack of Experience

Many times, people jump into the field of entrepreneurship with the mindset of building a startup with any idea and just adequate planning, and then they go around asking for funds from investors. A startup never works like this, nor does an investor provide funds to such startups. Before any funding, the startup must be able to generate income in a self-sufficient manner. Thus, a startup must have a proper plan that works and is able to generate revenue without any external funding in the first place.
 

• Lack of Funding

Funding plays a major role in scalability. One of the primary differences between a startup and a business is that startups are scalable. Startups that have the previously mentioned qualities and are generating revenue must go for Venture Capital funding or do what is required to attract and pull in investors. Without such funds, a startup cannot grow. The co-founders and CEO of a startup must have good communication skills, confidence, and knowledge about the present and future plans of the startup in order to present a good enough pitch to their investors. Let us look at some startups that dissolved due to lack of funding:
 

Auto.in: The startup was a service-based one that delivered car-fixing services on order. The unique thing about it was that Auto.in provided their services by directly going to their customers' homes. Though the startup had potential, it eventually failed, one of the prime reasons being a lack of funds. Auto.in was self-funded; the owner put in around $10,000 from his pocket and could only earn a revenue of $5000. This shows how vital external funds become in startups.

RoomsTonite: Around the same time Ritesh Agarwal started OYO, RoomsTonite was doing the same work. The company provided last-minute hotel bookings with a market of around 4000 hotels in 325 places in India. They were also on the verge of raising around $1.5 million, but it didn't happen as planned, which led to the company's struggle to continue its services.

 

• Competition 

The one thing to learn from the mistakes of many failed startups in India is to keep an eye on competitors. Competition is prevalent in any field in a country like India. Thus, the startup world is no exception. Many businesses just copy and paste business models of other companies to gain shortcuts to success. And many genuine startups also fail to recognize and outgrow their competitors in their respective markets. This leads to the downfall of many startups, primarily that are small and growing. Let us review some examples:

Dazo: Started in 2015, Dazo was a food-tech startup that provided on-demand food delivery from some selected restaurants. They made a sensible approach to have only specific food items that their customers craved the most at discounted prices and deliver to them in minutes. However, this startup, though well-planned, only made it short. Startups in the food sector require heavy investment for marketing and scaling. However, Dazo didn't have those, while its competitors, like Zomato and Swiggy, gradually became popular in the market. Consequently, with the decline of its customer traffic, this company had to shut down its operations.

• Wrong Timing

A startup's success depends strongly on its surroundings. Factors like market trends, government laws, and the country's geopolitical situation significantly impact companies. Thus, new startups must consider 

these factors before launching their products or services. 

Things Startup Should Not Do To Fail

A startup is like a baby; it must be adequately nurtured for it to grow. With such a minute success rate, startups are still growing as a career option today in India. But still, 90% of startups fail in India. Thus, we should explore ways in which we can learn from the mistakes made by failed startups in India. 

So, here are the don'ts of a startup:

1. Inadequate market research: Before launching any product or service, the most logical thing one must do is study the market—the preferences of people, the demand for the product, the economic background of the area, and so on. Market research provides vital information about a product or service's scalability. Without inadequate market research, a startup will be directionless and result in one of many failed startups.
    
2. Hyperscaling too early: Scaling is important for any company to grow. But sometimes, to meet the revenue demands of investors regardless of profits or losses, startups go for hyperscaling with the help of discounts, offers, and distribution systems. Most of the time, this results in a decline in customer trust and brand name and easier competition for other companies. Once the price model is shifted to the normal range, the customers will show no loyalty and opt for other company products that are on discount.
    
3. Not keeping an eye on competitors: Along with being a huge market in terms of consumers, India also has a vast number of startups, which are increasing daily. This creates more friction in the market. Thus, a startup should always keep an eye on its competitors to try and maintain its space in the market. Moreover, before starting a venture, one must study how competitive the market already is and in what ways the startup can be built in a different and more appealing way.
    
4. A flawed business model: Startups will eventually cease to grow without a proper business model, even with appropriate funds. A business model is an outline of how a startup is going to make money. With time, some business models get outdated. Thus, it is essential to stay with what works in the market. Companies like Zoomo and Jobridge are some examples of failed startups due to a flawed business model.

In Conclusion

In the world of Indian startups, entrepreneurial journeys are shaped by the intersection of success and failed startups. The outcome of initiatives is influenced by various factors such as market dynamics, regulatory obstacles, and strategic errors. 

Although mistakes often accompany harsh lessons, they also impart valuable skills crucial for managing the challenging startup scene. As India develops its entrepreneurial ecosystem, it is our joint responsibility to provide resources and guidance to budding businesses. 

Sustainable businesses can be achieved by adopting an innovative mindset, learning from the past, and creating a welcoming environment. If you are looking for business growth and hassle free taxation, compliance and registration, you can contact Filing Buddy. Through promoting resilience and adaptation, we can foster an environment in which startups thrive, benefiting the economy as well as the society.