What Makes A Startup Fall Through

why startups fail

Some of the most successful businesses today began as Startups someday. Through relentless pursuit of discovery, innovation, and value creation they have grown and evolved into businesses often significantly different from their original ideas.

In order to build a robust startup ecosystem and to support entrepreneurs, the Government of India launched the Start-up India action plan in January 2016. Under this plan, initiatives such as relaxed norms, funding, tax exemptions on income and investments, the startups’ intellectual property rights protection (SIPP) were taken [1]. These have further made the Indian Startup ecosystem particularly conducive for enterprising individuals.

Thanks to faster connectivity and ever-increasing storage capacity, tonnes of data, statistics, MOOCs, and stories of success and failures are available. Data, they say, is the new oil. Many startups have successfully used data to outperform well-established competitors. However, with ease of doing business comes cut-throat competition. 90% of startups are observed to fail within the first 5 years of incorporation [2]. Only those who can mine and refine the available data can extract value from it.

An enterprising entrepreneur may either choose to be discouraged knowing the high failure rate or to use that knowledge and data to succeed. Just as every success story motivates, every failure story allows us to learn without making expensive mistakes.

Here are some of the most common factors known to be responsible for the failure of most startups in India.

Lack of innovation – 70% of venture capitalists have said that Indian startups lack innovation [2]. Thrilling success stories of some startups motivate many aspirants to jump on the bandwagon. In the process of joining the race, several startups fail to sufficiently differentiate themselves from existing businesses; often with the idea that even a small piece of the pie – India’s large domestic market, would be significant enough for them to meet their targets. But an attractive market continues to attract new entrepreneurs and only the fittest survive.

Lack of leadership/passion/skill – Indian entrepreneurs happen to be among the youngest in the world. Over 80 percent of engineering graduates in India are unemployable [3]. Apart from lack of experience; missing skills, incompatibility of teams, and lack of common vision often lead to poor management and hence failure.

Lack of financing / poor cash managementDespite efforts taken by the government to fund entrepreneurs, perhaps due to a combination of the above factors, startups fail to attract investment. Even with access to funds, proper deployment of available funds to ensure sufficient ROI is essential to maximize value creation. Few manage to create value by cost-effective means.

Wrong Market / Product – Insufficient research before entering a market and failure to meet or adapt to the constantly changing customer expectations when already in the market, also results in a significant number of failures.

Lack of Research – With the ever-evolving markets, continuous awareness of the competitors, the consumers, regulators, financial markets; along with efficient use of analytics to glean relevant information from the noise is becoming increasingly more crucial for survival.

Footnote/References:

[1] Annual Report 2019-20: Department for Promotion of Industry & Internal Trade Ministry of Commerce & Industry Government of India

[2] 2016 Survey by the IBM Institute for Business Value, in collaboration with Oxford Economics

[3] “Over 80 percent of engineering graduates in India unemployable: Study.” The Economic Times. January 24, 2016.