"Nine out of ten startups fail in their very first year of operation." Not only this, more than two-thirds of them never deliver a positive return to their investors. Now, as an entrepreneur, you might have come across these stats at some point in your life. But the trivial point to be questioned is - Why do so many startups end up disappointingly, and what can we learn from these failed startups?
Well, before unraveling these mysteries, let's dive into our Indian startup ecosystem.
Indian Startup Ecosystem
Currently, India has more than 50 thousand officially recognized startups which makes it the third-largest startup hub in the world.
The Indian government has also taken several initiatives like Startup India and Atal Innovative mission to promote this culture. However, despite our nation having so much technological advancement, investments, and a young working population, more than 95% of startups fail in the first five years of their launch. Insufficient funds and wrong market timings might be among the reasons, but these are certainly not the primary ones. We have collated a list of reasons about the cause that lead to the downfall of such startups that once dominated the Indian market.
1. Lack of innovation
Let us start with a simple question - How do you build a startup?
Indeed, you don't wake up one fine morning only to quit your job and create a copycat model of an already existing startup!
A sane person would identify a problem and create a startup as a part of its solution. In other words, startups gain recognition because they offer innovative solutions to human problems. Startups prosper because they have something unique to offer; Something that has not been in the market yet. And when they fail to do so, they lose their competition to well-established companies.
Not so long ago, brands like Nokia, Micromax, and Spice aced the Indian smartphone market, but they lost this smartphone race with the arrival of cheaper and better products from foreign brands like Xiaomi. Lack of innovation and poor supply chain were among the primary reasons for their failures. It was easy for new sellers to enter the technologically advanced products at an affordable rate.
2. Failure in identifying the suitable customer base
No matter how exceptional the quality of a product is, if the startup fails to identify a relevant customer base, it is bound to fail.
When a particular startup targets a specific audience, it reduces their competition and the size of the market they step in. As a result, it helps them to evaluate the return on investments. But, an erroneous target audience leads to fewer sales and an inflated cash burn rate.
For instance: Askmebazaar offered listings of all businesses in the market on its platform and raised a seed capital of $300 million. Their target audience was people living in Tier 2 cities like Kanpur, Banaras, Kota, etc. The only problem was that they offered so many services like AskmePay, AskmeGroceries, and many others that their users were often confused. This confusion became a barrier for Askmebazaar to generate profits. Later the startup had to wind-up due to capital deficiency.
Now, all this happened due to the startup's inability to identify the correct audience base, no product differentiation, and, of course, poor marketing strategy.
3. Negative brand image
Do you remember how Amazon could tap the e-commerce market in India despite the presence of our desi brand- "Flipkart.” Yeah! It was due to its niche customer service.
In its initial phase, a startup consumes most of its resources and time in marketing. But, once it gains some recognition in the market, it becomes harder to sustain the reputation gained through years of hard work. One wrong tweet and they lose all their investors and audience base.
Good brand value establishes trust and builds networking in the market, which results in increased revenue. Therefore, maintaining a robust and positive online presence is critical, which begins with harboring a healthy, respectful, and friendly workspace.
For instance: AIB - a Mumbai-based comic roasting and ranting company, had to shut down its operations because of continuous sexual allegations against its owners. It was ranted for an unhealthy work environment, and finally, AIB fired all its staff members and dissolved after six years of continuous operation.
4. Not upto the mark service
Before understanding this point, answer a simple question- What aspect do you look for while ordering food online from a new restaurant? Well, apart from checking its menu, you scroll down to check its ratings and reviews and then decide to give it a go!
Customer feedback is a marker of the company's excellence and reputation. They leave a massive impact on future clients as well. Often, Indian entrepreneurs assume that a cheap solution is the best solution for their clients. As a result, they stop focusing on their products, leading to a negative feedback loop among their consumers. Poor product service weakens consumer relationships, spoils brand value, and causes hefty financial and operational costs.
For instance, Foodpanda was backed by Tencent and raised Rs 400 crores. It connected customers with restaurants, but today it is not in service. Wonder what went wrong?
It was due to the poor customer service. The restaurant aggregator lacked to properly track orders and set up a link between both parties. There were many instances when customers complained of wrong orders. On receiving customer queries, Foodpanda failed to deliver their requested order on time.
As a result of which, it lost track of its losses. Once it accomplished its operations all over Asia and Europe, today, Foodpanda doesn't operate anymore while its competitors like Zomato and Swiggy thrive because of their excellent service.
5. Excessive cash burn
In financial parlance, ‘burn rate’ refers to a company’s money towards its expenditures each month. It is a combination of all the expenses, including marketing, operating costs, salaries, etc.
Entrepreneurs usually create this notion where they assume that the higher the burning rate, the higher the startup's growth, but they often forget that it is not wise to invest entirely blindly when the startup is in its initial phase. At the same time, not spending appropriate money where it is required is also not wise. A planned cash burn rate helps in making proper investing decisions and calculating ROI. Investors criticize and compliment the market for its unpredictable nature.
The high cash burn rate has led to the downfall of many startups with enormous potential. MonkeyBox is one of the great examples of such a downfall. MonkeyBox was a Bengaluru-based startup that delivered nutrition-filled lunchboxes to school students. The startup was doing good, and it also raised seed funding in two rounds. But, it failed because of a high Cash Burn rate. MonkeyBox drained most of its cash in catering to the salaries of its kitchen staff; whereas their sudden expansion plans too failed their business model as they ran out of money.
"It's good to learn from your mistakes. It's better to learn from other people's mistakes."
- this quote by Warren Buffett perfectly sums up the above article. We often only look at the 'success stories' of unicorns but disregard the failures stories. But in the end, we get to learn a lot more from the failures rather than success. Failure of others helps us avoid making the same mistakes that they did, and in the case of startups, that is what matters the most!
So, what do you feel is the most important lesson to learn from the failed Indian startups? Tell us in the comments.