According to Forbes magazine, Startup failure rate is 90%. All the founders would like to be a part of rest 10%. As you can gauge from failure rate, It is not that easy. I am not discouraging budding entrepreneurs but we cannot turn our back towards the reality. In India, we don’t want to discuss the reasons for startup failure. At the macro level, we are not comfortable discussing failures. One of the national newspaper carries out, one FULL Page on startups every week. Till date, they have not discussed anything about failures. It looks like more of paid insert for the promotion of startups. It is good to be an optimistic and positive about happenings around us. At the same time, it is imp to be realistic. I personally believe in being realistic rather optimistic. Sometimes people mistook realistic people as pessimistic. There is a fine line between reality and pessimism. Those who can’t spot the difference consider being realistic is same as being pessimistic.
After the initial euphoria, in last three months, i am reading only negative news about startups. Some of the shockers for me are Housing.com, Foodpanda, Zomato, tiny owl etc. Though i will not be a right person to comment specifically on exact reasons. I studied some of the startups very closely. During my professional journey, large no of startups were clients of our organization. I interacted with them and understood their problems & challenges. I agree with Forbes that only 10% succeed rather can succeed.
With a startup failure rate 90%, how can we motivate and encourage potential entrepreneurs. The answer is very simple. We need to study the reasons for startup failure thoroughly and learn from the failure of others. A failure is not the end of the road but the beginning of the journey. In this post, i will share my learning’s i.e. reasons for startup failure. The best part is that founders of failed startups refuse to acknowledge the reasons. It further derails the learning process of new startups. Knowledge sharing is key to success in this domain but unfortunately, no one shares the key success factors. Maybe because of insecurity or, in reality, founders don’t know how they succeed :).
Startup failure – Top 5 Reasons Founders will not Accept
1. Me-Too Business Model
It is a harsh reality that most of the startups are me-too products/services or business models. I don’t remember the magazine name but it mentioned that 99% business ideas in India are copied from silicon valley. A me-too product/service can succeed being a first mover advantage but another problem is herd mentality. 10-15 more entrepreneurs will further copy the concept, re-modify, remodel and a new startup will be born. I don’t want to name businesses but food ordering apps are the perfect example. I also see a lot of activity in pet care, home services, and grocery space.
In my opinion, the probability of a startup failure is very HIGH in the case of me-too business models. I might sound harsh but copycats cannot succeed. A startup has to answer key question i.e. the value they are offering to their customers. If i am offering one of the hundred similar products available in the market then the customer should have a compelling reason to use my services/app/product. If there is no compelling reason then there will be one more addition to the startup failure list.
2. How to Monetize?
I do sympathize with the startups as it is very difficult to monetize in India. The Indians are value seekers. There are very few products/services in that we see the value and are willing to pay for it. Because of this reason, a lot of entrepreneurs prefer B2B business model instead of B2C business model. I shared in my post, High profit margin business ideas, the businesses that command premium pricing.
The perfect example is Facebook. They have whooping 138 Mn user base but net profit is paltry 16 Cr. Average revenue per user in the USA is Rs 630 whereas in India (2nd largest market), it is Rs 9 per user. The monetization is a big challenge and is one of the key reasons for startup failure. I am sorry to say but it is very difficult to make Indians pay for any service/product especially services.
3. Control Cost/Cash Burn
Personally, i observed, only those startups that controlled cost succeeded. This point is also linked to point no 4. By cost control, i also mean to control the cash burn rate. At the same time, it is catch 22 situations. It is difficult to say How much is too much? This is especially true for e-commerce companies and sole reason for their losses. As and when the funding is received, the e-commerce companies increase cash burn rate. According to wall street journal, In India e-commerce companies are burning hundreds of millions of dollars as deep discounts. In many cases, products were sold even below the wholesale price. E-Commerce is not for small vendors. At the end of the day, only 2-3 biggies will survive.
Last year, i bought a DSLR costing 38k for 27k. As my friend was working in the same company, therefore, i asked for better deal :). He told me that wholesale price is 29k. The e-commerce players with deep pockets can survive but as an entrepreneur, it can be a potential reason for the startup failure. Lastly, controlled cost without revenue model also signals distress situation. This is true for information based or mobile app-based startups. For example, recently i used a mobile app providing info on nightlife. Let me admit, it was an awesome app but as i shared in point no two, monetization is a challenge. The cost is controlled but revenue model is not kicking in.
4. Valuation Game/Scale-up
The majority of startups come into existence to join the mad race of valuation. The founders want to make quick bucks and exit. They scale up fast by opening 8-10 offices and hiring more no of people. The only tag that sells is of an IIT or an IIM. Trust me, it may or may not work. There is a famous saying in our mythology that you should not eat more than what you can digest. Some of the interviews with founders of successful startups are quite inspiring. In most of the cases, the founders did not withdraw any salary for initial few years and working wife was the only support. The point is the probability of startup failure is high if the founders are here to make some quick bucks. A valuation game is altogether a different domain. You should venture only if you know the rules of the game.
5. Labor/HR Issues
Though till date none of the founders attributed labor issues as the key reason for startup failure but yes it is. The startups dependent on logistics are not able to crack or solve this mystery. The logistics is a labor intensive domain. Some of the e-commerce players are tying up with India Post. In my opinion, this is the best strategy to control labor issues at the cost of losing control on logistics. Some other domains in which founders are struggling to control labor issues are grocery, on-demand cab etc. I shared my experience with UBER Cabs. The notorious drivers are spoiling the name of the company.
In grocery, improper handling or mismanagement may cause huge customer dissatisfaction. As i spoke to one of the founders of the online grocery store, the biggest challenges are to stop theft, damages, logistics etc. Moreover, it is low margin business, therefore, it is more imp to retain the business/customer. As i mentioned earlier that customer should have a compelling reason to order again. Discounts, Convenience, and Satisfaction are key to success in online grocery.
Words of Wisdom: A startup failure is not a good omen for the entrepreneurship Ecosystem. We should acknowledge the problems, learn from them and move on. The stories of million or billion dollar valuations inspire the youth of the country. At the same time, they should be aware of the challenges, limitations, and scope. The zeal to succeed, original thought process, conviction, confidence, and determination can keep you away from the startup failure club. There is no magical pill to launch a successful startup. It is a hidden treasure that you have to find out.
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