India has the third-largest start-up ecosystem in the world. By June 2021, 50,000 organizations were given the recognition of start-ups by DPIIT (Department for Promotion of Industry and Internal Trade), out of which 19,896 had earned recognition since April 1, 2020.
These startups have been predicted to grow YoY with an expected annual growth of 12 to 15%. They have changed the job market of the country by creating around 1.7 lac vacancies in 2020 -2021.
Amidst such a growing trend of startups and numerous success stories to follow, we can’t ignore that there are also several startup failures every year and millions of capitals are burnt in their formation only for them to dissolve in a few years.
According to a study conducted by the IBM Institute, 90% of Indian startups fail within the first five years of foundation. Amongst reasons, there are weak business models, gaps in leadership, poor planning, and incapable tech support just to mention a few.
For an in-depth understanding of the causes of startup failures, let us decipher the biggest no-no for startups to avoid disaster:
The lack of motivation and the burnout factor: Ideal work-life balance is uncommon for a startup founder and hence the risk of burning out is much high. Burnout was listed as a reason for failure almost 5% of the time.
Lack of motivation, inability to wear multiple hats at the same time have led many founders to experience burnout and hence quit.
Gurugram-based food tech startup Yumist which was founded in 2014 had to close shop in 2017. Yumist founders blamed their high growth model that led to a high burn rate.
Poor Management of funds: Running out of funds or not being able to secure investor interest/financing is one of the major reasons for startup failures. Stayzilla, the Indian version of Airbnb invested heavily in rebranding and scaling which led to cash crunch and their downfall in 2017.
After reaching a ballpark figure for basic expenses, figuring out the source of funds, allocation of funds, keeping funds strictly for business needs and revenue-based expense model is a must to build a sustainable startup.
Under-researched market needs: Overestimating the market needs for products/services is the principal cause of failure for a substantial 42% of all startups.
Finomena, a fintech start-up that focused on providing loans, a segment already saturated by other players, had to close down in 2018.
Using focus groups, analyzing market surveys, identifying demand gaps, and understanding trends is the best way to acknowledge and recognize if the service/product the startup is selling will be economically viable and have adequate demand.
Faulty Business Model: 18% of early-stage startups report problems with the scalability and costing of their business model. The pilot team of the startup needs to have a clear idea of the operation costs, source of earnings, estimated revenues, gross margins, and profit levels to make the right calculations.
JustBuyLive, an online app for retailers, despite their massive funding of 700 Crores failed due to their unscalable business model.
Inability to compete against market leaders and competitors: Obsessing over the competition is not healthy, but so is ignoring them. Fierce competition from market players like Amazon, Flipkart led to the closure of Shotang, an on-cloud marketplace for mobile and apparel startups.
It takes a keen business sense, powerful networking capabilities, flexible operation model, and credible experience to stay in business.
Poor Service and substandard product: Sometimes, the product does it all, and hence a flawed one has been responsible for a startup’s descent in 8% of the cases.
Overcart, founded in 2012 was the first Indian fintech to provide a platform for purchasing preowned electrical items. Late delivery, bad customer service, and poor quality of the items sold led to its fall in 2017.
Technology and Talent Acquisition: Among Global startups, 24% face everyday problems due to not having the right team and almost 7% fail due to unavailability of adequate tech solutions.
A carefully recruited, well-trained team with a self-motivated attitude is a must to handle various business needs. It is also important to build an employee-friendly culture.
Equally important is to have updated technology supporting the venture. Be it software, tools, platform, coding, the needed support needs to be implemented or the startup is left behind.
To conclude, to build a flourishing startup, and maximize the chances of success in the market one has to pay attention to the signs, learn from examples, and vet options carefully. Empower the right people, create what the customer wants, and build a sustainable business model to be a player in the long run.
