Innovate or Wither: Why Indian Startups Fail?

NEW DELHI, INDIA: Indian startup TinyOwl, a restaurant delivery service that had raised more than $27 million from investors like Sequoia Capital and Matrix Partners, has stopped its service in all cities except Mumbai.

Headquartered in Mumbai the startup was previously present in eleven large Indian cities. TinyOwl has been in news from quite some time. Last year its co-founder Gaurav Choudhary was allegedly been held hostage by the employees in Pune who were "laid-off" by the online food ordering startup.

Last month, Hyper funded grocery delivery startup PepperTap shut its operations to focus on expanding their own logistics business.

Heavy discounting for price conscious Indians has made a negative impact on the Indian startup ecosystem. Even leading firms like Flipkart and Snapdeal have lost millions of dollar every month because of this redundant policy.

All these startups loaded with investors’ money entered the business and offered services for very cheap, but in the end they forgot that profitability is essential to survival. So what has turned bad for the Indian startups after the ‘glorious’ last year when every investor had to invest in some startup? Through this article we explore the bad sectors which are damaging the startup ecosystem.

The Idea

There is a huge difference between “replicative” entrepreneurs and “innovative” entrepreneurs. Indian startups or to be more precise the overall Indian system, be it society, economics or fashion for that matter runs on herd mentality. Call it collective failure or common paranoia against doing things differently. Most of us remember that glorious phase of Kota coaching institutes when every other family wanted their sons or daughters to be engineers. Then came the MBA phase when every other person was armed with an MBA degree from third class institutes’ which had mushroomed all over Ghaziabad, Meerut or other parts of the country.

Indian startups are going through the same patch. There is a reason why Israel has, per capita, the most startups in the world and they are very successful. Israelis have a knack for identifying a problem and coming up with a technological solution to solve it. With no natural resource they have survived only because of technology and innovation.

Collective fear breeds herd instinct. Many startups are simply clones of their foreign counterparts. Apt to call them copycats but entrepreneurs are filling emerging market gaps with tried-and-tested business models. To quote George S. Patton, “If everyone is thinking alike, then somebody isn't thinking.”

The Money Angle

Indian startups are very different from their western counterparts. A large number of western startups receive funding from friends or family as there is a lot of competition among entrepreneurs to get venture capital money. Due to this, venture capitalists are extremely cautious in doling out funds.

It is necessary to add more constraints to the money supply received by the Indian startups. An uncontrolled supply of money is not the best way to go ahead and 2016 is going to be a year for rationalization in investments.

Hey, Even I will Open a Startup

Post Flipkart, Snapdeal, far too many individuals with no real entrepreneurial ability have joined the tech-enabled startup fest.

It is a surprise that many of them have succeeded in attracting initial funds from some of the most experienced and respected investors.

However, as expected, the initial buzz around these entrepreneurs died down very soon. And now, investors are expecting these businesses to start focusing on generating revenue and profits. Many of these media-hyped startups do not possess solid business model since the beginning; so generating real revenue and real profits is completely out of the question.

Cost of Acquiring Customer

President & Chief Operating officer of Japanese giant SoftBank Corp Nikesh Arora has said that e-commerce startups in India should focus on the customer proposition and different ways to captivate them, instead of burning cash by giving out discounts.

E-commerce startups should refrain from this short term tactic of “discounting”.

Morgan Stanley's recent markdown of Flipkart's stock has raised questions not only on the online retailer's latest fundraising but also on the entire ecommerce ecosystem.

This steep markdown in valuations of some successful Indian startups can be partly attributed to the high stress on discounting. Also, many startups depend on capital injections from investors and VC’s and some have also closed down.

To Conclude

Innovation happens when people from different backgrounds come together, think out of the box and challenge each other.

Last year, NR Narayana Murthy rightly said that there had been no significant invention/innovation in India in the past 60 years, and that our elite educational institutions had failed in this respect. He further added that 150 fundamental technological innovations from MIT alone have had wide-ranging impact. These include things like email, the transistor, the human genome project, radar, e-ink, color movies, spreadsheets, PET scans and RSA encryption to name a few.

Our education system exists in a silo just like the startups and a lot needs to be done to produce cutting edge products and services.

Flying high on easy money, high valuations and lots of consumer businesses Indian startups are chasing users with the hope of becoming feasible some day in the future. While some will succeed many will face rejection.